COMMISSIONER OF INCOME TAX vs. U K TEXTILE

ITR/261/1993HC GujaratGJHC24021288199313 July 2005Author: HONOURABLE MR. JUSTICE D.A.MEHTA,HONOURABLE MS. JUSTICE HARSHA DEVANI9 pages
AI SummaryRemanded

What were the facts?

The Commissioner of Income Tax (CIT) initiated proceedings under Section 263 of the Income Tax Act, 1961, for Assessment Year 1988-89. The assessee, U K Textile, a firm constituted to carry on the business of job work of printing cotton sarees, had its assessment completed under Section 143(1). The CIT believed the firm had not conducted any business activity but merely let out its building and machinery, earning lease rent. He considered the Assessing Officer's grant of registration to the firm erroneous and prejudicial to revenue. The Tribunal, however, set aside the CIT's order, restoring the Assessing Officer's decision. The revenue then filed a reference to the High Court.

What did the High Court hold?

The High Court found itself unable to answer the reference due to conflicting findings between the CIT and the Tribunal and a lack of clarity on whether the assessment year in question involved the initial grant of registration or its continuation. The Court noted that Section 184(7) of the Act states that once registration is granted, it continues without further inquiry, unless cancelled under Section 186. Neither the CIT nor the Tribunal had established the factual position regarding the firm's registration status (initial or continuation) or whether the procedure under Section 186 was followed if cancellation was contemplated. The Court also referred to its own precedent in Commissioner of Income Tax Vs. New India Industries Ltd. (1993) 201 ITR 208, emphasizing the need for the Tribunal to determine if letting out assets was for earning rent or for exploitation of commercial assets in the course of business. Consequently, the reference was returned unanswered, with directions to the Tribunal to adjust its decision while finally deciding the appeal in accordance with law.

What were the issues?

1. Whether the appellate Tribunal is right in law and on facts in setting aside the order made by the CIT under Section 263 of the Act, directing the Assessing Officer to consider the aspect of registration to the assessee firm, given that the firm had not carried out any business activity and had only let out its building and machineries, earning lease rent? Assessee's Contention (as per Tribunal's findings): The Tribunal held that letting out business assets to a third party for a short time to overcome a temporary lull does not amount to cessation of business, and registration cannot be refused on this ground alone. Furthermore, a clause in the partnership deed authorizing the firm to carry on 'any other legitimate business' includes handing over the business and accepting rent. Revenue's Contention (as per CIT's order): The CIT argued that the firm was not entitled to registration as it had not carried on its intended business of job work of printing sarees. The factory premises and plant/machinery were leased out, and income from lease rent should be taxed under 'income from other sources', not as business income. The CIT proposed to treat the grant of registration as erroneous and prejudicial to the interests of the revenue.

Which sections of the Income-tax Act were involved?

Section 263,Section 143(1),Section 185,Section 184,Section 186

AI-generated summary — verify with the full judgment below

1 IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 261 of 1993 For Approval and Signature: HON'BLE MR.JUSTICE D.A.MEHTA HON'BLE MS.JUSTICE H.N.DEVANI ======================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ======================================================= COMMISSIONER OF INCOME TAX - Applicant(s) Versus U K TEXTILE - Respondent(s) ======================================================= Appearance : MR TANVISH U.BHATT for Petitioner No(s).: 1. SERVED BY RPAD - (N) for Respondent No(s).: 1. ======================================================= CORAM :HON'BLE MR.JUSTICE D.A.MEHTA

2 AND HON'BLE MS.JUSTICE H.N.DEVANI Date : 13/07/2005 ORAL JUDGMENT (Per : HON'BLE MR.JUSTICE D.A.MEHTA) 1 The following question has been referred by the Income Tax

The order continues below.

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