The main legal point established in the judgment is the importance of considering the purpose and use of the property in determining the appropriate classification of income, and the application of this principle in assessing income derived from leasing out premises in an industrial estate.

Srinivasa Iyengar, J.—The Income Tax Appellate Tribunal, Bangalore Bench, has referred the following question for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the income derived by the assessee by leasing out the premises in its industrial estate is assessable as income under the head 'Income from business' ?"

2. The question arises in relation to the assessment for the assessment year 1966-67, the previous year being the one ended with March 31, 1966. The assessee is the Hindustan Machine Tools Ltd. It constructed an Industrial estate with the object of having ancillary units which would manufacture components required for the purposes of the machines in the manufacture of which it was engaged. It had constructed 50 sheds. These had been leased out to several persons on a rental basis. The question arose as to whether the income from those sheds should be treated as income from property under s. 22 of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), or as business income under s. 28 of the Act. The ITO held that as the assessee was the owner of the sheds, the income therefrom should he brought to tax under s. 22 of the Act. On appeal, the AAC disagreed with him and held that the income should be computed under the head "business" under s. 28 of the Act. On a further appeal the Tribunal upheld the view taken by the AAC. At the instance of the CIT, the above question has been referred to this court.

3. There is no dispute that the assessee was the owner of the sheds and they had been let out on rent. The view of the Tribunal was that the dominant object in construction of the sheds and letting them out to several entrepreneurs was to have a ready source of supply of components which the assessee itself might have found it inconvenient to manufacture and which it preferred the ancillary units to manufacture for it, and the leasing out of the premises in the industrial estate, therefore, was incidental to and for the purposes of the assessee's business of manufacture of various machines and the income by leasing out premises was part of its income from business.

4. The Tribunal relied upon the pamphlet which had been issued by the assessee at the time of the inauguration of the industrial estate and also the contents of the lease deeds entered into between the assessee and the third party. The object as had been stated in this pamphlet which has been annexed as annex. "A" was :

"In the manufacture of machine tools, Hindustan Machine Tools with its present capacity of 1,000 machines per annum has to manufacture over 2 million component parts of various types every year. Instead of manufacturing all these components in the main factory of HMT as at present, it is intended to set up a large number of small-scale ancillary feeder industries in the Industrial Estate owned and managed by small-scale entrepreneurs mainly of the worker-proprietor type and to sub-contract to them the simpler components which do not require heavy equipment or very high degree of skill and technique. The Hindustan Machine Tools factory will thereafter limit itself to the manufacture of the more complicated and heavy components requiring heavy equipment and a high degree of skill and technique and leave the simpler components to be manufactured by the ancillary feeder industries and supplied to HMT thereby passing on to the small-scale entrepreneurs the ownership of the means of production and part of the profits which HMT would have otherwise made."

5. It is also stated :

"The entrepreneurs for the units are selected by HMT having regard to the candidate's experience in the particular line, his technical competence and his genuine enthusiasm to build up competitive small-scale industrial units."

6. Several facilities were accorded to the ancillary units by the HMT which included free technical advice for the setting up of the units and for the manufacture of the components required by the H