A holding company lets out a portion of its factory premises to its subsidiary company. The let out was done as subsidiary could carry out the job work on its behalf. Now, the query arose that how to deal with the portion of factory let out. The Supreme Court gave the following ruling regarding the above query:   

Case: Kapri International (P.) Ltd. vs. Commissioner of Wealth Tax

Facts:

The assessee was engaged in manufacturing bed sheets. It let out a portion of its factory building to its subsidiary company namely ‘D’ Ltd. The subsidiary company was doing processing work of dyeing for the assessee in said portion of factory building.

During the assessment proceedings, the AO viewed that the portion of building let out was shown as that part was used by the assessee itself for its business purpose.

The AO was of view that portion of building belonging to assessee was in fact used by ‘D’ Ltd. for its own use of manufacturing activity and consequently, it could not be said that such portion of building was used by the assessee for the purpose of its own business of manufacturing as factory in terms of section 40(3)(vi) of 1983 Act. Therefore, such portion of the building was to be included in the net wealth of the assessee.

The Tribunal and the High Court upheld the order.

Aggrieved by the order, assessee appealed to the Supreme Court.

Held:

The Court in this case noticed that the subsidiary company was doing their own business on the premises and were charged Rs. 20000 as license fee by the assessee. In addition, for the job work done by ‘D’ Ltd., it was charging the assessee. Thus, it was clear that the two companies, for the said transaction shall be treated as two separate entities though under the same management.

The act of assessee of charging license fee from its subsidiary and claiming it as a business expense shows that the assessee itself treat the subsidiary as a separate corporate entity.

Therefore, such portion of factory shall be included in the wealth of the assessee. Hence, building let out to subsidiary for license fee to carry out work for assessee shall form part of its wealth.

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