Full Judgment Text
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PETITIONER:
UNIVERSAL PLAST LIMITED ETC.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, CALCUTTA
DATE OF JUDGMENT: 23/03/1999
BENCH:
Syed Shah Mohammed Quadri, S.P.Bharucha
JUDGMENT:
QUADRI,J.
Civil Appeal No.207 of 1995 is filed by the assessee -
Universal Plast Limited - from the judgment and order of a
Division Bench of the Calcutta High Court in Income Tax
Reference No. 17 of 1991 under Section 256(2) of the Income
Tax Act, 1961 [for short, ‘the Act’] passed on February 6,
1992 [hereinafter referred to as ‘UPL Case’]. Civil Appeals
Nos.__________ of 1999 @ Special Leave Petition c Nos.
10912-14 and 10984 of 1986, in which leave is granted, are
preferred by the assessee - The Guntur Merchants Cotton
Press Company Limited, Guntur - aggrieved by the judgment
and order of a Division Bench of the Andhra Pradesh High
Court in Case Referred No.22 of 1979, under Section 256(1)
of the Act dated August 9, 1984 [hereinafter referred to as
‘Guntur Merchants’ case’]. The points for consideration in
these appeals are similar. In UPL case, the question of law
referred to the Calcutta High Court, at the instance of the
revenue, reads : "Whether on the facts and in the
circumstances of the case, the Tribunal was correct in law
that the income received by the assessee by leasing out the
factory was business income?"
The following is one of the questions of law referred
to the Andhra Pradesh High Court, at the instance of the
assessee in Guntur Merchants’ case : "Whether on the facts
and in the circumstances of the case, the Appellate Tribunal
was justified in holding that the letting of Godowns at
Guntur and Narsaraopet and the letting of the factory with
machinery at Narsaraopet and at Guntur did not constitute
business of the assessee?"
Both the Calcutta High Court as well as the Andhra
Pradesh High Court answered the said questions in the
negative, in favour of the Revenue and against the assessee.
The assessees are thus in appeal before us. To resolve the
controversy in these cases, we refer to the facts in the UPL
case. The appellant-assessee set up a factory styled as
"UPL Factory" for carrying on the business of manufacturing
PVC sheets and allied products. It appears that from the
venture the assessee suffered losses for two years. It then
entered into an agreement styled as ‘leave and licence’
agreement with M/s. Leatherite Industries Limited
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[hereinafter referred to as ‘the licensee’] for a period of
7 years on March 13, 1977. The agreement contains renewal
clause giving option to the licensee to renew it for a
further period of three years. The licensee was to pay
licence fee of Rupees twenty four lakhs and twenty per cent
of the net profit of the factory in question with effect
from April 1, 1977. For the first three months which fell
in the accounting year relevant to the assessment year
1977-78, the assessee received only licence fee of Rupees
six lakhs as no profit was earned by the licensee during the
said period. That amount was shown by the assessee as part
of the business income. The Income Tax Officer did not
accept that it was business income and assessed the same as
income from other sources. However, the Commissioner of
Income Tax (Appeal) accepted the plea of the
appellant-assessee that it was its business income and
allowed the appeal on April 27, 1985. The Revenue
unsuccessfully appealed against the order of the Appellate
Authority before the Income Tax Appellate Tribunal. On an
application filed by the Revenue under Section 256(2) of the
Act, the High Court directed the Tribunal to draw up
statement of case and refer the aforementioned question to
it. On February 6, 1992 the High Court answered the
question in the negative, in favour of the Revenue and
against the assessee, as noted above. Mr. M.L.Verma,
learned senior counsel appearing for the assessee, has
contended that under the ‘leave and licence’ agreement, the
assessee exploited the business assets; the intention in
receiving a share in the profit of the business as part of
the consideration and in ensuring that the amounts due by
the Company to the creditors are paid regularly was to keep
the business running so that it might continue the business
after the expiry of the lease period. He invited our
attention to various clauses of the Agreement and pointed
out that the High Court has not considered Clauses 15 and 16
which unmistakably point out that the Agreement was only a
temporary measure and the intention of the assessee was to
go back to the factory. Therefore, submitted the learned
counsel, the High Court had erred in not treating the amount
in question as business income. Mr. K.N. Shukla, learned
senior counsel for the Revenue, supported the judgments
under appeal in these cases. The question whether the
amount earned by an assessee by leasing out the assets of
the business would be an income from business carried on by
it, has been the subject matter of consideration by this
Court as well as by various High Courts and it would be
useful to refer to the judgments of this Court bearing on
the issue. In Commissioner of Excess Profits Tax, Bombay
City Vs. Shri Lakshmi Silk Mills Limited [1951(20) I.T.R.
451], the assessee-company was carrying on the business of
manufacturing silk cloth and dyeing silk yarn. Due to lack
of supply of silk yarn during the relevant period while
keeping idle other plant and machinery, it let out dyeing
plant for five months. The question which came up for
consideration before this Court was whether the rent
received from letting out the dyeing plant would fall under
the head "Income from business" or "income from other
sources". If it was "Income from business", it would have
been chargeable to excess profits tax; if not, the
liability would not arise. Mahajan,J., speaking for the
Court, observed that no general principle could be laid down
which was applicable to all cases and each case had to be
decided on its own circumstances. It was held that it was
part of the normal activities of the assessee’s business to
earn money by making use of its machinery by either
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employing it in its own manufacturing concern or temporarily
letting it to others for making profit for that business
when for the time being it could not itself run it and for
that reason the dyeing plant had not ceased to be a
commercial asset of the assessee, so the sum representing
the rent for five months received from the lessee by the
assessee was income from business and was chargeable to
excess profits tax. In Narain Swadeshi Weaving Mills Vs.
Commissioner of Excess Profits Tax [1954 (26) I.T.R. 765],
a Constitution Bench of this Court considered a similar
question which also arose under the Excess Profits Tax Act,
1940. In that case, the assessee-firm was carrying on
manufacturing business. A Public Limited Company was
incorporated to take over the business from the
assessee-firm. The company purchased the building of the
assessee-firm and took over from it the plant and machinery
on lease at an annual rent. One of the questions that fell
for consideration there was whether the lease money obtained
by the assessee from the company could be legally treated as
business profit liable to excess profits tax.
Distinguishing Shri Lakshmi Silk Mills case (supra), it was
pointed out that only a part of the business of the assessee
therein, namely dyeing silk yarn, was temporarily stopped
owing to difficulty in obtaining silk yarn on account of war
so that part of the assets did not cease to be commercial
asset of that business and accordingly, the income from the
assets would be the profit of the business irrespective of
the manner in which that asset was exploited by the company.
Noticing the facts in the case before the Court that the
assessee had already sold land and building to the Company;
it was not having any manufacturing, trading or commercial
activity; and let out the plant and machinery on an annual
rent of Rupees forty thousand and applying the common sense
principle to the facts, this Court found that the
transaction of lease was quite apart from the ordinary
business activity of the company, so it was impossible to
hold that the letting out of the plant and machinery etc.
was at all a business operation when its normal business
activity had come to a close. In Commissioner of Income
Tax, West Bengal Vs. Calcutta National Bank Limited [1959
(37) I.T.R. 171], the case arose under the Excess Profits
Tax Act. The assessee was a banking company. It owned a
six-storeyed building of which only a part was under its
occupation and the rest was let out to tenants. The
question was whether the rent received from the tenants of
the building was the business income of the company. The
majority opinion was that realisation of rental income of
the assessee was in the course of its business being in
prosecution of one of its objects in its memorandum and was
liable to be included in its business profits and was
assessable to excess profits tax. That conclusion was
reached on the premise that the term ‘business’ as defined
in that Act was wider than the definition of that term under
the Income Tax Act. The minority, however, took a contrary
view. In Sultan Brothers Private Ltd. vs. Commissioner of
Income Tax, Bombay City-II [1964 (51 I.T.R.353)], the
assessee constructed a building, fitted it up with furniture
and fixtures and let it out on lease fully equipped and
furnished for the purpose of running a hotel. The lease
amount provided separately for running of the building and
hire charges for furniture and fixtures. The question that
fell for consideration was whether the rent income was
business income taxable under the Income Tax Act, 1922? It
was held that as the assessee never carried on any business
of a hotel in the premises let out or otherwise at all and
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there was nothing to show that it intended to carry on a
hotel business itself in the same building, the letting of
the building did not amount to the carrying on of a
business, so the income under the lease could not be
assessed as income from business. The Constitution Bench
formulated the principle thus : "Whether a particular
letting is business, has to be decided in the circumstances
of each case. Each case has to be looked at from the
businessman’s point of view to find out whether the letting
was the doing of a business or the exploitation of his
property by an owner..".
In New Sevan Sugar and Gur Refining Co.Ltd. vs.
Commissioner of Income Tax, Calcutta [1969 (74) I.T.R.7],
the appellant-company was carrying on business of crushing
sugarcane and gur refining. The building, machinery and
plant of the factory mill were leased out initially for a
period of five years with three options to renew for similar
periods on the part of the lessee. The assessee had,
however, the option to terminate the lease after first two
years which option was not exercised. The question was
whether the income which arose to the assessee for the
Assessment Year 1955-56 from the lease was assessable as
income from business or income from other sources? It was
held, on interpretation of the terms of the lease deed, that
the intention of the appellant-assessee was to part with the
machinery of the factory and the premises with the obvious
purpose of earning rental income and not to treat the
factory and the machinery as commercial asset during the
subsistence of the lease; the intention of the appellant
was found to go out of business altogether, therefore the
income was not assessable as business income. Commissioner
of Income Tax, Lucknow vs. Vikram Cotton Mills Ltd. [1988
(169) I.T.R.597] is again a case arising under the Income
Tax Act, 1922. One of the creditors filed a petition in the
High Court for winding up. The Industrial Financial
Corporation took possession of fixed assets under an English
mortgage of those assets. The assessee company had gone
into losses and had stopped its manufacturing activity.
Under the scheme evolved by the High Court under the
Companies Act, the business assets were let out for ten
years with an option for renewal for another ten years. The
management of the company was transferred to a Board of
Trustees approved by the High Court. The question which
fell for determination was whether the rental income was
assessable in the relevant assessment years as business
income? The findings of the Tribunal were that on account
of financial crisis, the company found it advantageous to
let out the machinery on hire for a temporary period and the
company was able to liquidate its liability at the end of
the lease period and regained possession of its assets; the
company did not sell or otherwise dispose of its assets;
there was nothing on record to show that the company was
formed to let out plant and machinery on hire. The Tribunal
came to the conclusion that the maintenance of the assets
meant that the Company had an intention to re-start the
business and that the intention of the Company in letting
out its assets was to exploit the commercial assets for the
purpose of its business and therefore the rental income was
assessable as business income. On reference, that
conclusion was upheld by the High Court. On appeal to this
Court, while affirming the decision of the High Court, it
was noted that all relevant facts were correctly considered
from the standpoint of an ordinary prudent businessman by
the Tribunal and it was also pointed out that the stoppage
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of the business by the company was a temporary suspension of
business for a temporary period with the object of tiding
over the crisis condition and there was never any act
indicating that the company intended to carry on the
business in future. In the light of the above discussion,
the propositions may be summarised as follows: (1) no
precise test can be laid down to ascertain whether income
(referred to by whatever nomenclature, lease amount, rents
licence fee) received by an assessee from leasing or letting
out of assets would fall under the head ‘Profits and Gains
of business or profession’; (2) it is a mixed question of
law and fact and has to be determined from the point of view
of a businessman in that business on the facts and in the
circumstances of each case including true interpretation of
the agreement under which the assets are let out; (3) where
all the assets of the business are let out, the period for
which the assets are let out is a relevant factor to find
out whether the intention of the assessee is to go out of
business altogether or to come back and restart the same.
(4) if only or a few of the business assets are let out
temporarily while the assessee is carrying out his other
business activities then it is a case of exploiting the
business assets otherwise than employing them for his own
use for making profit for that business; but if the
business never started or has started but ceased with no
intention to be resumed, the assets also will cease to be
business assets and the transaction will only be
exploitation of property by an owner thereof, but not
exploitation of business assets. Now adverting to the facts
of UPL case, the High Court referred to the findings of the
Tribunal that the leasing out of the factory was not a
sequel to the assesee’s decision to go out of the business
in respect of the subject factory and that it was just a
make-shift transient alternative means of commercial
exploitation of the commercial assets, so income from such
letting could not be treated as the fruits of ownership
simplicitor of the asset. The High Court also referred to
various clauses in the Agreement, particularly Clauses 1,2,
4,7,19,20,21 and 22 and concluded that "licensee exercising
its vested right of option to purchase the licenced
premises, the assessee stands completely out in the cold".
The High Court recorded the following findings :
"Therefore, it can very well be presumed that at the time
the licence agreement was entered into, the intention of the
ultimate outright sell out was already there. The assessee
was already committed to the licensee for such a sell-out at
licensee’s pleasure and there is no means of the assessee
falling back from that commitment. Therefore, it can very
reasonably be inferred that the assessee in the case decided
to go out of business as far as this particular factory was
concerned..
The lease agreement is in fact a veiled agreement for
lease-cum-sale....We are of the opinion that the licensing
is not meant to be a temporary stop gap exploitation of
commercial assets. It could not be in the contemplation of
the assessee at the time it entered into the licence
agreement, to retain the assets any more as a commercial
asset."
It was contended by Mr. Verma that the High Court did
not consider Clauses 2(ii)c, 3(v), 4, 7 15 and 16 of the
Agreement. The clauses read thus: "2(ii)c. The 25% of the
net profit, if any, within 60 days of the accounts of
licensee being adopted and passed by the Shareholders.
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3. The licensee hereby agrees and covenants: (v) to
permit the licensor on reasonable previous notice in writing
to enter the UPL factory premises and inspect the premises,
plants, machinery etc. with or without their agent,
inspector, engineer and other personnel and provide all
necessary facilities to them;
4. The Licensee shall use the said UPL factory for
the purpose of business of manufacturing; provided always
that the Licensor shall not in any way be responsible for
any debt or responsibility incurred by the Licensee during
the subsistence of this Agreement including that in respect
of expenses, such as working expenses, rates and taxes in
respect of property, except of capital nature insurance
premia, interest on all advances, depreciation on newly
acquired assets, bonus and gratuity to employees nor for any
liability in respect of Sales Tax or tax on incomes, profits
and gains made by the Licensee so far as they relate to the
Licensee’s part of the income from the UPL factory and the
Licensee hereby indemnified the Licensor against all such
debts, liabilities, costs, charges and expenses in respect
thereof.
7.The Licensee shall be liable for payment of
retrenchment/retirement compensation, if any, to the workmen
in case such workmen are retrenched or retired by the
Licensee. However, the Licensor shall be liable for payment
of retrenchment/retirement compensation, if any, in case of
workmen retrenched or retired after the termination of the
licence.
PROVIDED, however, that on the termination of the
licence, the Licensee shall be liable for any retrenchment
compensation payable to workmen on account of removal by
them of any plant and machinery acquired and installed by
the Licensee.
15.In the event of the Licensee committing a breach of
any of the terms of this Agreement or making default in
payment as provided in clause 2(ii) of any two quarterly
instalments, the Licensor shall be entitled to terminate
this agreement upon the expiry of the period of one month
from the service of notice in writing by the Licensor to the
Licensee to remove the breach or to make payment, as the
case may be, if the Licensee fail to remove the breach or to
make payment, as the case may be, within the said period.
16. If the Licensee pass a resolution for winding up
or are ordered to be wound up (except for the purpose of
amalgamation or reconstruction) or if the Licensee shall do
or cause to be done or permit or suffer any act or thing
whereby the Licensor’s right in the UPL factory and in the
building, plant, machinery and equipment therein may be
prejudiced or put in jeopardy, the Licensor may without any
notice determine this Agreement and the licence and it shall
thereupon be lawful for the Licensor to enter upon and
retake possession of the UPL factory.
From a plain reading of the clauses noted above, what
is clear is that they deal with a situation arising out of
the breach of the terms of the Agreement entitling the
Licensor to terminate the Agreement on the expiry of the
period of one month from the service of the notice to the
Licensee. Clause 16 deals with a situation of the Licensee
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being wound up in which situation the Licensor reserved his
right to determine the Agreement and retake the possession
of the factory. These clauses do not whittle down the
conclusion arrived at by the High Court with reference to
the rights of the assessee-lessor coming to an end on the
exercise of option by the lessee under clause 19 of the
Agreement. Applying the afore-mentioned tests, we are clear
in our mind that the High Court has reached the correct
conclusion which does not warrant interference. So far as
Guntur Merchants’ case is concerned, the Agreement of Lease
is not placed on record and there is no challenge that in
recording its findings the Tribunal and in answering the
question the High Court has ignored any vital clause of the
Agreement. The Tribunal recorded the findings as follows :
"The assessee stopped its business of ginning cotton in 1964
for the sole reason of non- availability of cotton and that
it did not start the same even in 1977; there was nothing
to show that the non-availability of cotton continued or
could continue for such a long period; the godowns of the
assessee were let out to a tobacco merchant and the assessee
could not be said to be carrying on the business of cotton
with godowns so let out; the assessee could be said to have
only exercised his right as an owner of the property in the
leasing out its properties; the machinery remained idle for
a very long period and the assessee had separated the
machinery from the godown and let out the pressing factory
to a metal pressing factory; the assessee did not continue
its business for an unusual long time and give out its
godown to different business than the one which the assessee
was carrying on; the conduct of the assessee did not
support that it was using the godown and machinery as
business asset and not as the owner of the property."
On considering these findings, the High Court answered
the question referred to it in favour of the Revenue. On
the face of these findings, it cannot but be concluded that
the assessee had dismantled its business never to return
back to it. Applying the aforesaid principles, it has to be
held that the answer recorded by the High Court to the
question referred to it is correct in law. In the result,
we hold that both the High Courts were right in answering
the questions referred to them, in favour of the Revenue and
against the assessee. These appeals are, therefore,
dismissed with costs.