Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME TAX,
Vs.
RESPONDENT:
VIKRAM COTTON MILLS LTD.
DATE OF JUDGMENT15/12/1987
BENCH:
MUKHARJI, SABYASACHI (J)
BENCH:
MUKHARJI, SABYASACHI (J)
RANGNATHAN, S.
CITATION:
1988 AIR 460 1988 SCR (2) 389
1988 SCC Supl. 442 1987 SCALE (2)1403
ACT:
Whether the income of the assessee company which lets
out its assets temporarily is liable to tax as "profits and
gains of business" or "Income from other sources"-Sections
10 and 12 of the Income Tax A rt
HEADNOTE:
%
The respondent, the assessee company, carried on
business of manufacture of textiles. From the year 1949, the
respondent started running into losses, resulting in the
stoppage of its manufacturing activity from December, 1953.
In May, 1956, one of the creditors of the company filed a
winding up petition in the High Court. One major creditor of
the respondent company, in exercise of its powers under an
English mortgage of the fixed assets of the company took
actual possession of the immovable properties hypothecated
to the creditor. The High Court, with the approval of the
assessee company and its creditors, evolved a scheme
whereunder the business assets of the company were let out
on a rent of Rs.2,50,000 per year. The lease was for ten
years with option of renewal for another ten years. The
intention was that the various creditors would be paid out
of the lease money. The lease money realised by the company
for the assessment years 1957-58 to 1959-60 was assessed by
the Income Tax Department under section 10 of the Income Tax
Act under the head "Profits and gains of business". But in
the subsequent assessment years, the Income Tax officer held
that income from the lease rent was liable to be assessed
under the head "Income from other sources" under section 12
of the Act. The assessee company filed an appeal against the
order of the Income Tax officer. The Commissioner upheld the
order of the Income Tax officer. The assessee took the
matter to the Income Tax Tribunal. The Tribunal directed the
Income Tax officer to treat the income arising out of the
letting out of the assets as ’business income’. The matter
then went to the High Court. The High Court held that the
income derived by the assessee company by way of the lease
rent from the letting out of the assets during the years
ending 31st December, 1959, 31st December, 1960, 31st
December, 1961 and 31st December, 1962, is assessible to tax
under the head "profits and gains of business". Aggrieved by
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the decision of the High Court, the revenue appealed to this
Court.
390
Dismissing the appeal (as also the connected petitions
for special leave), the Court,
^
HELD: Whether a particular income received by the
assessee as a result of the activities carried on by the
assessee is business income or rental income depends upon
the manner of the exploitation of the assets of the
assessee. It only varies from the facts and circumstances of
each case. In each case, the intention has to be gathered as
to whether the commercial asset was intended to be exploited
by the assessee or whether it was intended to be used by
letting it out for a temporary period. From the facts and
circumstances of the case, it appears that it was a possible
conclusion that the assessee intended that there should be a
temporary suspension of the business for the purpose of re-
construction of the company and for that matter, there must
be stopping of the user of the machinery by the assessee. It
was a temporary lease though for 10 or 19 years on renewal,
and after the expiry of the period, the property reverted
back to the assessee. It is pre-dominantly a matter of
intention, which is an inference to be drawn from the
relevant facts. All the relevant facts, it appears, have
been considered by the Tribunal from the correct stand-
point. The Tribunal found that the intention was not to part
with the machine but to lease it out for a temporary period
as a part of exploitation. In such circumstances, it cannot
be said that no business was carried on and the income
derived from the machine letting out was only a rent income,
and in the facts and circumstances of the case, it cannot be
said that such a finding was perverse or not sustainable.
The High Court was right in the view it took. [398F; 399E-H;
400A-B]
Commissioner of Excess Profits Tax, Bombay City v. Shri
Lakshmi Silk Mills Ltd., 20 ITR 451; Commissioner of Income
Tax, West Bengal v. Calcutta National Bank Ltd., 37 ITR 171;
Narain Swadeshi Weaving Mills v. Commissioner of excess
Profits Tax, 26 ITR 765; Inland Revenue Commissioner v.
Broadway car Ltd, [1946] 2 AER 609; Commissioner of Income
Tax v. Shaw Wallace & Co., [1932] ILR 59 Cal. 1343 and New
Savan Sugar and Gur refining Co. Ltd. v. Commissioner of
Income Tax, Calcutta, 74 ITR 7, referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 689692
(NT) of 1975.
From the Judgment and order dated 8.5.1973 of the
Allahabad High Court in Income Tax Reference No. 453 of
1971.
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Miss A. Subhashini for the Appellant.
D.D. Gupta for the Respondent.
The Judgment of the Court was delivered by
SABYASACHI MUKHARJI, J. These appeals by special leave
arise from the judgment and order of the Allahabad High
Court at the instance of the revenue. The Income-tax
Appellate Tribunal, Bombay Bench, referred the following
question of law for the opinion of the Allahabad High Court:
(The question related to the assessment years 1960-6 1,
1961-62, 1962-63 and 1963-64).
"Whether, on the facts and in the circumstances of
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the case, the income derived by the assessee
company by way of lease rent from the letting out
of its assets during the years ended 31.12.59,
31.12.60, 31.12.61 and 31.12.62 is assessable to
tax under the head ’Profits and gains of business’
or under the head ’Income from other sources’?"
The assessee company was a limited company. It carried
on the business of manufacture of textiles. From 1949, the
assessee company started running into losses. At the end of
December, 1953, the position was that as against the capital
of Rs.11,00,000 the accumulated liabilities of the assessee
company amounted to Rs.26,00,000. Because of this the
assessee company stopped its manufacturing activity from
December, 1953. This state of affair continued till 21.5.56
when one of the creditors of the company filed a
winding up petition in the High Court. M/s Industrial
Finance Corporation, who was one of the major creditors of
the company, had in exercise of its powers under an English
mortgage of the fixed assets of the company taken actual
physical possession of the immovable properties hypothecated
to them. Under Section 153 of the Indian Companies Act 1913,
the High Court with the approval of the assessee company and
the creditors evolved a scheme whereunder the business
assets of the assessee company were let out to M/s General
Fibres Dealers (Pvt.) Ltd., Calcutta on Rs.2,50,000 per year
rent. The lease was for ten years with an option of renewal
for another ten years. The intention, it was contended, was
that the various creditors would be paid out of the lease
money. The management of the assessee company was
transferred to a Board of Trustees appointed by the High
Court. The lease money realised by the assessee company for
assessment years 1957-58 to 195960 was assessed by the
Department under Section 10 of the Indian
392
Income-Tax Act under the head ’Profits and gains of
business’. But in subsequent assessment years the Income-Tax
officer held that the income from the lease rent was liable
to be taxed under. the head ’income from other sources’
under section 12 of the Act. The assessee company took the
matter up in appeal. It was urged before the Commissioner
that the assets of the company were exploited and there was
no intention of the assessee to discontinue the business
activities. The assets of the company, were let to the
lessee with the principal object of liquidating a colossal
liability and extricating itself from financial crises. The
Commissioner, however, upheld the finding of the Income Tax
officer. The assessee company then took the matter to the
tribunal The Tribunal found:
1. There was nothing on record to indicate that the
assessee company was formed to let out its plant and
machinery on hire
2. On account of financial crisis, the assessee company
found it advantageous to let out the machinery for a
temporary period of ten years to the lessee.
3. The assessee company was able to liquidate its
liabilities at the end of such period and regain the
physical possession of it assets.
4. The assessee company was able to persuade its
creditors not to make any distress sale of the
machinery taken over by the Industrial Finance
Corporation with a view to salvage the company from
its total extinguishment.
5. At the end of the lease period, the assessee company
did not dismantle the assets and did not sell away
or otherwise dispose of the assets.
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It appears that the maintenance of the assets by the
company meant that the company had intention to restart
manufacturing of textiles. The Tribunal inferred that the
intention of the company in letting out its assets was to
exploit the commercial assets for the purpose of its
business. The Income-Tax officer was directed to treat the
income arising out of the letting out of the assets as
business income.
The High Court noted in the Judgment under appeal which
inci-
393
dentally is reported in ITR Vol. 106 (1977) at page 829 that
the assessee’s case was that the income received by it from
the lease of the plant and machinery was business income and
was liable to be adjusted against the unabsorbed loss of the
preceding year. It is here that the question arises. If it
was business income then the unabsorbed loss of the
preceding year could be adjusted against such income. If on
the other hand it was not, then such income could not be
adjusted against the loss of the previous year. The rub of
the matter lies there.
It is well-known that Section 24 of the Indian Income-
Tax Act, 1922, deals with set off and carry forward of
losses. Under Sub, section (IJ where an assessee sustains a
loss of profits or gains in any year under any of the head
mentioned in Section 6, he shall be entitled to have the
amount of the loss set off against his income profits or
gains under any other head in that year. Sub-section (2)
provides that where an assessee suffers loss in any business
and the loss cannot be wholly set off under sub-section (1),
the unabsorbed loss shall be carried forward to the
succeeding year and shall be set off against the income from
the same business. Before the loss could be carried forward
it was necessary that the income against which the loss has
to be set off should be income from any business (emphasis
supplied).
It was submitted before the High Court on behalf of the
assessee that the plant and machinery of the factory were
commercial assets and any income from the letting out of
such an asset would be the business income. In support,
reliance was placed upon several decisions of this Court.
One among them is the decision in the case of Commissioner
of Excess Profits Tax, Bombay City v. Shri Lakshmi Silk
Mills Ltd., 20 I.T.R. 45 1. This Court in Commissioner of
Income-tax West Bengal v. Calcutta National Bank Ltd., 37
I.T.R. 171 dealing with excess profit tax case, explained
that. the concept of profit and business was little wider
under Excess Profits Tax Act of 1940. The High Court relied
on the several decisions, namely, the decision in the case
of Commissioner of Excess Profits Tax, Bombay City v. Shri
Lakshmi Silk Mills Ltd., (supra) and Narain Swadeshi Weaving
Mills v. Commissioner of Excess Profits Tax, 26 ITR 765. In
view of the above decisions, the High Court held that the
income derived by the assessee company by way of lease rent
from the letting out of its assets during the years ended
31st December, 1959, 31st December, 1960, 31st December,
1961 and 31st December, 1962. is assessable to tax under the
head profits and gains of business.
Being aggrieved by the aforesaid decision revenue has
come up
394
in appeal before this Court by Leave under Article 136 of
the Constitution. Whether a particular income received by
the assessee as a result of activities carried on by the
assessee is business income or rental income depends upon
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the manner of the exploitation of the assets of the
assessee. It only varies from facts and circumstances of
each case.
This question was discussed in detail by this Court in
Commissioner of Excess Profits Tax, Bombay City v. Shri
lakshmi Silk Mills Ltd., (supra}) where this Court found
that if a commercial asset was not capable of being used as
such, then its being let out to others did not result in an
income which was the income of the business but it could not
be said that an asset which was acquired and used for the
purpose of the business ceased to be a commercial asset of
that business as soon as it was temporarily put out of use
or let out to another person for use in his business or
trade. The yield of income by a commercial asset was the
profit of the business irrespective of the manner in which
that asset was exploited by the owner of the business. He
was entitled to exploit it to the best advantage and he
might do so either by using it himself personally or by
letting it out to somebody else. The view that in order to
constitute business income the commercial asset must at the
time it was let out be in a condition to be used as
commercial asset by the assessee himself was not correct. In
that case the assessee company was a manufacturer of silk
cloth and as a part of its business it installed a plant for
dyeing silk yarn. During the chargeable accounting period,
Ist January, 1943 to 31st December, 1943 owing to difficulty
in obtaining silk yarn on account of the war it could not
make use of this plant and it remained idle for some time.
In August 7 1943, it was let out to a person on a monthly
rent. The question was whether such sum representing the
rent for five months realised by the assessee was chargeable
to excess profits tax as profits of business or was income
from other sources and was therefore not chargeable to
excess profits tax. It was held by this Court that it was a
part of the normal activities of the assessee’s business to
earn money by making use of its machinery by either
employing 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 that
the dyeing plant had not ceased to be a commercial asset of
the business and the sum representing the rent for five
months received from the lessee by the assessee was
therefore income from business and was chargeable to excess
profits tax. As mentioned hereinbefore, the question arose
in the context of Excess Profit Tax Act; the consequence
will be the same in the case of Income-Tax Act. This Court
observed again that the yield of income by a commercial
asset irrespective of the manner in which the assets
VINEET
395
are exploited by the owner of the business would be income
from business. It was emphasised that the assessee was
entitled to exploit it to the best advantage and he might do
so either by using it himself personally or by letting it
out to somebody else. This Court gave an example. For
instance, in a manufacturing concern use of its plant and
machinery could advantageously be made owing to the paucity
of raw materials only for six hours in a working day, and in
order to get the best yield out of it, another person who
has got the requisite raw materials is allowed to use it as
a licensee on payment of certain consideration for three
hours. The question was posed: could it be said in such a
situation with any justification that the amount realised
from the licensee was not a part of the business income of
the licensor. The Court noted that in that case the company
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was incorporated purely as a manufacturing concern with the
object of making profit. It had installed plant and
machinery for the purpose of its business and it was part of
it, if at any time it found that any part of its plant "for
the time being" could not be advantageously employed for
earning profit by the company itself, to earn profit by
leasing it to somebody else. In such circumstances, it would
be improper to refuse it to treat it as such being the
advantage of business income. This Court noted the
observations of the Court of Appeal in Inland Revenue
Commissioner v. Broadway Car Co Ltd., [1946] 2 A R 609. In
that case the company had carried on the business of motor
car agents and repairers on land held on lease from 1935 to
1956 at an annual rent of 750. By 1940 the company’s
business had dwindled under war conditions to such an extent
that no more than one third of the land was required. In
those circumstances the remainder was sublet for fourteen
years at an annual rent of 1150. The General Commissioner
of Income Tax decided that the difference of 1400 between
the outgoing of 1750 for the land retained and the incoming
of 1150 for the land disposed of was "income received from
an investment", and business not being one within the
special categories mentioned in the Finance Act 1939 that
1400 was not taxable. Lord Scott, J. held that the word
’investment’ must be construed in the ordinary popular sense
of the word as used by business men and not as a term of art
to say that the Commissioners had erred in law in coming to
the conclusion that the transaction resulted in an
investment. Lord Scott, J. emphasised on the point that
after the business of the company had dwindled, it
partitioned part of the land from the rest and sublet it by
installing a heating apparatus for the sublessee. It was
found that war-conditions had reduced the company’s business
to very small proportions and they cut their LOSS by going
out of business in respect of the major part of their land
and put it out of their power for fourteen years to resume
business there. In such a
396
situation, it could not be business any more. That was a
peculiar circumstance when the assessee had a desire to part
with that type of business. Therefore, whether a particular
income is from business or from investment must be decided
according to the general commonsense view of those who deal
with those matters in the particular circumstances and
conduct of the parties concerned. Has the assessee evidenced
any intention to switch over from exploitation of assets by
itself and used the asset as a rented one?
This Court in the aforesaid decision found that it was
a part of the normal activities of the assessee’s business
to earn money by making use of his machinery by either
employing it in his 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. The High
Court in that case was in error, therefore, in holding that
the dyeing plant had ceased to be a commercial asset of the
assessee and the income earned by it and received from M/s
Parakh & Co was chargeable to excess profits tax.
This Court had again occasion to examine this question
in Narain Swadeshi Weaving Mills v. Commissioner of Excess
Profits Tax, 26 ITR 765. That was a case under Excess
Profits Tax Act, 1940. It was observed by this Court that
before the Excess Profits Tax officer could embark upon an
enquiry as to whether a transaction was effected for the
avoidance or reduction of liability to excess profits tax
within the meaning of Section 10A of the Excess Profits Tax
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Act, 1940 and to make such adjustments as he considered
appropriate under that section there must be proof that the
assessee was, during the chargeable accounting period,
carrying on business of kind referred to in Section 5 of the
Act. There the assessee firm was carrying on a manufacturing
business consisting of three partners, N and his two sons R
and G. In April 1940 a public limited company was
incorporated with the object of taking over the business
from the assessee firm. The Company was director-controlled
and the directors were N, his three sons R, and S and a
brother-in-law of G. the company purchased only the
buildings and leasehold rights from the assessee firm but
took over from it on lease at an annual rent the plant and
machinery. The assessee firm did not thereafter manufacture
anything and it had accordingly no further trading or
commercial activity. In July, 1940 the company executed a
managing agency agreement in favour of U & Co. consisting of
R and as partners. In January, 1941, the company appointed
as its selling agent R & Co. consisting of R, and S as
partners. In April, 1941, the shares of the partners in the
assessee firm were adjusted so as to
397
equalise, as far as possible, the share of N with the shares
which his sons got in the several firms. All the three firms
were registered under Section 26A of the Indian Income-Tax
Act, 1922. The question was whether the Excess Profits Tax
Authorities were justified in amalgamating the income of U &
Co. and R & Co. with the income of the assessee firm under
the provisions of Section 10A of the Excess Profits Tax Act,
1940. It was held that in the facts and circumstances of the
case the letting out of the plant and machinery by the
assessee firm to the company could not be held to fall
within the body of the definition of "Business" under
section 2(5) and as the assessee firm had, therefore, no
business during the relevant period to which the Act
applied, Section 10a could not be invoked by the Excess
Profits Tax Authorities. It was further held that the
application of Section 10a with a view to amalgamating the
income of the firms of U & Co. and R & Co. with the income
of the assessee firm was not valid in law.
Dealing with this question, this Court noted that
"business" as defined under Section 2(5) of the Excess
Profits Tax Act included amongst others, any trade, commerce
or manufacture or any adventure in the nature of trade,
commerce or manufacture. The first part of this definition
of a "business" in the Excess Profits Tax Act is the same as
the definition of a business in Section 2(4) of the Indian
Income-Tax Act, 1922. Whether a particular activity amounted
to any trade, commerce or manufacture or any adventure in
the nature of trade, commerce or manufacture is always a
difficult question to answer. The Judicial Committee noted
in the case of Commissioner of Income-tax v. Shaw Wallace &
Co., [1932] I.L.R. 59 Cal. 1343 that the words used in the
definition are no doubt wide but underlying each of them is
the fundamental idea of the continuous exercise of an
activity, (emphasis supplied). It was also emphasised by
this Court that the word "business" indicated some real,
substantial and systematic or organised course of activity
or conduct with a set purpose. In that case, this Court
pointed out the difference between Excess Profits Tax Act
and the Indian Income-Tax Act, 1922. So far as the question
before us is concerned, this difference is not material.
Shri Manchanda, learned counsel for the revenue draw
our attention to Commissioner of Income-tax, West Bengal v.
Calcutta National Bank Ltd., 37 I.T.R. 171. This Court
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reiterated that the term "business" is a word of very wide,
though by no means determinate, scope. There the assessee,
which was a banking company in a large way of business,
owned a six-storeyed building, where its offices were
located on the ground floor and a part of the sixth floor,
while the rest
398
of the building was let out to tenants. The question was
whether the income realised by the assessee by way of rent
for the portion of the building let out was liable to excess
profits tax and could be included in the profits of the
business under rule 4(4) of the First Schedule to the Excess
Profits Tax Act, 1940. It was held that the realisation of
rental income by the assessee was in the course of its
business in prosecution of one of its objects in the
memorandum. It depends in the facts and circumstances of
each case.
In New Savan Sugar and Gur Refining Co. Ltd. v.
Commissioner of Income Tax, Calcutta, 74 I.T.R. 7, this
Court was dealing with a case, where the appellant-company
was carrying on the business of crushing sugarcane and gur
refining. Its managing agents wrote a letter addressed to
its shareholders referring to the alarming increase of
Government interference in the affairs of this sugar
industry in Bihar and the increase of wages of the workers,
the levy of a cess and deterioration in cane crops and
advising the acceptance of an offer of the lease of the
company as a running concern. Thereafter examination, it was
found that the cumulative effect of different clauses of the
deed suggested that the assessee would have no concern with
the production of the company. It was therefore held that
the terms of the lease deed that the intention of the
appellant was to part with the entire 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 a commercial asset during the subsistence of the lease.
In each case the intention has to be gathered as to
whether the commercial asset was intended to be exploited by
the assessee or whether it was intended to be used by
letting it out for a temporary period. It depends upon the
facts and circumstances of each case. The circumstances of
the instance case were as follows as appears from the
statement of the case:
"The assessee-company incurred losses in its
business of manufacture of textiles from the year
1949. On account of heavy losses, its
manufacturing activities were stopped from
December, 1953. By 1956, colossal loss had
accumulated. Its liabilities had amounted to Rs.26
lakhs as against the capital of Rs.11 lakhs. A
winding-up petition was filed in the Allahabad
High Court by the creditors. M/s. Jawala Prasad
Radha Krishan in February 1954. The Industrial
Finance Corporation was one of the creditors of
the company and the company had a liability of
Rs.12.5 lakhs to
399
that undertaking secured by the fixed assets in
terms of a mortgage deed dated 19.12.1950. The
Punjab National Bank had advanced a loan of Rs.6.5
lakhs to the company by movable assets of the
company such as cotton, cloth and yarn. The
Industrial Finance Corporation had taken physical
possession of the immovable properties of the
company on 12th July, 1954, on the company’s
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failure to pay off its debts to the I.F.C. The
High Court thereafter approved a scheme, by an
order dated 21.5.1956 whereby the assets and the
entire business of the assessee-company were let
out to M/s. General Fibres Dealers (Pvt.) Ltd.,
Calcutta, at a least rent of Rs.2,50,000 per year.
The management of the assessee company was
transferred to a Board of Trustees appointed by
the High Court pursuant to the scheme referred to
above. According to the terms of the lease dated
7.7.1956 with the lessee, the General Fibres
Dealers (Pvt.) Ltd., the assets of the company
were let out for an initial period of ten years,
with a right given to the lessee to exercise the
option for a further period of ten years. The
assesse-company had maintained a skeleton staff
thereafter."
In the context of these facts, it appears that it was a
possible conclusion that the assessee intended that there
should be a temporary suspension of the business for the
purpose of reconstruction of the company and for that matter
there must be stoppage of the user of the machinery by the
assessee. It was temporary lease though for 10 or 19 years
on renewal years and after the expiry of the period the
property reverted back to the assessee.
It is pre-dominantly a matter of intention. Intention
is an inference to be drawn from the relevant facts. All the
relevant facts, it appears have been considered by the
Tribunal from the correct standpoint, i.e. Ordinary prudent
businessman or as in England it used to be "man on the top
of the platform omnibus.", or "director’s arm chair". If on
that test a plausible conclusion has been drawn-no objection
can be taken.
On that basis applying the correct principle the
Tribunal found that the intention was not to part with the
machine but to lease it out for a temporary period as a part
of exploitation. In such a circumstance, it cannot be said
that no business was carried on and their income derived
from the machine letting was only a rent income. There
400
was a temporary suspension of business for a temporary
period for an object to tide over the crisis condition.
There was never any act indicating that the assessee never
intended to carry on the business.
In the background of these principles and in the facts
and circumstances of the case so found, we cannot say such a
finding was either perverse or not sustainable.
In the aforesaid view of the matter, the High Court was
right in the view it took and the appeals must accordingly
fail and are dismissed with costs.
In the view we have taken in the first matter, the
special leave petitions Nos. 5324 and 5325 of 1978 are also
dismissed. But there will be no order as to costs.
S L Appeals & Petitions dismissed.
401