COMMISSIONER OF INCOME TAX, v. VIKRAM COTTON MILLS LTD.

DECEMBER 15, 1987

B

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 Act. c 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 acti· vity 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 D English mortgage of the iv<ed assets of the company took actual posses- sion of the immovable properties hypothecated to the creditor. The High Court, with the approval of the assessee company and its cre- ditors, 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 wonld 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 busi- ness". 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 t0- 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 3 lst December, 1959, 3lst December, 1960, 31st December, 1961and3lst December, 1962, is assessible to tax under the head "profits and gains of business". Aggrieved by the deci- H sion of the High Court, the revenue appealed to this Court.

389

p. 390

A Dismissing the appeal (as also the connected petitions for special leave), the Court,

truction 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 to or 19 years on renewal, and after the expiry of the period, the property reverted hack to the assessee. It is pre-dominantly a mat· D ter 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 macltine 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 E 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-BJ

Commissioner of Excess Profits Tax, Bombay City v. Shri F 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 Commtsisoner 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. G Commissioner of Income Tax, Calcutta, 14 ITR 7, referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 689- 692 (NT) of 1975.

From the Judgment and Order dated 8.5.1973 of the Allahabad H High Court in Income Tax Reference No. 453 of 1971.

COMMR. OFJNCOMETAXv. VIKRAM COTTON MILLS [MUKHARJJ,J.I 391

Miss A. Subhashini for the Appellant. A

, ..,, D. D. Gupta for the Respondent.

The J udgment of the Court was delivered by

SABYASACHI MUKHARJI, J. These appeals by special leave B 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 1960-61, 1961-62, 1962-63 and 1963-64). c "Whether, on the facts and in the circumstances of 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 busi- ness' or under the head 'Income from other sources'?" D

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 posi- tion 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 E 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 com- pany 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 con- tended, 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 1959- 60 was assessed by the Department under Section 10 of the Indian H

p. 392

A 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 undet. 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 Com· missioner that the assets of the company were exploited and there was B 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 tri· J bunal. The Tribunal found: A c 1. There was nothing on record to indicate that the assessee ,.J company. was formed to let out its plant and machil)ery on hire.

2Copy pinpoint2. On account of financial crisis, the assessee company found it D advantageous to let out the machinery for a temporary period of ten years to the lessee.

3Copy pinpoint3. The ass<..,J. e company was able to liquidate its liabilities at the end of such period and regain the physical possession of its assets. _.j E

4Copy pinpoint4. The assessee company was able to persuade its creditors not to make any distress sale of the machinery taken over by the r', ) Industrial Finance Corporation with a view to salvage the company from its total e.ttinguishment.

5Copy pinpoint5. At the end of the lease period, the assessee company did not dismantle the assets and did not sell away or otherwise dis- pose of the assets. ~ It appears that the maintenance of the assets by the company meant that the company had intention to restart manufacturing of G 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.

H The High Court noted in the Judgment under appeal which inci·

COMMR. OF INCOME TAX v. VIKRAM COTTON MILLS (MUKHARJI.J.] 393

dentally is reported in ITR Vol. 106 ( 1977) at page 829 that the asses- A see'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 B 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 ~ ~

(1) 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 c 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 t 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 J,,. i" Excess Profits Tax, Bombay City v. Shri Lakshmi Silk Mills Ltd., 20 I.T.R. 451. 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 tha: 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 Commis- sioner 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, r~ 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 H

p. 394

in appeal before this Court by Leave under Article 136 of the Constitu- A tion. Whether a particular income received by the assessee as a rest.tit of 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 facts and circumstances of each case.

B This question was discussed in detail by this Court in Commis· sioner 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 c 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 D 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. Dµring the chargeable accounting period, E Ist January, 1943 to 3 lst December, 1943 owing to difficulty in obtain- ing silk yarn on account of the war it could not make use of this plant and it remained idle for some time. In August, 1943, it was let out to a person on a monthly rent. The question was whether such sum repre- senting the rent· for five months realised by the assessee was charge- able to excess profits tax as profits of business or was income from F 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 it!;elf 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 con~equence will be the same in the case of Income-Tax Act. This Court observed·llJ¥litt lhat tht'1 yMd of income by a commercial asset irrespective of the manner in which the assets

t COMMR. OF INCOME TAX v. VIKRAM COTTON MILLS lMUKHARJI, J.] 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 con- sideration 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 was incorporated purely as a c manufacturing concern with the object of making profit. It had instal- lo., led 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 observa- tions of the Court of Appeal in Inland Revenue Commissioner v. Broadway Car Co Ltd., [1946] 2 A ER 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 l 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 £400 between the outgoing of £750 for the land re- tained 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 £400 was not taxable. Lord Scott, J. held that the word 'investment' must be con- strued 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 iastalling 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 H

p. 396

A 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 common- sense view of those who deal with those matters in the particular circumstances and conduct of the parties concerned. Has the assessee B 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 mak- ing use of his machinery by either employing it in his own manufactur- ,)., ing concern or temporarily letting it to others for making profit for that c 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 charge- • able to excess profits tax. D 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 E. the avoid'ance or reduction of laibility to excess profits tax within the meaning of Section lOA of the Excess Profits Tax Act, 1940 and to make such adjustments as he considered appropriate under that sec- tion 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 tal\ing over the business from the assessee firm. The Company was director-controlled and the directors were N, his three sons R, G and Sand 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 acitivity. In July, 1940 the company executed a 1 managing agency agreement in favour of U & Co. consisting of Rand Gas partners. In January, 1941, the company appointed as its selling agent R & Co. consisting of R, G and Sas partners. In April, 1941, the shares of the partners in the assessee firm were adjusted so as to

COMMR. OF INCOME TAX v. VIKRAM COTTON MILLS [MUKHARJI, J .I 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 amal- gamating the income of U & Co. and R & Co. with the income of the a!iS~ssee firm under the provisions of Section lOA of the Excess Profits Tax Act, 1940. It was held that in the facts and circumstances of the B )( 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, there- . ~ fore, no business during the relevant peri.od to which the Act applied, Section lOA could not be invoked by the Excess Profits Tax Autho- rities. It was further held that the application of Section lOA with a c view to amalgamating the income of the firms of U & Co. and R & Co. ,,l with the income of the assessee firm was not valid in law.

1 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 adven- D ture 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 particulr activity amounted to any trade, corn- ~ merce or manufacture or any adventure in the nature of trade, corn- merce or manufacture is always a difficult question to answer. The E Judicial Committee noted in the case of Commissioner of Income-tax v. Shaw Wallace & Co., [1932] l.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 "busi- ness" indicated some real, substantial and systematic or organised F 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 at- G .ten.lion to Commissioner of Income-tax, West Bengal v. Calcutta + National Bank Ltd., 371.T.R. 171. This Court reiterated that the term "business" is a word of very wide, though by no means determinate, scope. There ihe 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 H

A

p. 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 t 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 B 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 c 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 examina- D tion, it was found that the cumulative effect of different clauses of the deed suggested that the assessee would have no concern with the pro- duction 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 E 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 F 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 G from December, 1953. By 1956, colossal loss had accumu- lated. 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 com- H pany and the company had a liability of Rs.12.5 lakhs to

COMMR. OF INCOME TAX v. VIKRAM COTTON MILLS [MUKHARJI, J.] 399

that undertaking secured by the fixed assets in terms of a 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 yam. The Industrial Finance Corporation had taken physi- ea! possession of the immovable properties of the company on 12th July, 1954, on the company's failure to pay off its B 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 c ~ scheme referred to above. According to the terms of the lease dated 7. 7. 1956 with the lessee, the General Fibres i 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 f. 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 l )' 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 infer- F ence to be drawn from the relevant facts. All the relevant facts, it appears have been considered by the Tribunal from the correct stand- point, 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 r be taken. G ;~ 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 circumst- ance, it cannot be said that no business was carried on and their in- come derived from the machine letting was only a rent income. There H

p. 400

A was a temporary suspension of business for a temporary period for an object to tide over the crisis condition. There was never any act indi- cating 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 13 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 dismis- sed with costs. )._

C 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.