1. The assessee is common and the points involved in these appeals also are common and hence for the sake of convenience they can be taken up together and disposed of by this common order. The question at issue in both these appeals is whether the sums of Rs. 1,27,475 for the assessment year 1985-86 and Rs. 1,69,565 for the assessment year 1986-87 are liable to be included as business income of the assessee for these years by virtue of the newly inserted provisions of Section 161(1 A) introduced with effect from 1-4-1985, which are as follows :- Notwithstanding anything contained in Sub-section (1), where any income in respect of which the person mentioned in Clause (iv) of Sub-section (1) of Section 160 is liable as representative assessee consists of, or includes, profits and gains of business, tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate.
2. The assessee is a private trust which came into existence under the provisions of the trust deed dated 1-4-1982 executed by Smt. SAP Lakshmi Achi, widow of Shri Palaniappan Chettiar. The trust was executed for the benefit of six beneficiaries, the first of the beneficiaries being one SAP Annamalai, the trustee of M/s Kumudam Endowments, which was a trust under the indenture dated 1-1-1971. The second beneficiary is his son Shri A. Jawahar Palaniappan, who is now said to be a nonresident and working as a cardiologist in USA. The third and fourth beneficiaries under the trust deed are minor son and daughter of Shri Palaniappan. The fifth and sixth beneficiaries under the deed are the sons of Shri P.V. Parthasarathy, one of the trustees appointed under the deed. The second trustee Shri Swamynarayanan is the brother of Parthasarathy, the first of the trustees. Each of the beneficiaries are given the corresponding shares shown against them in the table below :-6. P. Varadarajan 2.5% ------ Thus under the trust deed the number of beneficiaries are known and their beneficial interest are also known. The objects clause of the trust deed would show that the income of the trust after deduction of all necessary outgoing expenses shall be divided and credited to the accounts of the beneficiaries and shall be utilised for the general welfare, education, marriage and maintenance expenses of the second, third, fourth, fifth and sixth beneficiaries and for purposes of making payments for the maintenance expenses of and for carrying out of the objects of the first beneficiary trust out of income so credited to their accounts till the extinguishment of the trust. Shri Parthasarathy and his brother Shri Swamynarayanan were made trustees under the deed.
Listing out the powers of the trustees in para 4 Clause (f) the board of trustees were given full liberty to carry on any business under whatever name or names they may determine and the trustees were also given full choice to make the trust join as a partner in any partnership firm carrying on any business. Clause 7 of the deed would say that the duration of the trust is 15 years from the date of the deed or till the demise of the last surviving beneficiary or till the trustees unanimously decide to determine the trust, whichever event happens earlier. As long back as on 15-4-1982 the assessee trust was appointed as a distributor for Kumudam, Kalkandu and Malaimathi publications by Kumudam Publications Pvt. Ltd., for certain areas like Alwarpet, T. Nagar, Mint in Madras, Coimbatore, Bangalore, Trichy, Madurai and VT and Dadar in Bombay. The terms and conditions on which the assessee trust was appointed as distributor for the above publications were provided at page 2 of the paperbook-II filed by the assessee before us. The reverse of page 2 contains the terms and conditions for sale of the distributorship of the above publications which were in force on and from 1-6-1980. It may here itself be stated that Kumudam Publications Pvt. Ltd. was the publishers of Kumudam and Kalkandu weeklies and Malaimathi a bi-weekly. They are popular journals familiar with the reading public in the whole of Tamilnadu as well as in pockets of Bombay. Kumudam Publications itself is a closely held private limited company having only 4,300 equity shares. Shri SAP Annamalai, the trustee of the Kumudam Trust who is the first beneficiary under the assessee trust holds 1000 shares as an individual and 2,600 shares as a Hindu undivided family in Kumudam Publications Pvt. Ltd. So also Smt. SAP Lakshmi Achi, the author of the assessee-trust held 300 shares and Smt. Meena Jawahar Palaniappan, wife of Jawahar Palaniappan, one of the beneficiaries held 100 equity shares out of the total 4,300 shares of Kumudam Publications Pvt. Ltd. It is significant that till 1984-85 assessment year the assessee-trust was doing business as the distributor of the magazines published by Kumudam Publications Pvt. Ltd. In the accounting year relevant to the assessment year 1985-86 more exactly under the terms of the agreement dated 1-4-1984 the distributorship rights of the assessee-trust were made over to a partnership firm M/s Varalakshmi Agencies, in which Shri Parthasarathy and Shri Jawahar Palaniappan were the only two partners.
A copy of the said agreement is provided at pages 17 to 19 of the paperbook-I. Under the terms of the deed Varalakshmi Agencies should pay Rs. 10,000 per month as consideration for taking over the distribution rights of Kumudam, Kalkandu and Malaimathi for all the territories over which the assessee-trust used to have the distributorship rights. The agreement is put in force for one year. M/s Varalakshmi Agencies undertook to bear all outgoings with reference to the distribution of the aforesaid publications including taxes due to the Government. There is a renewal clause to further extend the period of agreement. On such terms and conditions which the parties may agree upon. Again on 1-4-1985 the sub-distributorship created in favour of Varalakshmi Agencies was further extended for another year. Under the terms of this agreement dated 1-4-1985 it was stated that the assessee-trust was doing business of agency in distribution of Kumudam, Kalkandu and Malaimathi journals at Madras and other places and it offered to give the distribution rights to Varalakshmi Agencies over the territories of Madras city, Coimbatore, Bangalore, Bombay Dadar and VT, Madurai and Golden Rock for a consideration of Rs. 1.8 lakhs per annum. The amount should be paid at the rate of Rs. 15,000 per month for aperiod of one year. Varalakshmi Agencies only should be liable to incur all outgoings with reference to the distribution of the said publications including taxes due to the Government.
3. For the assessment year 1985-86, for which the previous year ended by 31 -3-1985 the assessee returned a sum of Rs. 1,27,480 as income.
This income has been allocated in the profit sharing ratio among the beneficiaries under the trust. It had shown the break-up of the total income of Rs. 1,27,480 as follows : The assessee trust claimed that the consideration derived by it for appointing Varalakshmi Agencies as its sub-distributors of the above said periodicals was in the nature of income from other sources. It is the claim of the assessee-trust that since the trustees of the assessec-trust are only representing the beneficiaries and since their liability is co-extensive with that of the beneficiaries and they can be assessed only to the same extent to which the beneficiaries can be assessed if individual assessments are framed against them, the returned income should be assessed according to the profit sharing ratio of the beneficiaries. The Income-tax Officer rejected this contention and held by virtue of the newly inserted Section 161(1 A) by the Finance Act, 1984 with effect from 1-4-1985 the consideration received for appointing Varalakshmi Agencies as sub-distributors of the three periodicals mentioned above would represent nothing but exploiting income yielding asset and the amount derived from leasing out the distributorship is nothing but business income and it cannot be considered as income from other sources. Further by virtue of the provisions of Section 161(1 A) the whole of the business income is liable to be charged with maximum marginal rate since the provision of Section 161(1A) prevails notwithstanding anything contained in Section 161(1). Therefore there is no question of distributing the returned income among the beneficiaries under the trust and making the trustees liable to the same extent as that of the beneficiaries. Thus he brought the wholeofRs. 1,27,475 to tax at maximum marginal rateand levied a sum of Rs. 78,875 as tax under his assessment order dated 11-3-1987 framed under Section 143(3) for the assessment year 1985-86.
4. For the assessment year 1986-87 the assessee declared a net income of Rs. 1,69,565 under the head other sources. The assessee contended that the income received from Varalakshmi Agencies is to be assessed under the head other sources. During the assessment proceedings the Income-tax Officer served a letter dated 26-7-1988 calling upon the assessee as to why the income returned should not be treated as business income for the following three reasons: (1) The right to distribute the magazines published by Kumudam Publications under the agreement of distributorship obtained from M/s. Kumudam Publications Pvt. Ltd., was earlier exploited by the assessee itself and the income therefrom was returned and assessed as business income till the assessment year 1984-85. (2) The distributorship rights which was yielding business income was transferred to Varalakshmi Agencies by an agreement and hence the income received from Varalakshmi Agencies is business income. (3) Income derived from a source which is capable of being exploited for business purposes is business income only in view of the various decisions of the High Courts including the decision of the Calcutta High Court in Park Hotel (P.) Ltd. v. CIT [1987] 167 ITR 60. The assessee-trust gave a reply dated 25-8-1985 contending mainly that the trust was a mere recipient of lease amount and that it was not carrying on any activity or trade which involved various acts like placing order on Kumudam, take charge of copies, arrange for distribution and the other connected activities. The Income-tax Officer held that the income derived from transfer of distributorship is business income and brought the total income of Rs. 1,69,565 to tax at the maximum marginal rate and levied a sum of Rs. 84,785 as income-tax for the assessment year 1986-87 under the assessment order dated 15-3-1989. The assessments were made directly upon the trust treating its status as that of an association of persons.
5. Having been aggrieved against those assessments the assessee went in appeal before the learned Commissioner (Appeals), who disposed of the appeal for the assessment year 1985-86 by his order dated 26-7-1988 and the appeal for the assessment year 1986-87 was disposed of by the learned Commissioner (Appeals)-I, Madras by his order dated 1-11-1989.
The appeals relating to the respective assessment years 1985-86 and 1986-87 were dismissed by the learned Commissioner (Appeals) in their impugned orders stated above.
6. Against the impugned orders dated 26-7-1988 for the assessment year 1985 -86 and dated 1-11-1989 for the assessment year 1986-87 the assessee came up in second appeal before this Tribunal and thus the matter stands for our consideration. We have heard Shri Ramamani, the learned counsel for the assessee and Shri Ravindran, the learned departmental representative. The learned counsel for the assessce contended that the main question in this appeal is to decide whether the assessee-trust was carrying on the business in the accounting years relevant to the assessment years 1985-86 and 1986-87 or only enjoying the ownership rights of the property represented by the distributorship agreement held by the assessce from M/s. Kumudam Publications Pvt. Ltd. If we agree with his contention that the assessee is enjoying only the ownership rights under the distributorship agreement obtained from Kumudam Publications Pvt. Ltd., then Section 161(1A) is inapplicable.
It is next contended that even our answer to the first question is held against the assessee then also only the so-called business income received by the assessee is taxable with the maximum marginal rate but not the whole income derived by the assessee for the each of the accounting years in question. Thirdly it is contended that from out of the whole accounting period relevant to the assessment year 1985-86 the assessce carried on business under the distributorship agreement for only ten days namely from 1 -4-1984 to 10-4-1984. If for only ten days out of the whole accounting year the assessce carried on the business how far it would be justifiable to tax the income of the whole year with maximum marginal rate. It is next contended that the distributorship was later leased out to Varalakshmi Agencies, a partnership firm from whom the assessce trust was receiving only licence fee which should be treated as 'income from other sources' but not business income. The learned counsel for the assessee made it clear that he is not questioning the assessment against the association of persons as incorrect. The words 'whole of the income' occurring in the newly inserted provisions of Section 161(1A) should mean the whole of business income but not total income. Now in this appeal the learned counsel for the assessee submitted that the true meaning of the words 'profits and gains of business' occurring in Section 161(1A) is to be found out and given. He submitted that when the assessee trust stipulated to get. a fixed amount for the ownership of distributorship rights of the periodicals it had obtained from Kumudam Publications Pvt. Ltd., being exploited what all it wanted was to insulate itself from the risk of business and it only remained a passive recipient of the licence fee from Varalakshmi Agencies and so that licence fee cannot be characterised as business income. The whole of the expenditure concerning the distributorship of the periodicals under the explicit terms of the contract dated 1-4-1984 was taken over by M/s.
Varalakshmi Agencies. The following recital in the agreement dated 1-4-1984, which is repeated in the agreement dated 1-4-1985, is significant and is as follows: "The party of the second part shall be liable to incur and pay all outgoings with reference to distribution of the aforesaid publications including the taxes due to the Government." The learned counsel for the assessee submitted that all the activities like placing orders on Kumudam, take charge of copies, arrange for distribution and other connected activities were all taken over by Varalakshmi Agencies and for making over the distribution rights the assessee trust was simply getting a consolidated amount of Rs. 10,000 per month during the accounting year relevant to the assessment year 1985-86 and Rs. 15,000 per month for the accounting year relevant to the assessment year 1986-87. Thus in this case the intention of the parties in entering into the sub-distributorship contract dated 1-4-1985 would appear to be that the assessee-trust wanted to insulate itself from commercial risk and leave the actual exploitation to another agent for a fixed price agreed upon. Thus the amounts received under the sub-distributorship contracts were received passively. The assessee withdrew itself from business. It ceased to carry on the business from 1-4-1984 itself or in the alternative from 12-4-1984 from which date M/s. Kumudam Publications Pvt. Ltd., recognised the distributorship rights of Varalakshmi Agencies. Thus the income derived by the assessee-trust under the agreements dated 1-4-1984 and 1-4-1985 which it had entered into with Varalakshmi Agencies yielded only income from other sources but not business income since it does not involve any exploitation of the distributorship rights.
7. The learned departmental representative, opposing the contentions of the learned counsel for the assessee, contended that M/s. Kumudam Publications Pvt. Ltd., the assessee-trust, the beneficiaries under the trust, the trustees appointed under the assessee-trust as well as the two partners of the partnership firm called Varalakshmi Agencies, were common and if a consolidated view of all the documents under which the several persons came into existence would show that the same set of persons were carrying on the business both as publishers as well as distributors of the periodicals mentioned above. He stated that there are only two partners in Varalakshmi Agencies. They are Shri Parthasarathy and Shri Jawahar Palaniappan. Shri Parthasarathy is one of the trustees under the assessee-trust and Shri Jawahar Palaniappan is one of the beneficiaries under the assessee-trust. Kumudam endowments is a major beneficiary under the assessee-trust, represented by Sri SAP Annamalai, who holds 90% share both as individual as well as Hindu undivided family in the equity capital of a closely held private limited company called Kumudam Publications Pvt. Ltd. The learned departmental representative contended that the transfer of the distributorship rights in favour of M/s. Varalakshmi Agencies was only pitched upon in an attempt to avoid the taxing provisions like 161(1 A). He relied 011 the decision of the Supreme Court in Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 for the proposition that it is the duty of the court in every case where ingenuity is expended to avoid taxing and welfare legislations to get behind the smoke-screen and discover the true state of affairs. The court is not to be satisfied with form and leave well alone the substance of a transaction. The learned departmental representative contended that the agreement dated 12-4-1984, a copy of which is put on record at page 5 in paper book-II filed on behalf of the assessee can easily be proved to be an afterthought and got up document. This document is purported to be a document under which Varalakshmi Agencies were recognised to be the distributors of the three periodicals mentioned above in the cities over which the distributorship rights were first recognised in favour of the assessee-trust, from 12-4-1984. Unfortunately the terms and conditions which the distributor purported to have agreed upon were shown in printed form on the back of page No. 5. That means the agreement at page 5 was filed mainly to show that Varalakshmi Agencies was recognised as the distributor from 12-4-1984 by Kumudam Publications Pvt. Ltd., distributor at the following places : Alwarpet, Mint, Puruswalkam in Madras city, cities of Golden Rock, Madurai, Coimbatore, Bangalore, Dadar and VT in Bombay. The number of copies of the periodicals which the distributor sought from the publishers were all mentioned in that agreement.
Condition No. 16 of the distribution agreement in favour of Varalakshmi Agencies itself would show that they have to pay Rs. 9 per copy of Kumudam, Rs. 5 per copy of Kalkandu and Rs. 3 per copy of Malaimathi as advance to the publishers. If this advance was in fact paid to the publishers on 12-4-1984 then also we can so say that the distributorship agreement in favour of Varalakshmi Agencies is genuine.
For this purpose we have verified the original of the income-tax records in Varalakshmi Agencies' file. The learned departmental representative filed before us the balance-sheet of Varalakshmi Agencies as on 31-3-1985. The said balance-sheet disclosed only loans and advances of Rs. 20,216. The details of loans and advances were also given. They are as follows : Thus it is clear that no advance as such was paid to the publishers by Varalakshmi Agencies under the alleged distributorship agreement dated 12-4-1984. This is one of the strong grounds on which we can say that the distributorship agreement dated 12-4-1984 in favour of Varalakshmi Agencies is not a genuine document but should have been got up subsequently and no credence need be given to it. As already stated a copy of the agreement is provided at page 9 of the paper book-II.Further the learned departmental representative argued that the assessee-trust seems to have intimated the publishers by their letter dated 15-3-1984 the intention to hand over the distributorship to Varalakshmi Agencies. The contents of this letter would show that the distributorship was entrusted to Varalakshmi Agencies due to reasons of the assessee's inability to look after directly and due to other reasons. Hence it was requested of the publishers that all parcels which were used to be sent in the name of the assessee-trust were directed to be sent at the places mentioned in the letter, from 1-4-1984, till further intimation. Thus this letter would show that the conduct of business itself was entrusted to Varalakshmi Agencies and Varalakshmi Agencies was to carry on the distributorship business on behalf of the assessee from 1-4-1984 till further intimation to the publishers. This letter nowhere envisages that a sub-distributorship was given to Varalakshmi Agencies nor the period of the sub-distributorship was intimated. Further if the contention of the assessee that it had retired from the business altogether is correct then the advances which were made to the publishers under Clause 16 of the distributorship agreement should have been received back from the publishers or from the sub-distributors. The publishers agreed to supply the following number of periodicals : According to Clause 16 of the distributorship agreement dated 15-4-1982 which the assessee trust entered into which the publishers it had to deposit Rs. 7 per copy of Kumudam, Rs. 4 per copy of Kalkandu and Rs. 2.50 per copy of Malaimathi as advance with the publishers. According to the said stipulation the following amounts should have been deposited by the assessee-trust with the publishers : If the assessee-trust entertained an idea to retire from the business then the first thing to be expected of it is that it would take back the advance which it had deposited with the publishers since it is a substantial amount of more than Rs. 10 lakhs. However, no such withdrawal of advance was either pleaded or proved. Further when it was the case of the assessee that it completely retired from the business after making over of the distributorship rights to Varalakshmi Agencies then it should have got back the advance of about Rs. 10 lakhs mentioned above from the sub-distributors. However, as already noted neither Rs. 10 lakhs or any amount whatsoever was paid either as advance or as repayment of advance by Varalakshmi Agencies. This itself would show, according to the learned departmental representative that the assessee never had the intention to go out of business but was only made over the business to Varalakshmi Agencies as a stop gap arrangement. Further there cannot be two distributors for the same areas. Varalakshmi Agencies were sought to be treated as the real distributors in the place of Scva Trust. Then the distributorship agreement in favour of the assessee should have corne to an end or should have been cancelled and a fresh agreement of distributorship should have been entered into with Varalakshmi Agencies. However, as the correspondence before us would show that Varalakshmi Agencies are recognised as distributors only at the instance of the asscssee-trust and not otherwise. That itself would show that the assessee wants to exploit the distributorship agreement in its favour as a commercial asset for both these assessment years. Therefore, the amounts obtained by the assessee-trust from Varalakshmi Agencies for having allowed to use its distributorship agreement with the publishers were correctly considered as business income and not as income from other sources.
8. The learned departmental representative contended that the following decisions would apply to the facts of the case: (1) CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC) and (2) G.R. Narasimier and Co. v. CIT [1969] 73 ITR 257 (Mad.). He also contended that it is not correct to argue that only the business income is liable to be taxed with maximum marginal rate under the provisions of Section 161(1A). It is the whole income whether business income or the oilier income earned by the assessee which is liable to be taxed with the maximum marginal rate, In this connection the learned departmental representative brought to our notice the budget speech of the Finance Minister on the Finance Act, 1984, which is found in 152 ITR 17 (St.).
The learned departmental representative also relied on the decision of the Allahabad High Court in CIT v. Vikram Cotton Mills Ltd. [1977] 106 ITR 829.
9. On the other hand the learned counsel for the assessee relied on the decisions of the Supreme Court in Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765 and in Sultan Bros. (P.) Ltd. v. CIT [1964] 51 ITR 353; and also relied on a portion of the commentary at page 818 of Chaturvedi and Pithisaria's Income-tax Commentary, Third Edn. Vol. 1.
10. After having considered the arguments thus advanced on both sides we arc unable to accept the arguments of the learned counsel for the assessee for the following reasons. Firstly let us consider whether the distributorship rights which the asscssee-trust got under the agreement dated 15-4-1982 which it had entered into with the publishers of the periodicals is a commercial asset or is mere enjoyment of a proprietary right or income derived from other sources. In this connection it is admitted that out of the accounting period relevant to the assessment year 1985-86 the assessee carried on the business of distributorship from 1-4-1984 to 11-4-1984. It is the case of the assessee that from 12-4-1984 it stopped its business and allowed Varalakshmi Agencies to act as distributors. For so allowing them to act as distributors it had charged a sum of Rs. 1000 per month in the accounting year relevant to the assessment year 1985-86 and a sum of Rs. 15,000 per month in the accounting year relevant to the assessment year 1986-87. What is the inherent nature of the distributorship agreement dated 15-4-1984 in favour of the assessee-trust. Is it a commercial asset which is capable of producing income only on exploitation or is it an asset like an immovable property like a building, plant, machinery, which are capable of being leased out and in which case there may be difficulty felt to decide whether the rental income derived therefrom is 'business income' or 'rental income' or 'income from other sources'. In our considered opinion the rights under the distributorship agreement represent only a commercial asset which means that unless exploited it docs not produce income. We come across with a case where up to 11-4-1984 the assessee-trust itself carries on business of distributorship and subsequently it allowed Varalakshmi Agencies to carry on the business.
It is to be admitted that the publishers namely Kumudam Publications Pvt. Ltd., Seva Trust and Varalakshmi Agencies were all interconnected and manned by the same set of persons. We have already dilated on this topic sufficiently in the prior paras of our order. In our opinion if the assessee intended to quit the business from 12-4-1984 then it should have expressed it so to the publishers and would have cancelled the distributorship agreement also with them. However, it is significant to see that the distributorship agreement dated 15-4-1982 was never cancelled. On the other hand it had merely directed the publishers to send the copies of the periodicals only to Varalakshmi Agencies on their behalf till further intimation. The letter dated 15-3-1984 in Tamil, a translated copy of which is furnished to us, would show the following : "We have decided that the sales distributorship of Kumudam, Kalkandu and Malaimathi for the undermentioned places now carried out by our institution Seva Trust be entrusted to M/s. Varalakshmi Agencies, 151, Puruswalkam High Road, Madras - 600 010, due to reasons of our inability to look after directly and also due to other reasons. Hence all the parcels sent ia our name to undermentioned places may please be sent from 1-4-1984 till further intimation to M/s. Varalakshmi Agencies. Monthly bills be sent to M/s. Varalakshmi Agencies' address: 151, Puruswalkam High Rd., Madras - 600 010." It would show that the assessee never wanted to go out of business permanently. It also would not show that up to what date it requested the parcels intended to the places mentioned in the notice to be sent in the name of Varalakshmi Agencies. We are further of the opinion that if it was the intention of the assessee trust to go out of the business altogether then it would have sold it distributorship rights permanently instead of leasing them out yearly on a stipulation to pay Rs. 1,20,000 per annum during the accounting year for the assessment year 1985-86 and Rs. 1,80,000 per annum for the accounting year relevant to the assessment year 1986-87. Further the assessee-trust did not withdraw the advance of over Rs. 10 lakhs which it had deposited with the publishers before supplying the assured number of copies to it at several places at which places it was working as distributors. All this would clearly show that the assessee never intended to quit the business as distributor of the abovesaid periodicals but only merely suspended its business temporarily. It is no doubt stated to us that ultimately the assessee's agency came to an end in 1987. That itself would show that the assessee continued to be an agent till 1987, i.e., after the end of the two accounting periods relevant to the assessment years 1985-86 and 1986-87, with which we arc concerned in these appeals. If really the assessee wanted to withdraw from business and Varalakshmi Agencies were appointed as distributors of the periodicals in place of the assessee-trust, then the advance paid to the publishers by the assessee-trust should have been replaced or substituted with the advance made by Varalakshmi Agencies. However from the balance-sheet of Varalaksmi Agencies as on 31-3-1985 no such advance was ever paid to the publishers. All this would show that the distributorship agreement dated 15-4-1982 was a commercial asset, that the assessee continued to exploit it and earned business income by exploiting the same from 15-4-1982 to 11 -4-1984 and because it thought that leasing it out to others would be a better sort of exploitation, it had leased out for a consideration of Rs. 12,000 per month for the accounting year relevant to the assessment year 1986-87. In this connection it would appear to us that the decision of the Supreme Court in Shri Lakshmi Silk Mills Ltd.'s case (supra) is on all fours to the facts of the present case. In that case the assessee was a manufacturer of silk cloth and as a part of its business it installed a plant for dyeing silk yarn. During the accounting year from 1-1-1943 to 31 -12-1943 it found difficulty in obtaining silk yarn on account of war.
Therefore it could not make use of the 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 the 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. During the course of the judgment they disapproved the following ratio held by the High Court: "The High Court was in error in engrafting a proviso on the rule deduced by it from the authorities considered by it, to the effect that a commercial asset of a business concern which yields income must at the time it was let out to be in a condition to be used as a commercial asset by the assessee himself." Their Lordships of the Supreme Court laid down the following ratio in the same page: "But we cannot accept the view 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 is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business. He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else." While laying down the above ratio their Lordships approved and followed an English case in Sutherland v. IRC [1918] 12 Tax Cas. 63, which laid down the following proposition as stated at page 456 of the reported decision: "That a commercial asset susceptible of being put to a variety of different uses in which gain might be acquired, and whichever of these uses it was put to by the appellant, the profi t earned was a user of the asset of the same business. A mere substituted use of the commercial asset does not change or alter the nature of the asset.
Whatever the commercial asset produces is income of the business of which it is an asset, the process by which the asset makes the income being immaterial." 11. In G.R. Narasimier and Co. v. CIT [1969J 73 ITR 257 (Mad.) a partnership firm carried on a powerloom factory up to April 12,1954 and thereafter the manufacturing was stopped and the machines and the buildings were lying idle. The powerlooms were commissioned again to work by R with effect from 1-11-1956 under an agreement dated 13-6-1957 and which was renewed on 16-4-1958. Under the agreement, though R was at liberty to shift the looms and accessories to a new premises and work them there, their ownership continued to be that of the assessee partnership. The assessee was to be paid a sum of Rs. 650 per month as and by way of share of net profits. The departmental authorities and the Tribunal treated the agreement as one of lease and assessed income derived by the assessee therefrom as income from other sources rejecting the contention of the assessee that the same was assessable as income from business. The High Court held that the intention of the parties as expressed in the document being one to create the relationship of principal and agent in relation to the working of the looms, it could not be treated as a lease and hence the income was assessable as income from business. In the present case also it would appear that the assessee trust permitted Varalakshmi Agencies to carry on the business of distributorship on its behalf and so while Varalakshmi Agencies carried on the distributorship business it merely acted as an agent of the assessee-trust and hence the ratio of the above Madras High Court decision appears to be applicable to the facts of this case.
12. In the Allahabad High Court decision in CIT v. Vikram Cotton Mills Ltd.'s case (supra) a company carried on business of manufacture of textiles. Because of heavy liabilities due to losses the company stopped its manufacturing activity from December 1953. At the instance of several creditors winding up proceedings were filed before the High Court. Under Section 153 of the Indian Companies Act, 1913, the High Court with the approval of both the assessee and its creditors evolved scheme whereunder the business assets of the company was let out to M Ltd. or Rs. 2 lakhs per year rent. The lease was for ten years with an option to renew for another ten years. The intention was that the various creditors would be paid oui of the lease money. For the assessment years 1960-61 to 1963-64 the Income-tax Officer held that the income from the lease rent was liable to be taxed under the heat, 'income from other sources'. On the other hand the Tribunal held that it is in the nature of business income. Agreeing with the Tribunal the High Court on reference held the following as per the headnote at page 830 : "Held, agreeing with the Tribunal, that the income of the company by way of lease-rent from the letting out of its assets was assessable to tax under the head 'profits and gains of business'. The Tribunal had pointed out that the company had no intention to permanently discontinue its business. It adopted the method of using its business assets through another company by way of a lease in order to resolve its very serious financial difficulties. Since the liabilities were liquidated, the assessee-company was able to regain possession of its business assets and utilise them for carrying on its manufacturing business. There was sufficient material to justify the finding of the Tribunal that the income derived from the lease of the plant and machinery was income from business and that the income so derived could be set off against losses of the company from the business of the manufacture of textiles brought forward from the preceding year under Section 24(2) of the Act. The lessee utilised the business assets of the company to carry on the same kind of business as was being carried on by the assessee, namely, manufacture of textiles. So, it could not be said that the business in which the losses occurred was not continued to be carried on in the assessment years in question within the meaning of Sub-section (2) of Section 24 of the Act." Just like in the above case, the sub-distributor also exploited the distributorship agreement in the same way in which the assessee-trust used to exploit previously. So the ratio of the Allahabad High Court decision appears to be applicable to the facts of the case.
13. The learned counsel for the assessee as already stated, relied on two decisions, viz., Narain Swadeshi Wvg. Mills' case (supra), and Sultan Bros. (P.) Ltd.'s case (supra) besides some earlier Tribunal decisions, copies of which are filed in the paper book, e.g., (1) L.V.Prasad Charitable Trust [IT Appeal No. 1322 (Mad.) of 1985 dated 25-5-1987, (2) Tuluva Vellala Association [IT Appeal No. 3984 (Mad.) of 1987 dated 22-4-1987]; (3) SOS Children's Village of India v. ITO [1990] 34 ITD 476 (Mad.); and (4) Yennarkay Rajaratnam Charities [IT Appeal Nos. 1223 to 1225 (Mad.) of 1985 dated 31-7-1987]. We have gone through all these decisions. We hold that they are distinguishable on the facts of the case and we are of the opinion that the ratio of none of those cases applies to the facts on hand. In Narain Swadeshi Wvg, Mills' case (supra) the facts found by the Tribunal on the basis of which their Lordships rendered their decision are found stated at page 772 as follows : "What then are the facts found by the Appellate Tribunal apart from its findings under Section 10A. The findings are that after the formation of the company the assessee firm was left with no business at all. The company purchased the leasehold rights in the land and buildings where the plant, machinery, etc. were installed. The firm as such ceased to manufacture any ribbons and laces. It was left with the plant, machinery, etc., which it did not require and which ceased to be a commercial asset in its hands, for it had no longer any manufacturing business. Further the assessee firm had put itself out of its power to use the plant, machinery, etc. for it had no right in the lands and buildings where the plant, machinery, etc. had been installed. In these circumstances, the assessee-firm let out the plant, machinery, etc. to the company. It was thenceforth the company which was carrying on the business of manufacturing ribbons and laces and for that purpose hired the plant, machinery, etc. from the assessee firm.
Prima facie it was the company which appointed the managing agents and the selling agents. Ex facie and apart from the alleged result of any enquiry under Section 10 or Section 10A of the Excess Profits Tax Act those were not transactions of the assessee firm. The assessee firm was, therefore, left only with some property which at one time was a commercial asset but had ceased to be so. The assessee firm thereupon let out that property on rent. The question is whether such letting out in such circumstances amounted to carrying on of a business". In that case their Lordships had distinguished their own earlier decision in Shri Lalcshmi Silk Mills Ltd.'s case (supra). It was stated that in Shri Lakshmi Silk Mills Ltd.'s case (supra) the respondent company was continuing its business of manufacturing silk cloth. Only a part of its business, viz., that of dyeing silk yarn on account of war was discontinued. However, in the case before them the assessee firm'sbusiness had been entirely closed. It no longer manufactured any ribbons and laces. It had accordingly no further trading or commercial activity. It could not in fact use the plant, machinery, etc. after the land and the buildings where they were installed had been sold to the company. In the circumstances the assessee firm let out plant and machinery, etc. on annual rent of Rs. 40,000. Thus it is clear that the whole business was wound up that the factory premises as well as the factory buildings were sold away and the plant and machinery only were let out. In those circumstances it was held that the lease income derived does not represent business income. However, in the case before us we gave a definite finding that the assessee did not abandon its intention to continue the business while it had appointed Varalakshmi Agencies as its sub-distributors. It is only during the course of the lull felt by the assessee trust they allowed Varalakshmi Agencies to exploit the distributorship rights which the assessee trust held under the agreement dated 15-4-1984 for a sum agreed upon. Further the total period during which the rights of distributorship was parted with was only for two years and that too in two spells, each spell occupying one year. After two years the distributorship again came to the assessee-trust. In those circumstances the ratio of Narain Swadeshi Wvg. Mills (supra) cannot be applied. In the case of Shri Lakshmi Silk.
Mills Ltd.'s case (supra) the plant and machinery by themselves cannot.be called business assets whereas in our opinion the distributorship agreement in favour of the assessee-trust is nothing but a commercial asset, pure and simple and that makes all the distinction between the present case before us and Narain Swadeshi Wvg.
Mills''s case (supra) and therefore the ratio of that decision cannot be applied.
14. In Sultan Bros. (P) Ltd.'s case (supra) the assessee was a private company and it had constructed a building on a plot of land fitted up with furniture and let it out on lease fully equipped and furnished for the purpose of running a hotel. The lease provided for a monthly rent of Rs. 5,950 for the building and a hire of Rs. 5,000 for the furniture and fixtures. The question was whether the lease amount is to be treated as business income, In that case it was specifically held that the assessee never carried on any business of hotel in the premises let out and there was nothing to show that it intended to carry on the hotel business itself in the same building. In those circumstances the letting out of the building was held not to amount to carrying on of any business. However, in this case from 1982 to 1984 the assessee exploited the distributorship agreement and in fact engaged itself as a distributor of periodicals in the cities and towns specified under the agreement. It is only during a part of the accounting year relevant to the assessment year 1985-86 it had leased out its rights of distributorship to Varalakshmi Agencies and therefore there is clear evidence in this case of the assessee carrying on business previous to the leasing out and the fact that the lease was only for a temporary period of two years in two spells also would disclose that after lease period is over, the assessee intended to carry on the business again as a distributor. Further the distributorship rights under the agreement dated 15-4-1982 in favour of the assessee-trust cannot be compared with the rights of an owner in a building fitted with furniture and fittings in which a hotel can be run. Whereas the distributorship agreement is necessarily a business asset, the building need not necessarily be a business asset. The income derived from building can be a property income, income from other sources or business income depending upon the circumstances of each case. Therefore, in our opinion the ratio of Sultan Bros. (P) Lid. (supra) cannot be applied to the facts on hand.
15. Now, coming to the Tribunal decisions relied on by the learned counsel for the assessee, their ratio cannot be applied inasmuch as all of them dealt with cases of public trusts and not with the cases of private trusts. In the case of L.V. Prasad Charitable Trust (supra) the question was about the application of Section 13(1) (bb) of the Income-tax Act. This decision was relied upon by the learned counsel for the assessee in support of his contention that the income received by the assessee was only a passive receipt but not as business income by actively participating in any business activity. In that case M/s.
Prasad Productions Pvt. Ltd., the producer of a Hindi film 'Bidaai', already gave the distribution rights to six distributors in different areas. Only the overflow rights were settled on the assessee-trust and those overflow rights have been specifically described to mean the rights of the settlee to receive. 50% share of the collections from the distributors after adjustment of the minimum guarantee amount. Those rights were settled on the asscssee-trust by means of the deed dated 15-5-1975. M/s. Ravishankar Films represented by its managing partner Ramesh had produced another Hindi film called 'Shaadi ke baad' and he had already given the distributorship rights of the said film to M/s.
Rajshree Pictures Pvt. Ltd. on 27-3 -1972 and made over the overflow rights of the said film in favour of the assessee under the settlement deed dated 9-10-1972. Thus in that case what is settled was the right to derive benefits from out of the business. The assessee had no right to alter the business or to interfere in the business. It is only the right to receive benefits out of the business which is settled under the two settlement deeds mentioned above. In fact that was highlighted by the Tribunal while accepting the contention that, the assessee- trust in that case was only passive recipient of the income who never carried on any business. At the close of para 10 of their order the following is what is found : "On the contrary, we find that the materials on record fully support the contentions of the learned counsel that the appellant-trust was only a passive recipient of the net income from the rights settled on the appellant-trust by the two donors as donations to the corpus of the appellant-trust, and that the appellant-trust had not carried on any business, much less abusiness in film distribution, as the donors had already entered into such film distribution agreements with the seven distributors, for the distribution of the two films in respect of the various territories and as such there was nothing to be done by the appellant-trust, except to receive the net income from the said distributors for the three charitable objects of the appellant trust and as empowered under the trust deed dated 12-8-1971 and carry out the said trust objects." It was further found that the total amount received from the distributors of these two films was Rs. 1,06,304. The amount received from the distributors of 'Bidaai' was Rs. 1,05,410 and the paltry sum of Rs. 894 was received towards the overflow rights from the distributors of the film 'Shaadi ke baad'. The settlement deed dated 15-5-1975 by which overflow rights were conferred on the assessee-trust contain Clause 2, which is as follows: "This agreement shall not confer on the settlee any right to interfere with the rights of distributors to distribute the picture in accordance with the agreement already entered into by the settlor and the settlce's right is only confined to the collections of the 'overflow rights' as defined hereinabov, for a period of one year from 1st June, 1975." The above would dearly disclose that the assessee trust in that case had no right to interfere in the business of distributorship and it had no other role to play except to collect the amount due under the distribution agreement. Under the circumstances the claim of the assessee that it was only a passive recipient of the benefits of business was accepted. However, the facts of this case arc quite different. In the trust-deed under which the assessee-trust was formed, as was already seen, here was only a clause entitling the trustees to carry on any business which they like and to invest the trust funds in such business. Unlike in the case quoted before us, where not only the particulars of the business was stated, but also the role which the assessee-trust has to play, was also mentioned specifically. In the cited case the role of the assessee-trust was only just to receive the benefits of the business under the settlement entered into with the distributor. However, it is not the case here. So the amount that is received (Rs. 1,20,000 for 1985-86 and Rs. 1,80,000 for 1986-87) cannot be said to be amounts which directly flowed as benefits of business already arranged under the terms of the trust deed. Therefore the argument that the assessee-trust was only a passive recipient cannot fit into the facts and circumstances of this case.
16. The decision in Tuluva Vellala Association's case was cited for the proposition that even supposing the amounts received by the assessee are held to be taxable only the business incomes are taxable but not the total income. The provision which fell for interpretation of the Tribunal in that case was 13(1)(d) but not 161(1 A) as is the case before us. The Tribunal found that there was ambiguity in the wording of Section 13(1)(d) inasmuch as they have expressed the following at para 5 of their order: "No doubt the expression will lose exemption from income-tax or forfeit exemption from tax have been used to explain the provision. But the provision itself starts with the exclusion of the part of the income from the property which does not enure for the benefit of the public in Sub-clause (1) of Section 13(1). Sub Clause (d) refers to any income thereof which may mean either any income of the trust or any income from a particular source which docs not conform to the pattern of investment. There is an ambiguity in the wording of the section which could have been easily avoided if the Parliament had used clear language to state that the trust itself would not be eligible for exemption." When there is ambiguity only, the question how to resolve the ambiguity arises and the question of application of the ratio in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC), would arise, according to which when there are two constructions possible, the one in favour of the assessee should be preferred and adopted.
However, in our opinion in the wording of Section 161(1A) there is no ambiguity whatsoever present and so there is no warrant to apply the ratio of Vegetable Product's case in the present case. Section 161(1A) was inserted by the Finance Act with effect from 1-4-1985. Not only the provisions of Section 161(1A) are very clear and unambiguous they were also explained lucidly in CBDT circulars reported in 152 ITR 1 (St.) at page 17 paras 26.1 and 26.2 which are as follows: "26.1 Trustees of a private trust are ordinarily not expected to carry on any business because, implicit in the nature of business is the possibility of incurring loss and no prudent trustee would risk the trust's property in business venture. However, it has come to notice that taxpayers are increasingly conducting business through the medium of private trusts.
Such arrangements are entered into for purposes of lax avoidance, the main object being to avoid payment of the registered firm's tax which would become payable if the business is carried on in partnership. 26.2 In order to counteract such attempts at tax avoidance, the Finance Act has inserted a new Sub-section (1A) in Section 161 of the Income-tax Act which provides that where any income in respect of which any person mentioned in Clause (iv) of Sub-section (1) of Section 160 of the Income-tax Act (i.e., a trustee appointed under a trust declared by a duly executed instrument in writing, whether testamentary or otherwise, including a wakf deed) is, liable as representative assessee consists of or includes profits and gains of business, income-tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate." In SOS Children's Village of India Ltd.'s case (supra) the Tribunal was concerned with the correct interpretation of Section 11(4A) and not 161(1A). In the case of Yennarkay Rajaratnam Charities the Tribunal was concerned with \3(1)(bb) and they did not deal with Section 161(1A). Suffice it for the present to state that there is a clear finding that the asscssee in that case was not a trader and the assessee trust had no intention of doing any business in that case. Trade marks may be commercial assets and their exploitation may be business activity but in a matter like the present one before them in the hands of a non-business institution even the commercial assets shed the character of commercial assets and become only a simple item of corpus of the trust It is the character of the person who exploits the assets that was to be looked into to find out whether it is commercial asset or a simple item of profit, but that is not the case here. The assessee admittedly carried on business from 1982 to 1984 and so the ratio of that decision does not apply to this case.
17. For all the above reasons we hold that the treating of the income earned by the assessee is business income and treating the status of the assessee as association of persons is perfectly justified and the orders of the lower authorities are therefore confirmed. In the result the appeals of the assessee are found to be without merits and hence they are dismissed.