| SooperKanoon Citation | sooperkanoon.com/66283 |
| Court | Income Tax Appellate Tribunal ITAT Hyderabad |
| Decided On | Jun-29-1993 |
| Judge | T R Rao |
| Reported in | (1994)48ITD72(Hyd.) |
| Appellant | Majety and Sons Oil Co. (P.) Ltd. |
| Respondent | income-tax Officer |
2. The common question at issue in all these four appeals is one and the same. The said issue is whether the lease income derived from leasing out the mill premises along with plant and machinery is exigible to income-tax under the head 'business income or under the head 'other sources' as contended by the Department. The events which led to the filing of these appeals, in short are as follows: (a) Assessee is a private limited company, registered by the Registrar of Compaines, Andhra Pradesh, Hyderabad on 2-11-1973. The main objects of incorporation of the Company was to run cotton ginning and oil extraction mill at Door No. 302/2-A of Dokiparru Village in an area of 2 Acres and 84 Cents of land. The said village is situated under the jurisdiction of Sub-registrar of Narsarao Pet in Guntur District. The factory was built in an area of 2 Acres and 84 Cents of land and it was fitted with all necessary plant and machinery, sufficient to run the cotton ginning and oil extraction plant. The objects clause in the Memorandum of Association of the Company, inter alia reads: To do all or any of the above things in any part of the world, and either as principals, agents, trustees, contractors or otherwise and either along or in conjunction with others and either by or through agents, subcontractors, trustees or otherwise.
It is also stated in the objects clause that the assessee-company is entitled to do all such other things as are incidental or conducive in the opinion of the Board of Directors to the above objects or any of them. The authorised capital of the company was Rs. 10,00,000 divided into 1,000 equity shares of Rs. 1,000 each. Calendar year is the previous year chosen by the assessee-company. During the assessment years 1975-76 and 1976-77, assessee conducted its business by itself running the mill, and derived income from cotton ginning and extraction of cotton oil. When the assessee had run the mill on its own, it had incurred losses, and losses only were returned for the purposes of income-tax also. At pages 16 and 17 of the paper-book filed by the assessee, assessment order for 1976-77 was filed, and on pages 18 and 19, assessment order for the assessment year 1977-78 was filed.
(b) Subsequently, assessee felt it more profitable to lease out the factory building together with plant and machinery installed therein, to any prospective lessee who wanted to run the same as a factory for cotton ginning as well as cotton oil extraction. The Board of Directors of the assessee-company met on 20-2-1976 at the registered office of the company at Guntur and passed the following resolution: Resolved to lease out the factory to any sound party and Mr.
M.V.R.K. Mutyalu is hereby authorised to negotiate with any prospective lessees and to execute the necessary documents in connection therewith. He is also authorised to affix the seal of the company to any such documents.
The report of the Board of Directors of the assessee-company, together with the resolution passed at the Broad of Directors' meeting on 20-2 -1976 were furnished at pages 6 to 9 of the paper book filed on behalf of the assessee. At page 9, we come across a part of the Report of the Board of Directors, which is as follows: We have crushed 15,847.67 Qtls. of Cotton seed and our production of oil is 1979.49 Qtls. and Cake is 13,245.00 Qtls. As the conditions are not favourable even in the early part of this year, to avoid further losses, it was thought desirable to give the factory on lease. The factory was leased out as per Board's resolution dated 20-2-1976 to M/s. Bharat General and Textile Industries Limited, Calcutta and Guntur for a rent of Rs. 1,00,000 for the period ending with 31st December, 1976.
It is significant to note that the Board of Directors appears to have been concerned very much with the losses sustained even in the second year of their manufacture, and therefore, they intended to lease out the factory, as an integrated unit, and they never intended to lease out in parts like building to one and plant and machinery to another.
They never intended to break the integrity of the factory and they intended that the lessee also should run it as a factory for ginning cotton and extracting oil from cotton seeds.
(c) For the first time, the factory was leased out by the assessee as per the Board's resolution dated 20-2-1976 for a rent of Rs. 1,00,000 for the period ending with 31-12-1976. Before the expiry of the said lease, the assessee entered into a regular lease agreement dated 11-11-1976 with M/s. Bharat General and Textile Industries Ltd., Calcutta and Guntur. The lessee was a subsidiary of Birla Group of Companies. The lessee was manufacturing same products in its factory located at Guntur and therefore, it felt it convenient to run the mill of the assessee as lessee. Separate agreements of lease were executed -- one with regard to the building or the mill premises, and the other with regard to plant and machinery. The first agreement of lease was executed on 11-11-1976 for a period of five years beginning from 1-1-1977 to 31-12-1981. The factory building was leased out at an yearly stipulated lease of Rs. 1,20,000. The second lease agreement was executed between the same parties on 23-10-1980 separately for factory building and for plant and machinery. The period stipulated under the second lease agreement was 10 years beginning from 1-1-1982 to 31-12-1991. The factory building was leased out on an yearly rent of Rs. 50,000. The said sum of Rs. 50,000 was to be paid in three instalments. First instalment of Rs. 25,000 should be paid at the beginning of each year of lease, while the second instalment of Rs. 12,500 should be paid in the month of April and the third instalment of Rs. 12,500 should be paid in the month of August of each year of lease.
The lease deed was furnished at pages 21 to 29 of the paper-book filed on behalf of the assessee. In the preamble of the lease deed, it is admitted that the building leased was already in the possession of the lessee, wherein it was running the mill, under a lease ending with 31-12-1981. Clause 4 of the lease deed authorises the lessee to use the premises and building as a lessee for the lease period of 10 years for the purposes of its business, and it shall be the responsibility of the lessee to ensure proper maintenance and upkeep of the buildings during the lease period. The lease deed dated 23-10-1980, under which the plant and machinery installed in the mill was leased out for a period of 10 years from 1-1-1982 to 31-12-1991, is also furnished at pages 30 to 33 of the paper book filed on behalf of the assessee. Under the said lease agreement, the stipulated rent was Rs. 1,50,000 per year for the first five years and Rs. 1,75,000 per year for the remaining five years viz., from 1-1-1987 to 31-12-1991. As in the case of the building, half of the lease amount was to be paid at the beginning of each year of lease, and the other half should be paid in two equal instalments in April and in August of each year of lease. Clause 5 of the lease agreement stipulates that the lessee should agree to obtain necessary licences for running the machinery, and it is obliged to pay all necessary licence fees, tax, etc. for such business, which it may carry on during the period of lease. Clause 12 of the lease agreement authorises the lessee to add more machinery to the existing machinery in order to increase the capacity or efficiency in the working of the factory. On the expiry of the lease period, a pre-emptive right is created in favour of the lessor inasmuch as in respect of the machinery installed by the lessee prior to 31 -12-1986, lessor shall have the option to take over such machinery on payment of 60% of the purchase value, including installation cost of the machinery of huller section, and on payment of 75% of the purchase value including cost of installation in respect of machinery in expeller section. In respect of machinery additionally installed after 1-1-1987, the lessor shall have the option to take over the same on payment of its price after deducting 5% per annum as depreciation from the purchase value of such machinery, including cost of installation. This option to purchase shall not be available to the lessor in respect of sharpies, Refinery, etc., which has been added by the lessee in March 1980, and this can be purchased by the lessor from the lessee only at such value which may be mutually agreed upon between them.
(d) The third lease agreement was executed between the same parties on 31-l-1991,which is for a period of four years and 10 months, ie., from 1-1-1992 to 31-10-1996. The lease amount agreed upon for the factory building was Rs. 70,000 per annum. Half of the same, viz., Rs. 35,000 should be paid by the month of January and the remaining should be paid in two equal instalments of Rs. 17,500 in April and August of each year of lease. Here also, the plant and machinery was leased out to the same party under another lease agreement dated 24-10-1991. The rent agreed upon was Rs. 2,35,000 per year. Half of it, viz., Rs. 1,17,500 is to be paid at the beginning of each year and rest of the amount should be paid in two instalments of Rs. 58,750 in April and August of each year of lease.
3. It is argued by the learned Counsel for the assessee, Shri Ch. G.Murali, C.A. that a survey of the lease agreements would clearly show that the assessee intended to lease out the whole mill treating it as a commercial asset, with an avowed purpose of deriving maximum profit out of the said commercial asset. Each of the three lease agreements were preceded by the resolutions passed by the Board of Directors. The Board of Directors' report, a copy of which is furnished at pages 11 and 12 of the paper-book reads as follows: During the year 1981 also the company was under lease to M/ s.
Bharat General and Textile Industries Ltd., Calcutta on a lease rent of Rs. 1,60,000 as in the earlier years and this year was the last year of the 5 years under the earlier lease agreement which was in force from 1-1-1977. The factory has again been leased out with effect from 1-1-1982 till 31-12-1991, i.e., for ten years on a lease rent of Rs. 2 lakhs for the first five years and Rs. 2.25 lakhs for the remaining 5 years to the same lessees. One standard car has been purchased during the year for the use of the company.
Again, the Directors" Report dated 25th September, 1992 contains the following, which is extracted from pages 14 and 15 of the paper-book filed on behalf on the assessee: During the year 1991 the company was under lease to M/s. Bharat General & Textile Industries Ltd., Calcutta for the 10th year under the lease agreement which was in force from 1-1-1982 expired on 31-12-1991.
Due to financial problem the Company is again leased out to M/ s.
Bharat General and Textile Industries Ltd., Calcutta for a further period of 4 years 10 months effective from 1-1-1992 to 31-10-1996 executed on 31-10-1991 for a sum of Rs. 3,05,000 (Rs. 70,000 towards buildings Rs. 2,35,000 towards movables).
The Company is approaching bankers for financial assistance and whenever the same is available the Company will be run by us without leasing out to any outsiders.
The learned Counsel for the assessee pointed out the portions of the above Resolutions, with the avowed purpose of showing that the assessee-company never intended to exploit the mill as mere property to recline and relax and rest content only with deriving lease amount from the mill. It has been observing the market conditions and as and when the conditions are found favourable, it wanted to run the mill on its own, after terminating the lease. In fact, the last of the Reports of the Board of Directors clearly shows that they have been approaching the bankers for financial assistance and whenever it is available, the mill would be run by them without leasing it out to outsiders. Thus, he argued that it would be his endeavour to show that the mill is a commercial asset and in whichever way the said asset is exploited, the income resulting therefrom should be considered as part of 'business income' and it can never be considered as 'income from other sources'.
He further contended that from the beginning, i.e., from the assessment year 1977-78 to assessment year 1981-82, the lease amount obtained by the assessee from the lease was always considered to be part of its business income, and for the first time, the ITO while framing the assessment for 1982-83, intended to assess the same as 'income from other sources', instead as 'business income' and in order to do so, the ITO issued a show-cause letter dated 18-9-1982 requiring the assessee to explain as to why the lease income should not be treated under the head 'other sources', purporting to follow the decision of the Hon'ble Supreme Court in New Savan Sugar and Gur Refining Co. Ltd. v. CIT [1969] 74 ITR 7.
4. The assessee filed written explanation dated 17-7-1983 contending inter alia that the cited decision of the Hon'ble Supreme Court is not applicable since the following main factors are absent in that case: (a) Parting with the plant and machinery and building with the object of permanently earning only rental income, treating the assets as only as investment; (b) Not to treat the assets leased as commercial assets during the tenure of lease.
Since it was never the object of the assessee to earn permanently rental income only, and since the assessee never treated the assets only as investment, and since it intended the assets leased out to be treated or used as anything other than commercial assets during the tenure of lease, the decision of the Supreme Court in New Savan Sugar and Gur Refining Co. Ltd.'s case [supra) does not apply. Further, it is contended that the assessee had installed an electrical transformer of higher KVA, which makes it possible for using greater electrical loads.
Further, the assessee also relied upon the decision of the Calcutta High Court in CIT v. Prern Chand Jute Mills Ltd. [1978] 114 ITR 769.
5. Having surveyed the salient features of the lease agreements, the ITO held in his assessment order dated 30-3-1985 passed for assessment year 1982-83 that the arguments of the assessee are not tenable, since the Supreme Court decision in New Savan Sugar and Gur Refining Co. Ltd. 's case (supra) fully applies to the facts of the case, and therefore, he was fully justified in including lease income as 'income from other sources'. Similarly, the ITO passed his assessment order dated 3-1-1986 for assessment year 1983-84, treating the lease income as part of 'income from other sources'. So also, he passed his assessment order dated 15-10-1986 for assessment year 1984-85. For assessment year 1985-86, ITO passed his assessment order dated 19-10-1986 in the same way.
6. Having been aggrieved about the treatment given to the lease income received by the assessee from the lease in each of the four assessment years referred to above, assessee went in appeal before the CIT (A), Vijayawada. The learned CIT(A), Vijayawada had taken up the appeals for assessment years 1982-83 and 1983-84 together and disposed them of, by his appellate order dated 17-2-1988. Similarly, the learned CIT (A) had taken up the appeals for the latter two years together and disposed them of, by an independent order dated 30-3-1988. He dismissed the appeals filed by the assessee for all the four assessment years, and confirmed the finding of the Assessing Officer that the lease amounts received by the assessee from the lease of the mill, in each of the four assessment years was rightly assessed under the head 'other sources'. Having been aggrieved by the impugned orders passed by the learned CIT (A), assessee came up in second appeal before this Tribunal.
7. I have heard Shri Ch. G. Murali, learned Counsel for the assessee and Shri S.C. Jaini, learned Senior D.R. for the Department. The learned Counsel for the assessee contended mainly that the assessee never intended to lease out the factory building, and plant and machinery installed therein separate from each other. Assessee-company never intended to break the integrity of the mill, and it always intended to lease out the mill to a lessee who is willing to run it as a mill, which manufactures cotton oil from cotton seeds and also carries on cotton ginning. For the first two years, assessee ran the mill on its own and sustained losses. Thereupon, the assessee felt it more profitable to exploit the oil mill with plant and machinery by leasing them out and getting good sums of lease rent. The mill as well as the plant and machinery installed therein is capable of manufacturing cotton oil, besides enabling cotton ginning, and is thus a 'commercial asset'. Whether the assessee carries on business on its own or whether it derives income from outsiders, after leasing it out to others, since the mill is a "commercial asset", in whichever way it is exploited, the income derived therefrom cannot but be considered as a "business income". The lease agreements from which extracts were taken in the preceding paras, would clearly show the intention on the part of the assessee, i.e., to take back the mill from the lessee and to run it on its own at an appropriate time, when the conditions suit it. The assessee had taken care also to insert certain clauses in the lease agreements, under which it claimed to have pre-emptive right to purchase the additional machinery, if any installed in the mill by the lessee. If the assessee had no interest to run the mill on its own and resume the business by itself, there would be no scope to find such a stipulation in the lease agreements, since the assessee would not be interested to purchase the additional machinery from the lessee.
Further, the intention of the assessee-company was made very clear in 1991, when the Board of Directors had unequivocally expressed themselves that they are trying to get bank assistance and as and when the same is available, they would resume the mill and run it on their own. This would clearly show that the assessee-company never abandoned the idea of returning to do business on its own instead of remaining content with continuously leasing out the factory to others. According to the learned Counsel for the assessee, the Supreme Court decision in New Savon Sugar and Gur Refining Co. Ltd. 's case (supra) is clearly distinguishable and it should not have been applied to the facts of the present case. Further, the learned Counsel contended that there are catena of decisions in support of his contention that lease of a commercial asset yields only 'business income', and not 'income from other sources'. He cited the following decisions before this Tribunal: (h) CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC), (0 CIT v. New India Industries Ltd. [1993] 201 ITR 208 (Guj.).
He also furnished an unreported decision of the Tribunal at page 50 of the pape'r book filed before this Tribunal, and it represents the order of this Tribunal 'B' Bench in IAC v. Lakshmi Finance and Industrial Corpn. Ltd. [IT Appeal No. 1878 (Hyd.) of 1987] in Hyderabad. He strongly contended that the treatment of the lease income in the hands of the assessee, by both the lower authorities is quite wrong and it should have been treated only as business income, and therefore, these appeals of the assessee should be allowed.
8. Learned Departmental Representative, on the other hand, contended that the decision in Vikram Cotton Mills Ltd. 's case (supra) cited by the learned Counsel for the assessee is quite distinguishable. In that case, it was found that there was only temporary suspension of business, and therefore, it was considered that the lease income derived was business income, whereas in the instant case, if the period of lease is any indication of the intention of the assessee, it can be seen that the intention of the assessee was to derive only lease income throughout, and hence it is rightly considered by the lower authorities as 'income from other sources'. He relied upon the decision of the Andhra Pradesh High Court in Guntur Merchants Cotton Press Co. Ltd. v.CIT [1985] 154 ITR 861. In that case also, the lease income derived from letting out godown and factory with machinery was considered only as 'income from other sources'. Similarly, leaned Departmental Representative also relied upon the Andhra Pradesh High Court decision in Ambica Tobacco Co. (P.) Ltd. v. CIT [ 1988] 172 ITR 343. It is contended that in the said case, the Andhra Pradesh High Court also considered the Calcutta High Court decision in Prem Chand Jute Mills Ltd. 's case (supra) and A.P. High Court decision in Aryan Industries (P.) Ltd. 's case (supra) relied by the learned Counsel for the assessee. The two Tribunal decisions cited on behalf of the assessee, it was contended by the learned D.R., did not take into consideration the two A.P. High Court decisions in Guntur Merchants Cotton Press Co.
Ltd. 's case (supra) and Ambica Tobacco Co. (P.) Ltd. 's case (supra) and hence they should not be followed or preferred.
9. In reply, the learned Counsel for the assessee submitted that the A.P. High Court decision in Aryan Industries (P.) Ltd. 's case (supra) considered the Supreme Court decision in New Savan Sugar and Gur Refining Co. Ltd. 's case (supra) and held that it is distinguishable.
10. This Tribunal, thus, had considered the arguments advanced on either side fully and completely and it went through the records of the case, as well as the paper book filed on behalf of the assessee. This Tribunal considers that the arguments of the learned Counsel for the assessee. Shri Ch. G. Murali, are to be accepted. The reasons are as follows: 11. Firstly, the argument of the learned Departmental Representative that the Supreme Court decision in New Savan Sugar and Gur Refining Co.
Ltd. 's case (supra) completely covers the case and is fully applicable to the facts of the case, cannot be accepted. Before discussing the Supreme Court decision and the ratio laid down therein, this Tribunal intends to keep in mind the caution given by the Supreme Court itself while appreciating the ratio of its judgments. A reference to the said caution was made in its decision in CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR297 (SC). At page 299, as per the head-note, the following is the caution: It is neither desirable nor permissible to pick a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the Court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, courts must carefully try to ascertain the true principle laid down by the decision.
Firstly, this Tribunal wants to keep the said caution in mind, before proceeding to consider the merits of the arguments and to accept the decisions cited on either side. This Tribunal is of the view that the ratio of the decision reported in New Savan Sugar and Gur Refining Co.
Ltd. 's case (supra), cannot be applied to the facts on hand. On the facts of that case, the Hon'ble Supreme Court came to the conclusion that the intention of the assessee was to part with the entire machinery and factory' and the premises with the obvious purpose of earning rental income and not to treat the factory and the machinery etc. as a 'commercial asset' during the subsistence of the lease. This finding of fact was recorded by the Hon'ble Supreme Court, taking the terms of the lease deed also into consideration. The Hon'ble Supreme Court further held that the intention of the assessee was to go out of the business altogether, so far as factory and machinery were concerned with effect from 1st June, 1945. However, in this case, the intention of the assessee was never to go out of business, but was to very much continue in business. Further, the assessee always treated the mill as a 'commercial asset' unlike in the case before the Supreme Court in New Savan Sugar and Gur Refining Co. Ltd. 's case (supra). Assessee always treated the mill as a 'commercial asset' and never tried to violate the integrity of the mill as a whole. It intended to work the mill either by itself or to lease it out as a mill, without dissecting it into building, plant, machinery etc. and separately giving them on rent.
Assessee had conducted the business by itself in the first two years, and it had incurred losses. The very intention of giving the mill on lease was that the lease amount offered was lucrative, and the Board of Directors of the assessee-company felt that by leasing out the mill, it makes out profit from and therefore, it preferred to get profit out of the lease of the mill instead of sustaining losses, while running the mill on its own. Therefore, the intention of the parties found out in New Savan Sugar and Gur Refining Co. Ltd. 's case (supra) is quite different from the intention of assessee in the present case. In fact, the distinguishing features of the present case as compared to the facts of the case before the Hon'ble Supreme Court in New Sauan Sugar and Gur Refining Co. Ltd. 's case (supra) were pointed out by the assessee in its letter dated 17-7-1983 addressed to the ITO, a copy of which is furnished at page 3 of the paper-compilation, and the points of distinction thus pointed out by the assessee before the ITO, are fully approved by this Tribunal.
12. I hold that majority of the decisions cited on behalf of the assessee, fully apply to the facts on hand, and the ratio of those decisions go to support the case of the assessee in more than one way.
This Tribunal has already quoted several clauses of the lease deed. The quoted clauses of the lease deed would clearly show in the opinion of this Tribunal, the eagerness or intention of the assessee to return back and do the business on its own, after it finds the business climate favourable and congenial. Prior to the floating of the assessee-company, assessee was new to this line of business. In the two preliminary years in which it conducted the business on its own, it sustained losses. The ordinary behaviour of any businessman would not be to continue in losses for ever. Every endeavour of the businessman would be how early to get out of the losses and begin earning profits.
Birla companies are known for their business acuman. Perhaps, the intention of the assessee is to observe the business tactics adopted by the Birla group, but at the same time get some fat sums towards lease, which would give them profits. Thus, in the particular process of leasing out the mill, assessee was getting business profits as well as creating an opportunity for themselves to observe and learn the business tactics from the lessee. Further, there was a stipulation in the lease deed which empowered the lessor to purchase the machinery which the lessee is entitled to add to the existing machinery in the mill, since it should be first offered to them for sale, before offering it to any other prospective buyers. If the intention of the assessee is only to remain content with rents by leasing out the mill, it would be the last person to be interested in the purchase of machinery at concessional rates and also to claim right of preemption in that regard. The very fact that the lessor had got such a stipulation incorporated in the lease deed, which created a pre-emptive right in its favour with regard to the sale of machinery, would clearly show the assessee's intention to renew the business and run the mill on its own. In the last of the lease agreements, which was executed for a period of four years and ten months, the Board of Directors made it very clear that they were approaching the Bankers for adequate finance, and as and when they succeed in getting the finances, they intend to renew the business on their own. This material on record would clearly show that the assessee never abandoned the whole idea of conducting the business on its own, by simply satisfying itself with the leasing of the mill to others and getting only lease rents from the lessees.
13. The contention of the assessee is that the mill in which cotton ginning would be undertaken and oil from cotton seeds would be extracted, is a commercial asset, since manufacturing activity is carried on therein.
In such a case, whether the said commercial asset it exploited either by the assessee on its own or by somebody on its behalf, the income derived from the said exploitation can only be considered as business income and not nothing else. This proposition has found support of the Calcutta High Court decision in Prem Chand Jute Mills Ltd. 's cast (supra), in which the following propositions were formulated: 1. In order to be a business income there must be evidence of exploitaion of a commercial asset.
2. Exploitation of a commercial asset does not necessarily mean exploitation by the assessee himself at all material times. The assessee may temporarily cause it to be exploited by another person against payment of consideration and for this purpose may execute a lease for a fixed period even with option to renew.
3. But, in order that the income derived from the lease should be taxable it must be shown that the lessor's intention was that during the period of the lease the asset leased out must remain and be treated as a commercial asset and be exploited as such.
4. This intention of the lessor has to be ascertained from the cummulative effect of all the terms of the lease and other material circumstances.
In the facts of that case, assessee was carrying on the business of manufacture of jute goods. In had incurred heavy losses due to various factors including quarrels amongst the Directors. The company leased out the jute mills for a period of five years, with an option to renew it for another five years. The Tribunal held that the income from lease is the business of the assessee, who is entitled to set off its unabsorbed depreciation and loss against its income. The High Court held in reference, inter alia as follows: Where income is derived by the exploitation of the asset, and there is only a difference in the manner of exploitation, that is to say, instead of user of the asset by the assessee himself, there is a leasing out of the asset, the income derived must be considered to be of the same nature, viz., business income. Unabsorbed depreciation and losses incurred when the asset was exploited by the assessee himself can be carried forward and set off against the income derived from leasing out of the commercial asset.
To the same effect is the decision of the Calcutta High Court in Everest Hotels Ltd. 's case (supra), in which the Calcutta High Court held as follows: ... Whether a particular letting is business or not depends on the circumstances of each case. And each case, as the Supreme Court points out in Sultan Brothers P. Ltd. v. CIT [1964] 51 ITR 353 (SC).
has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of the property by an owner. ...
14. The next decision cited in support of the assessee's contention was that of Andhra Pradesh High Court in Aryan Industries (P.) Ltd. 's case (supra), wherein the Hon'ble High Court has laid down the following ratio: As long as the assessee retained the character of an asset as a commercial asset and does not, either by word or conduct, express his intention to go out of the business by converting the commercial asset into property, the income that accrues to the assessee by the exploitation of such an asset by whatever process the assessee feels expedient to adopt, can be only business income and not income from other sources.
In the case before the Andhra Pradesh High Court, an oil mill belonging to the assessee was leased out for a period of 18 years.
15. In this connection, the learned Departmental Representative wanted to distinguish the above decision of the A.P. High Court by quoting a later decision of that very High Court in Ambica Tobacco Co. (P.) Ltd. 's case (supra). The learned Departmental Representative argued that the decision in Aryan Industries (P.) Ltd. 's case (supra) was considered and distinguished in that case. The Tribunal went into Ambica Tobacco Co. (P.) Ltd. 's case (supra), and it found that the facts of this case are quite distinguishable from the facts of the present case. In the case before the A.P. High Court Ambica Tobacco Co.
(P.) Ltd. 's case (supra) machinery purchased for the purpose of manufacture was not used for the purpose of manufacture, and it was mere leased out for Rs. 6,000, and the question that fell for consideration before the Hon'ble High Court was whether it should be considered as 'business income' or as income from 'other sources'. The machinery was in fact purchased for purposes of carrying on manufacture, but there was a definite finding of fact that the said machinery was not used for manufacturing purposes, and the machinery was leased out not for the purposes of manufacture by the lessee, but to use it for some other purposes. When once the machinery, which was first intended for manufacturing purposes was never used for the said purpose, or was discontinued from being used for the purpose, it ceased to be a commercial asset. In fact, that was the finding given by Justice Rama Rao of the A.P. High Court. Their Lordship of the A.P.High Court held that in determining whether the income from lease of machinery is income from business or income from other sources, it should be found out whether the machinery was a commercial asset. It was further held that stamp and incidence of commercial asset rises when the asset is acquired and used for the purposes of the business.
Mere acquisition of an asset normally used for business or manufacturing activity, does not make the asset a 'commercial asset' unless it is used for the said purpose. So, two ingredients are essential for being treated as a 'commercial asset - stamp and incidence. An asset is a commercial asset, if it is used for the business or manufacturing activity. If it is not so used, then it would lose the character of a commercial asset. In the facts before the High Court, as already stated, machinery was purchased for the purpose of manufacture, but it was never used for the said purpose. However, that is not the case here in the present appeals. The mill together with plant and machinery set up therein was a commercial asset, since it is capable of manufacturing, and it was in fact used by the assessee for manufacture initially, in the present case. After suffering losses in the first two years, assessee has leased out the mill to others and the manufacture is being carried on by the lessee. Simply because the manufacturing was carried on by the lessee, it does not mean that the commercial asset is not being used for business purposes. Therefore, in the considered opinion of this Tribunal, the Andhra Pradesh High Court decision in Ambica Tobacco Co (P.) Ltd. 's case (supra) also does not apply to the facts of this case, and it is clearly distinguishable. On the other hand, the decision in Aryan Industries (P.) Ltd. 's case (supra), is very near to the facts of the present case, and hence the ratio of that decision is very clearly applicable to the facts of this case.
16. In Aryan Industries (P.) Ltd. 's case (supra), Their Lordships of the Andhra Pradesh High Court had considered two Supreme Court decisions viz., Shri Lakshmi Silk Mills Ltd's case [supra) and New Savan Sugar and Gur Refining Co. Ltd. 's case (supra). For some time, they felt there was some irreconciliability between the two. Later, they held on a close scrutiny that there is no such irreconciliability between them. Discussing the decision in New Sauan Sugar and Gur Refining Co. Ltd. 's case [supra), on page 726 of the Report (138 ITR), the Hon'ble High Court observed that at the time of giving decision in the case in New Savan Sugar and Gur Refining Co. Ltd. 's case (supra), the earlier Supreme Court decision in Shri Lakshmi Silk Mills Ltd. 's case [supra) was cited before Their Lordships of the Supreme Court, but the Hon'ble Supreme Court distinguished the same on the ground that that was a case where only a part of the machinery was let out on lease and the rest of the machinery was worked by the assessee himself. The letting out of the machinery was for a short period of five months only. It was also pointed out that that was not a case of letting out of the factory as such. In that context, the Supreme Court held that the intention of the assessee was not to treat the factory etc., as a commercial asset during the subsistence of the lease, and the intention of the assessee was to go out of the business, so far as the factory and machinery were concerned with effect from the date of commencement of the lease and that the intention was to enjoy the return on the investment, as the owner of the factory. Their Lordships pointed out that in the earlier of the Supreme Court decisions, viz., Shri Lakshmi Silk Mills Ltd. 's case [supra), the Supreme Court emphasised that in whatsoever manner a commercial asset is used, the income arising therefrom is business income. While in the latter Supreme Court case, i.e., New Savan Sugar and Gur Refining Co Ltd. 's case [supra) in the facts and circumstances of the case, the Supreme Court held that the assessee had stopped using the factory as a commercial asset during the subsistence of the lease, whereas in the former case Shri Lakshmi Silk Mills Ltd. 's case (supra), it held that it did not. In both the Supreme Court cases cited above, it was emphasised that the question whether in a given case, an asset is being used as a commercial asset or as an income-yielding property, is a question of fact to be determined in the given facts and circumstances of each case.
17. Another decision relied upon by the learned Counsel for the assessee is the one of the Supreme Court in Vikram Cotton Mills Ltd. 's case (supra). In that case, the assessee-company carried on the business as manufacturer of textiles. However, it ran into losses in 1949. By December 1953, as against its capital of Rs. 11 lakhs, its accumulated liabilities amounted to Rs. 26 lakhs, and the company stopped its manufacturing activities. In May 1976, one of the creditors filed a petition in the High Court for its winding up. I.F.C., a major creditor took possession of its fixed assets by virtue of its powers under an English mortgage of those assets. The High Court, with the approval of the assessee-company as well as its creditors evolved a scheme under Section 153 of the Indian Companies Act, 1913, whereunder the business assets were let on a rent of Rs. 2.50 lakhs per year for 10 years with an option for renewal for another ten years, and the management of the company was transferred to a Board of Trustees approved by the High Court. For assessment years 1960-61 to 1963-64, the question arose whether the rental income was assessable as 'business income' and the losses incurred by the assessee in the earlier years could be set off against the said rental income. When the matter came up before the Tribunal, it held that the maintenance of the assets meant that the company had an intention to restart the business and that the intention of the company in letting out its assets was to exploit the commercial assets for the purpose of its business, and therefore, the rental income was business income against which company's earlier losses could be set off. When the matter came up in further reference to the High Court, the High Court confirmed the decision of the Tribunal holding that all relevant facts have been considered by the Tribunal from the correct stand point, namely, that of an ordinary prudent businessman. The Hon'ble Supreme Court also had agreed with the High Court. It held the following as per the head-note obtaining on p. 598 of the Report (169 ITR): ... applying the correct principle the Tribunal found that the intention of the company was not to part with the assets but to lease them out for a temporary period as a part of exploitation. In such a circumstance, it could not be said that no business was carried on or that the income derived by the company from letting out the machinery was only rental income. There was a temporary suspension of business for a temporary period with the object of tiding over the crisis condition. There was never any act indicating that the company never intended to carry on the business In the future. The High Court was right in its view that the income derived by the respondent 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'.
Therefore, whether the assessee is carrying on business during the currency of the lease period or not, has to be determined in the light of the businessman's point of view, as per the above decision. This Tribunal has already explained that after tasting losses for two years, assessee felt that it would be more profitable to do, if the commercial asset is leased out to earn good sums of lease rent, instead of continuing in losses further. Therefore/by leasing out, the assessee-cornpany thought that it would be carrying on its business with the same commercial asset, which it owns on more profitable basis.
Therefore, even as per the approved ratio of the Hon'ble Supreme Court in the cases cited above, it would appear that the lease income should be considered as part of business income and not as income from other sources.
18. Since we have already discussed the Supreme Court decisions on the subject, the other decisions rendered by the Tribunal and other High Courts may not be considered material, except to burden the record.
Therefore, this Tribunal does not propose to deal with the other citations, on which the learned Counsel relied upon to support his contentions. Suffice it to say that the orders of the lower authorities are beset with wrong appreciation of facts and law on the subject. They are therefore, set aside, and this Tribunal directs the Assessing Officer to treat the lease amounts derived in each of the accounting years relevant to the four assessment years under consideration, as part of business income of the assessee.