Commercial asset rental income treated as business income where the asset was created from business capital and remained part of the trade.

An oil mill built out of capital from an existing flour mill business was treated as a commercial asset because it was created as an extension of the business and not as a separate investment. Income from temporarily letting out that oil mill was held to be business income under section 2(5) of the Excess Profits Tax Act, since the asset remained part of the business apparatus and was later worked by the assessee himself. The reference was answered in favour of the Revenue on both points.

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Issues: (i) Whether the oil mill was a commercial asset. (ii) Whether the income from letting out the oil mill was income from business within the meaning of section 2(5) of the Excess Profits Tax Act.

Issue (i): Whether the oil mill was a commercial asset.

Analysis: The oil mill was constructed out of capital employed in the assessee's existing flour mill business. There was no finding that it was set up with the object of being let out only, and the assessee subsequently ran it himself. In these circumstances, the setting up of the oil mill was treated as an extension of the existing business and not as a mere investment unconnected with trade.

Conclusion: Yes. The oil mill was a commercial asset.

Issue (ii): Whether the income from letting out the oil mill was income from business within the meaning of section 2(5) of the Excess Profits Tax Act.

Analysis: The income arose from exploitation of a commercial asset formed out of business capital. Temporary letting out did not destroy its character as business asset, especially when the asset remained capable of being worked by the assessee and was later worked by him. The receipt was therefore attributable to business operations and not to a separate source outside business.

Conclusion: Yes. The income from hiring out the oil mill was income from business and was taxable under the Excess Profits Tax Act.

Final Conclusion: The reference was answered in favour of the Revenue on both questions, holding that the oil mill was a commercial asset and that the rental income was business income chargeable under the Act.

Ratio Decidendi: Where an asset is acquired or created out of business capital as an extension of an existing business and remains capable of being worked as part of that business, income derived from temporarily letting it out is business income, even if the asset is not used by the assessee himself during the relevant period.

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