1973 (5) TMI 28 - HC - Income Tax

Assessee's Leased Asset Income Taxable under Business Profits Rule

The court concluded that the income derived by the assessee-company from leasing its assets during the specified years is assessable under 'profits and ... Business Income, Set Off, Textile Mill Issues Involved:1. Classification of income derived from lease-rent: 'profits and gains of business' vs. 'income from other sources'.Detailed Analysis:P The primary issue in this case is whether the income derived by the assessee-company from the lease-rent of its assets during the specified years is assessable under 'profits and gains of business' or 'income from other sources'. The assessment years in question are 1960-61, 1961-62, 1962-63, and 1963-64.P The assessee-company, a limited company engaged in the manufacture of textiles, faced financial difficulties starting from 1949, leading to the cessation of its manufacturing activities by December 1953. A winding-up petition was filed in May 1956, and the Industrial Finance Corporation took possession of the company's immovable properties. Subsequently, a scheme was approved by the High Court under which the business assets were let out to M/s. Fibres Dealers (Pvt.) Ltd., Calcutta, for Rs. 2,50,000 per year to pay off creditors. The lease was for ten years with an option for renewal.P Initially, the lease income was assessed under 'profits and gains of business' for the years 1957-58 to 1959-60. However, for the subsequent years, the Income-tax Officer assessed it under 'income from other sources'. The assessee-company appealed, arguing that the assets were exploited commercially to alleviate financial distress, indicating no intention to discontinue business activities. The Tribunal found that the company intended to restart manufacturing after resolving its financial issues and directed the income to be treated as business income.P The Tribunal's findings included:1. The company was not formed to let out its assets on hire.2. The leasing was a temporary measure due to financial crises.3. The company liquidated its liabilities and regained possession of its assets.4. The company avoided a distress sale of its machinery.5. The company maintained its assets with the intention to restart manufacturing.P The Tribunal inferred that the company's intention in leasing its assets was to exploit them commercially for business purposes. The assessee argued that the income from leasing commercial assets should be considered business income, citing several Supreme Court decisions.P In Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC), the Supreme Court held that income from a commercial asset, whether used by the owner or let out, is business income. The court emphasized that the asset's commercial nature and the owner's intention to exploit it for business purposes are crucial.P In Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax [1954] 26 ITR 765 (SC), the Supreme Court distinguished between permanent discontinuation of business and temporary cessation due to exigencies. The latter does not change the commercial nature of the assets.P The Bombay High Court in Commissioner of Income-tax v. National Mills Co. Ltd. [1958] 34 ITR 155 (Bom) held that leasing business assets temporarily does not change their commercial nature, and the income remains business income unless the business is permanently discontinued.P The Tribunal's finding that the assessee-company intended to restart its business after resolving financial issues was supported by sufficient material. Therefore, the income from leasing the plant and machinery was business income and could be set off against previous business losses under section 24(2) of the Indian Income-tax Act, 1922.P The revenue cited Seth Banarsi Das Gupta v. Commissioner of Income-tax [1977] 106 ITR 559 (All), where the income from leasing assets was not considered business income because the firm had permanently stopped its business. This case was distinguished as the firm had ceased all business activities, unlike the temporary cessation in the present case.P The court concluded that the income derived by the assessee-company from leasing its assets during the specified years is assessable under 'profits and gains of business'. The assessee was entitled to set off this income against previous business losses.P The court answered the referred question in favor of the assessee, allowing the income to be taxed under 'profits and gains of business'. The assessee was awarded costs assessed at Rs. 200, with the same fee for the department's counsel.