Royalty from long-term lease of factory assets treated as income from other sources; special depreciation allowances denied

A long-term lease of a sugar factory, machinery and connected assets, where the assessee had effectively parted with the entire commercial apparatus, produced royalty income assessable as income from other sources under section 12 and not as business income under section 10 of the Income-tax Act, 1922. The royalty measured by production did not change the character of the receipt, because the assessee was no longer carrying on the manufacturing business through the leased assets. Additional depreciation and development rebate were also not allowable under section 12, as the special allowances in section 10(2)(via) and section 10(2)(vib) could not be imported into section 12 except where the statute expressly permitted.

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Issues: (i) Whether the royalty income from the lease of the sugar factory and machinery was assessable as business income under section 10 of the Income-tax Act, 1922, or as income from other sources under section 12; (ii) Whether additional depreciation and development rebate under sections 10(2)(via) and 10(2)(vib) were allowable in assessment under section 12.

Issue (i): Whether the royalty income from the lease of the sugar factory and machinery was assessable as business income under section 10 of the Income-tax Act, 1922, or as income from other sources under section 12.

Analysis: The lease covered the factory premises, machinery and connected assets for a long term, and the assessee had effectively parted with the entire commercial apparatus. The royalty was payable on production, but the production figure was only the measure of payment and did not determine the character of the receipt. The assessee did not carry on the business of manufacturing through the factory during the lease period, and the income arose from ownership and letting out of the assets rather than from business operations carried on by the assessee.

Conclusion: The income was rightly assessed under section 12 and not under section 10, and this issue was answered against the assessee.

Issue (ii): Whether additional depreciation and development rebate under sections 10(2)(via) and 10(2)(vib) were allowable in assessment under section 12.

Analysis: Sections 10(2)(via) and 10(2)(vib) introduced special allowances with a distinct statutory scheme. They were not read into section 12(3) or section 12(4) by implication, because the statute expressly allowed only the allowances specified there. The court declined to supply words that Parliament had not used.

Conclusion: Additional depreciation and development rebate were not allowable, and this issue was answered against the assessee.

Final Conclusion: The assessment under section 12 was upheld, the claimed business allowances were refused, and the appeal failed.

Ratio Decidendi: Where an assessee has effectively ceased to carry on the business and merely derives royalty from a long-term lease of the commercial assets, the receipt is income from other sources, and special allowances under section 10 cannot be imported into section 12 except where the statute expressly provides.

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