Lease of a running factory and sale of depreciated machinery can both yield taxable business income under the statutory scheme.

Income from leasing a running factory remained business income because the factory was acquired and improved as a commercial asset and continued to retain its business character despite being let year to year. The lease was treated as a mode of exploiting the asset for profit, so the receipts were taxable as business income. The second proviso to section 10(2)(vii) also applied to tax the excess realised on sale of depreciated machinery while the business was still being carried on; it operated as a charging provision for escaped profit and was not displaced by section 12(3).

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Issues: (i) whether income derived from the lease of the factory was assessable as business income under the Income-tax Act, 1922; (ii) whether the second proviso to section 10(2)(vii) applied notwithstanding the assessee's reliance on section 12(3).

Issue (i): whether income derived from the lease of the factory was assessable as business income under the Income-tax Act, 1922.

Analysis: The factory was acquired and improved as a business asset, was run as a going concern, and was thereafter leased on a year-to-year basis without ceasing to retain its commercial character. Leasing the running factory was treated as one mode of exploiting a commercial asset for profit, and the owner continued to earn income from the business asset even though actual operations were carried on by the lessee.

Conclusion: Yes. The income from the lease was assessable as business income, in favour of the Revenue.

Issue (ii): whether the second proviso to section 10(2)(vii) applied notwithstanding the assessee's reliance on section 12(3).

Analysis: The second proviso to section 10(2)(vii) was treated as a charging provision bringing to tax escaped profits arising on sale of depreciated business machinery while the business was being carried on. It was not regarded as an allowance provision within the scope of section 12(3). Since the asset remained a business asset and the sale occurred while the commercial activity continued, the proviso was held applicable.

Conclusion: The second proviso applied, and the assessee's objection based on section 12(3) failed.

Final Conclusion: The reference was answered against the assessee on the substantive questions, and the depreciation element realised on sale was held taxable as business profit under the statutory scheme.

Ratio Decidendi: Where a business asset remains a commercial asset and is exploited for profit, including by lease of a running concern, the resulting receipts retain the character of business income; on sale of depreciated machinery while the business is still being carried on, the second proviso to section 10(2)(vii) taxes the excess as escaped profit.

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