TaxTMI 
TaxTMI 
1969 (2) TMI 7
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....ing the offer of a lease of the company as a running concern from the Standard Refinery & Distillery Ltd. At an extraordinary general meeting of the shareholders of the assessee-company held on 5th March, 1946, it was decided to authorise the directors to enter into a lease with the said Standard Refinery & Distillery Ltd. By an indenture of 15th March, 1948, the lease was executed to come into effect retrospectively from 1st June, 1945. The term of the lease was originally for 5 years commencing from 1st June, 1945, with an option to the lessee to continue for further five years and thereafter two further options to the lessee, each for five years, on the same terms and conditions, but subject to the payment of higher rates of royalties and also subject to the option on the part of the assessee-company to terminate the lease by a resolution of the shareholders of the company to be held before 30th November in any year after the first two years. This option of termination of the lease was not exercised by the assessee-company. The consideration of the lease as described in clause 7 of the indenture was royalty payable on the manufacture of sugar and molasses. The royalty on sugar w....
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....inafter referred to as " the Act ") : " (1) Whether, on the facts and in the circumstances of the case, the income of the assessee-company was liable to be assessed under section 12 of the Indian Income-tax Act and not under section 10 of the said Act ? (2) Whether, on the facts and in the circumstances of the case, additional depreciation and development rebate can be allowed as a deduction ? " The High Court answered both the questions against the assessee holding that the income was liable to be assessed under section 12 and that no additional depreciation and development rebate could be allowed. Section 10 of the Act stood as follows at the material time : " 10. (1) The tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely :--. . . . (vi) in respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent, where the assets are ships other than ships ordinarily plying on i....
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....which is wholly used for the purposes of the business carried on by the assessee, a sum by way of development rebate in respect of the year of installation equivalent to twenty-five per cent. of the actual cost of such machinery or plant to the assessee : Provided that no allowance under this clause shall be made unless the particulars prescribed for the purpose of clause (vi) have been furnished by the assessee in respect of such machinery or plant ......." Section 12 was to the following effect : " 12. (1) The tax shall be payable by an assessee under the head 'income from other sources' in respect of income, profits and gains of every kind which may be included in his total income (if not included under any of the preceding heads)... (2) Such income, profits and gains shall be computed after making allowance for any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of making or earning such income, profits or gains ..... (3) Where an assessee lets on hire machinery, plant or furniture belonging to him, he shall be entitled to allowances in accordance with the provisions of clauses (iv), (v), (vi) and (vii) of sub-section (2) o....
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....ove the same provided always that the lessees shall forthwith repair and make good all damage caused to the demised premises by such removal of the lessees' machinery. Clause 7 provides for the payment of royalty. The royalty on sugar was to be computed at the rate of rupees seventy-five per 100 maunds of sugar manufactured for the first five years as well as next five years, then at the rate of rupees eighty-two and annas eight per 100 maunds of sugar manufactured for the third five years and Rs. 90 for the fourth five years. The royalty on molasses was computed at three pies per maund on all molasses sold during each year of the original lease period and any renewals thereof, subject to the payment of a minimum royalty of Rs. 6,500 per annum. Clause 8 : This clause provides that the lessee shall in addition to the royalty reserved be responsible for all the running expenses of the factory including salaries and wages and all factory staff and labour and shall pay all sugar excise duty, etc., excepting the ground rents payable to the landlords and taxes on income chargeable to the lessors and shall fully reimburse the lessors in respect of such expenses which have already been....
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.... commercial concern during the subsistence of the lease. The primary condition for the application of section 10 of the Act is that the tax is payable by an assessee under the head "profits and gains of business" in respect of business carried on by him. When an assessee does not carry on business at all, section 10 cannot be applicable and the income that he receives cannot bear the character of profits of business. As we have already shown there is no direct nexus between the income of the assessee and the production of the factory. The royalty payable to the assessee was not paid under clause 7 of the indenture of lease for the production in the factory. The production was only a measure of the royalty to be paid and, in any event, the measure of payment had nothing to do with the character of the payment as a receipt from business or from other sources. It follows that, in the circumstances of this case, the income of the assessee cannot be characterised as income from the activity of the assessee carrying on any business. The High Court was therefore right in holding that the income of the assessee was liable to be assessed under section 12 and not under section 10 of the Act.....
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....sessee-firm did not thereafter manufacture anything and it had accordingly no further trading or commercial activity. In the circumstances, it was held that letting out of the plant and the machinery by the assessee to the company could not fall within the definition of "business" under section 2(5) and as the assessee-firm had no business during the relevant period to which the Act applied, section 10A could not be invoked by the excess profits tax authorities. It was however pointed out that whether at particular activity amounts to any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture is always a difficult question to answer and no general principle can be laid down which would be applicable to all cases and each case must be decided in the setting and background of its own facts. It is evident that the material facts in the present case are somewhat different from those of Narain Swadeshi Weaving Mills' case for there is no outright sale of the building of the factory but only a lease of the factory premises together with the machinery for a long period of years. For the reasons already expressed our conclusion is that the intenti....