TaxTMI 
TaxTMI 
1987 (5) TMI 22
X X X X Extracts X X X X
X X X X Extracts X X X X
....the identical question in the affirmative. Virtually identical facts may be noticed from Tax Cases Nos. 249 to 251 of 1976. S. K. Sahana & Sons Ltd., the assessee, is a limited company which, inter alia, derives income from a mining establishment known as New Bansjora Colliery. By an agreement dated April 22, 1959, the assessee-company leased out the colliery to Khas Ganeshpur Coal Mines (P.) Ltd. by appointing the latter as a managing contractor for period of ten years with an option of renewal for a further period of three years. The terms of the agreement, inter alia, were for the payment of the minimum guaranteed amount of Rs. 18,000 per year to the assessee and further to pay a guaranteed profit of Rs. 1,50 per ton of coal raised from the colliery and an additional payment of Rs. 2.225 per ton for every ton of soft coke manufactured and Rs. 3 per ton for hard coke manufactured by the managing contractor. For the assessment years 1967-68 to 1969-70, it was contended on behalf of the assessee before the Income-tax Officer that the minimum guaranteed amount of income and the royalty received on every ton of coal raised by the managing contractor should be assessed as an inc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....5. On these premises, the Tribunal referred the following question to the High Court for the three assessment years: " Whether, on the facts and in the circumstances of the case, the income of the assessee received from the managing contractor was income from business ? " These cases originally came up for consideration by a Division Bench presided over by my learned brother, Uday Sinha J. In his lucid order of reference to the larger Bench, it was noticed that there appeared sharp cleavage of opinion within the court itself between the cases in S. K. Sahana & Sons Ltd. [1976] 102 ITR 437 and CIT v. Pure Dhansar Coal Co. [1985] 154 ITR 857 (Pat) on the one hand and Khas Benedih Colliery v. CIT [1974] BBCJ 440 (Pat) and CIT v. Kuya & Khas Kuya Colliery Co. [1985] 156 ITR 206 (Pat) on the other. It was consequently found appropriate that the question of the interpretation of the lease granted by the assessee should be considered by a larger Bench for deciding whether the earlier case in S. K. Sahana & Sons Ltd. [1976] 102 ITR 437 was correctly decided or not. To facilitate the resolution of the point, it was further directed that the agreements executed by the assessee, S. K. S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d under clause 15... 3. As there are no machineries existing at the said colliery, the managing contractor shall be entitled at its own cost to instal such machineries and to bring in such chattels and utensils at the said colliery, as it may in its discretion think fit and proper for the purpose of working the said colliery. The said machineries so to be installed and the said chattels and utensils so to be brought shall remain the absolute properties of the managing contractor and on determination of these presents, subject to the provisions of clause 5 hereof, the managing contractor shall be entitled to remove such machinery, chattels and utensils as may be installed at or brought in by it to the said colliery without any objection on the part of the proprietor. 2. The managing contractor shall have full power and authority to search for, get, quarry, win and dig coal by all... [torn]... required modes of coal mining in the said colliery and manufacture coke and otherwise to work the said colliery according to the Indian Mines Act and the Rules and Regulations framed or to be framed thereunder and all other statutes, bye-laws, rules and regulations applicable to the said ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to grant and sign effectual receipts and discharges for the same. (vi) To institute suits and other proceedings for recovery of price of coal and coke ... [torn]... and delivered and for the purposes aforesaid to sign vakalatnama, plaints, petitions and other cause papers. (vii) To enforce (sic) or otherwise negotiate any cheques that may be drawn in favour of the proprietor of New Bansjora Colliery by any such party as aforesaid or otherwise to collect the proceeds of the cheques. (viii) To enter into siding agreements with the Railway Administration and do all other things in connection with obtaining new siding accommodation and/or having additional loading accommodation. 9. That notwithstanding anything contained herein authorising the managing contractor to sell coal or coke, the managing contractor shall not sell or dispose of any coal or coke otherwise than by despatching the same by Railways except with the express written consent of the proprietor and in the presence of the representatives of the proprietor. 10. The proprietor hereby undertakes to execute in favour of the managing contractor or its nominee or nominees a power of attorney authorising it to e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of guaranteed income or profit at the rates mentioned above is subject to a minimum of Rs. 18,000 (rupees eighteen thousand) only per annum, that is to say, in case the guaranteed income or profit on the basis of raisings of coal and coke falls short of Rs. 18,000 (rupees eighteen thousand) only, in any particular year or years, the managing contractor shall be bound to pay to the proprietor the fixed sum of Rs. 18,000 only. That the said sum of Rs. 18,000 will be payable in three instalments of Rs. 5,000 (rupees five thousand) each in the months of April, July and October of the particular year and the balance by the month of January of the succeeding year. In accordance with clause 10, the proprietor also executed a general power of attorney in favour of the managing contractor authorising it to exercise all such powers as may be necessary and required for the purpose of working, managing and carrying on the business of the colliery. Now, what admittedly emerges from the aforequoted terms of the deed and deserves to be saliently put in the forefront is, first, the fact that the colliery in question was not even a working one and was undisputedly lying closed since long. The....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d expenses in the working of the said colliery and for carrying on the said business shall be borne and paid by the managing contractor. Further, the managing contractor was to keep the proprietor indemnified in respect of the coal raised and manufactured in the colliery during the term of the lease and the managing contractor was at full liberty to sell or otherwise dispose of the coal raised or manufactured in the colliery without let or hindrance. The other terms of the contract would leave no manner of doubt that the actual carrying on of the business of the colliery after the same was got reopened was done by the managing contractor who was entitled to realise the price of the products raised, to enter into all contracts for their sale, to carry on correspondence, to make bills, to institute suits for recovery of amounts due, to enter into siding agreements with the Railway administration and to employ labour and personnel for its working without let or hindrance by the proprietor. It is against the aforesaid backdrop of the salient terms of the contract betwixt the proprietor and the managing contractor that the crucial tests of statutory provisions and principles have to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head 'Profits and gains of business or profession'." [Emphasis supplied] Perhaps at this very stage, it may be pointedly recalled (in order to appreciate the earlier binding precedent) that the earlier provisions of sections 10 and 12 of the Indian Income-tax Act, 1922 (" the 1922 Act"), though not in pari materia literally, were nevertheless the closely corresponding sections of the aforequoted provisions and the principles laid down under the said sections by the earlier precedents of the final court and the High Court would be equally attracted in the present case. Mr. B. P. Rajgarhia, learned senior standing counsel for the Revenue, forcefully pointed out the language of section 28(i), namely, " profits and gains of any business which was carried on by the assessee ". Herein, he rightly highlighted two basic aspects, namely, in order to carry on the business, one must have the control, even if not all-pervasive, yet the ultimate power to direct the working and conduct of such a business. Unless such control or authority to direct is manifest, a person cannot be said to be c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h a view to making profit and gain therefrom. Therefore, a nexus with the profit of the commercial activity, to my mind, is an essential ingredient of a business. What has then to be borne in mind is that section 28 does not use the word " business " in isolation but in express terms talks of profits and gains from such a business which has been carried on by the assessee. Therefore, carrying on a business connotes some substantial, essential, systematic and organised activity with the object of making gain or profit therefrom, with the inevitable control and direction of such activity or business. Consequently, the two faces of the coin of carrying on a business imply control or direction of business activity with a direct or indirect nexus with the profits or losses therefrom, of course, subject to any express terms of the contract. In the converse, it necessarily follows that if there is neither control nor direction of the activity of a business nor direct nexus with its gain or profit, then a person or an assessee cannot possibly be said to have carried on such a business. Perhaps, it is somewhat unnecessary to over elaborate this aspect because it appears to me well borne ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t has been said by their Lordships above would become applicable even with greater rigour. The issue may perhaps be also examined from a different yet refreshing angle. Another test which would be relevant, if not crucial, in this context is the position (as in the present case) of the proprietor vis-a-vis the managing contractor which carries on the business of the colliery for the fixed term lease or its renewal thereafter. It would seem somewhat axiomatic that both the proprietor and the managing contractor cannot be said to be carrying on the identical business of the said colliery for the relevant assessing years. The terms of the agreement leave no manner of doubt, that it is the managing contractor who carries on the real, substantial, systematic and organised activity of working the colliery. Assuming, as would not be unusual, that herein both the proprietor and the managing contractor are income-tax assessees, the issue would naturally arise as to which one of them is carrying on the business of the colliery and making profits and gains therefrom during the previous assessment years. Obviously, both the proprietor and the managing contractor would not come within the am....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t for that business when for the time being it could not itself run it. " [Emphasis supplied] To my mind, the above observations cannot even remotely be a warrant for the proposition that leasing or renting out the whole business for a fixed period of ten years with renewal terms would still make the proprietor or the lessor a person carrying on the business for profit or gain for the previous assessment year. There is, however, no gainsaying the fact that the observations in Shri Lakshmi Silk Mills Ltd.'s case [1951] 20 ITR 451 (SC) were misconstrued in some jurisdictions till the matter was finally set at rest by the authoritative interpretation of its ratio in New Savan Sugar & Gur Refining Co. Ltd.'s case [1969] 74 ITR 7 (SC) later. However, it is worth recalling that even earlier in Narain Swadeshi Wvg. Mills' case [1954] 26 ITR 765 (SC), the Constitution Bench had distinguished and explained the ratio of Shri Lakshmi Silk Mills Ltd.'s case [1951] 20 ITR 451 (SC), as under : " The case of CIT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451, decided by this court is clearly distinguishable. There, the respondent company which was formed for the purpose of manufacturing ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the ratio in New Savan Sugar & Gur Refining Co. Ltd.'s case [1969] 74 ITR 7 (SC). Therein, the appellant company was carrying on the business of crushing sugarcane and gur refining. The managing agents, for a variety of reasons, advised the acceptance of an offer of the lease of the factory as a running concern. After approval at an extraordinary general meeting, a lease was executed for a period of five years with three options to renew for a similar period on the part of the lessee. The consideration for the lease was a royalty payable on the manufacture of sugar and gur at the rate specified therein subject to a minimum royalty of Rs. 65,000 per annum. The lessee was entitled to use the railway siding during the period of the lease and was responsible for all the running expenses of the factory and excise duty on sugar, etc. On these premises, the question was whether the income which arose to the appellant for the assessment year 1955-56 should be assessed under sections 10 and 12 of the 1922 Act. On behalf of the assessee, the main plank was the contention resting on the observations in the case of Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC). Repelling such a contenti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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. " [Emphasis supplied] To my mind, the aforesaid observations, therefore, cover and conclude identical and similar cases of fixed long term leases (with option to renew or otherwise) of a whole business which is to be carried on by the lessee during the said term and where there is no direct nexus between the income of the lessor and the production of the leased factory, colliery or any other business. The aforesaid view has been taken and consistently adhered to within this jurisdiction barring the case of S. K. Sahana & Sons Ltd. [1976] 102 ITR 437. A Division Bench of this court presided over by Untwalia C.J. in Khas Benedih Colliery's case [1974] BBCJ 440 (Pat), first rightly observed that the use of the phraseology in the terms of the contract cannot in any way be conclusive and what one has to look for is the substance and not the form thereof and, secondly, the mere use of the words " principal " and " agent " employed in an agreement would not necessarily mean that the principal was carrying on the business through his ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....conclusive answer provided by the Full Bench in CIT v. Syed Saddique Imam [1978] 111 ITR 475 (Pat), wherein, relying upon the long line of Supreme Court decisions, it has been held as under (at p. 486): Thereafter, the matter went up to the Supreme Court at the instance of the Commissioner of Income-tax and the Supreme Court held as follows (See [1972] 84 ITR 273, 277): The fact that in the earlier proceedings the Tribunal took a different view of those deeds is not a conclusive circumstance. The decision of the Tribunal reached during those proceedings does not operate as res judicata. Therefore, the earlier decision in Tax Case No. 10 of 1968 will not operate as res judicata and estop this court from considering the true import of the transaction, whether the transfer of the house by the husband to the wife in lieu of dower debt was a gift or a sale, every year's assessment being based on a separate cause of action... " In view of the above, within this jurisdiction, to my mind, the issue stands concluded in favour of the Revenue and it is wasteful to refer to earlier judgments by way of analogy on which learned counsel for the opposite party-assessee had attempted to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....kshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC). This has again to be noticed only to be rejected because in the earlier part of the judgment, I have pointed out that their Lordships of the Supreme Court themselves have explained and distinguished Shri Lakshmi Silk Mills Ltd.'s case [1951] 20 ITR 451 (SC) in Narain Swadeshi Wvg. Mills' case [1954] 26 ITR 765 (SC) and more pointedly in New Savan Sugar & Gur Refining Co. Ltd.'s case [1969] 74 ITR 7 (SC). Once that is so, it is inapt and incongruous on the part of the High Court to hold to the contrary and to read the ratio of Shri Lakshmi Silk Mills Ltd.'s case [1951] 20 ITR 451 (SC), contrary to how it has been authoritatively interpreted and thus to override and skirt the considered view in New Savan Sugar & Gur Refining Co. Ltd.'s case which, to my mind, is directly applicable to and governs the present case and those akin thereto. Mr. Prasad had then attempted to rely on the passing observations of a Division Bench of the Delhi High Court in Addl. CIT v. Rajindra Flour & Allied Industries (P.) Ltd. [1981] 128 ITR 402. That case, in my view, does not in any way advance the stand of the opposite party. Therein, the Division Bench, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er himself or it is merely let out or rented to another, it would make little difference and income therefrom would continue to be income from business under section 28. This line of reasoning is typified by CIT v. Prem Chand jute Mills Ltd. [1978] 114 ITR 769 (Cal) and CIT v. Katihar Jute Mills (P.) Ltd. [1979] 116 ITR 781 (Cal). In these two cases, the case of New Savan Sugar & Gur Refining Co. Ltd. [1969] 74 ITR 7 (SC) was referred to but with the deepest respect, its true import and ratio seems to have been missed. With deepest deference, I feel compelled to record dissent from such a line of reasoning after the watershed case of New Savan Sugar & Gur Refining Co. Ltd. [1969] 74 ITR 7 (SC). To my mind, the issue herein is not the character of the commercial asset. The salient question under section 28 is as to who has derived the profit and gain by carrying on the business with that commercial asset during the previous assessment year. In the aforesaid section, carrying on the business or exploitation of the commercial asset, in my view, means such exploitation by the person who actually carries on such business by the employment of such a commercial asset. It cannot be constru....
X X X X Extracts X X X X
X X X X Extracts X X X X
....different person, as the lessee thereof, for a long fixed term. Within this jurisdiction, the Calcutta High Court's view plainly runs counter to the long line of Patna High Court cases which have been referred to above. Perhaps, the reasoning therein is well countered by the following observation in Kuya & Khas Kuya Colliery Co.'s case [1985] 156 ITR 206, 209: " On the authority of the Supreme Court case in New Savan Sugar & Gur Refining Co. Ltd. [1969] 74 ITR 7 and CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451, it must be held that letting out of business as a whole is distinct from letting out commercial assets of the firm. If the business as a whole is let out, the income (i.e., the rent) would not be liable to be assessed as income from business..." What has been said above applies equally to the case of CIT v. Vikram Cotton Mills Ltd. [1977] 106 ITR 829, a Division Bench judgment of the Allahabad High Court which again adumbrated the theory of commercial asset and there being no intention to dismantle or discontinue the business, even though a long-term lease of 10 years with an option for renewal for another 10 years had been executed after letting it out to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng sublet) could not make the patently different agreement as one between a principal and agent. Even otherwise, such a rationale runs counter to Khas Benedih Colliery's case [1974] BBCJ 440, where it was expressly said that the mere use of the terminology of principal and agent, far from being conclusive, may actually be a misnomer. Perhaps, at this very stage, it may be noticed that the learned judges of the Division Bench failed to take notice of the earlier authoritative view of the coequal Bench in Khas Benedih Colliery's case [1974] BBCJ 440 which could only be deviated from by a larger Bench. As noticed earlier, Mr. Rajgarhia, learned counsel for the Revenue, was right in contending that the present case was on a much stronger footing than even Khas Benedih Colliery's case [1974] BBCJ 440. As has been often repeated and as virtually a hackneyed legal adage, one has to go to the root and substance of the contract and not merely to its form and name because, otherwise, it would be open to the parties to camouflage the substance of an agreement by merely employing the labels of principal and agent. Yet again, the Bench attempted to rely on the tenuous ground that the d....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eement of managing contractorship, passing on the whole of the control of the business to such a managing contractor, the proprietor would itself come in the category of carrying on such business, which admittedly it was not doing even earlier. It seems unnecessary to delve into further detail and I am constrained to hold with the deepest respect that S. K. Sahana & Sons Ltd.'s case [1976] 102 ITR 437 (Pat) does not lay down the law correctly and, in fact, runs contrary to the binding precedent in New Savan Sugar & Gur Refining Co. Ltd.'s case [1969] 74 ITR 7 (SC) and equally so to the earlier Division Bench judgment of this court in Khas Benedih Colliery's case [1974] BBCJ 440. What has been said above applies mutatis mutandis to the earlier Division Bench judgment of this court in Ray Talkies v. CIT [1974] 96 ITR 499 which had been relied upon. Therein also the assessee had let out the cinema premises along with all the apparatus, machineries, furniture and building appurtenant thereto to Jharia Talkies and Cold Storage Ltd., for a consideration under the deed of lease at an annual rent of Rs. 50,000. The lease was to be effective for a period of 10 years. Reversing the decisi....