TaxTMI 
TaxTMI 
TaxTMI 
1980 (9) TMI 75
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. 2,00,000 payable in half-yearly instalments of Rs. 1,00,000 each. In the two assessment years in question which ended for accounting purposes on 31st August, 1964, and 31st August, 1965, various questions arose concerning the manner in which certain expenses incurred by the company were to be dealt with for the purpose of computing the actual cost of machinery, plant and building. This question was common for both the years. In addition, in the second assessment year in question, the fact that the plant, machinery and building had been let out to another firm gave rise to the question whether the income from such lease was to be computed under the head " Profits and gains of business " or under the head " Other sources ". The actual questions which have been referred to us by the Tribunal are; For 1965-66 and 1966-67: "Whether the expenses incurred under the heads salaries, managing director's remuneration, interest and electrical energy charges before the commencement of the business represent an element of actual cost of machinery, plant and buildings of the assessee and as such depreciation and development rebate are admissible with reference to these amounts also." For 19....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ealed to the Tribunal. It is now necessary to set out in short the conclusion of the Tribunal on the two points in question. On the first point for the assessment year 1965-66, it was held that the expenditure incurred on salaries, wages, electrical energy and interest were relatable to the acquisition, construction or installation of the factory building and machinery and hence formed part of the actual cost of the fixed assets of the assessee. The Tribunal then proceeded to elaborate these expenses and in some cases allowed the entire expenses, but in the case of establishment charges, managing director's remuneration and salaries and wages relating to the construction of the building and erection of machinery, it allowed either 50% and directed the apportionment between the building and machinery in the proportion of the value shown in the balance-sheet as on 31st August, 1964. In short, either the whole of the expenses were allowed as capital cost for the purpose of allowing depreciation and development rebate or part of the expenses were allowed and the same had to be apportioned between the building and the machinery as directed. In the year 1966-67, the Tribunal's directi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hich is common to the two years 1965-66 and 1966-67. The answer would be in the affirmative. It now remains to consider the second question which arises in the assessment year 1966-67, and this is a hotly contested matter between the parties. According to Mr. M. L. Verma, learned counsel for the revenue, this is a case in which the assessee had not yet started business. No doubt, the factory was in the process of being set up and by 31st August, 1964, the factory was ready to go into production, but actually it never started doing anything. As the facts will indicate, the reason for this was that probably the moving figure behind the project, Shri Rajinder Nath, had died and there was some difficulty in getting a licence for running the flour mill. This licence is an industrial licence. In any case, the company did not itself start the manufacturing process. On 16th June, 1965, a lease was executed which is a document showing that the assessee had handed over the entire factory including plant, machinery, building and all instruments to a lessee. Thereafter, it is contended that the assessee was not concerned any more with those assets, which were utilised in business not by the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r, but that leasing was a commercial exploitation and not a mere renting of the assets for earning rent. Before dealing with the various cases on both sides of the line of division, it would be useful to detail the facts which have led the Tribunal to come to the conclusion that the letting out was a business in this case and not a mere letting out of an ordinary capital asset, such as the lease of house or a plot of land, etc. The facts detailed by the Tribunal are as follows: "In the first place, the company itself had started erection of the building and the machinery. For three years it incurred considerable expenditure for the purpose. It has made enquiries about the necessity of the licence and it was informed that no licence was necessary. Subsequently, the licensing procedure was changed and it was found that the company required a licence for milling the flour just at the crucial time, Shri Rajindra Nath, the moving spirit behind the company, died and his widow, Smt. Vimla Devi, had to take over as managing director in somewhat difficult circumstances. In the meantime the company had already negotiated with a party for its appointment as sole selling agent. It has also a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ow one. In most of the cases, the question has turned on whether a commercial asset belonging to the assessee has been treated as a non-commercial asset by him later. If the asset remains a commercial asset, then the income is to be taxed under the head " Business ", but if the commercial nature of the assets is converted into non-commercial use then the income is to be treated as being from "other sources ". Section 56 of the I.T. Act, 1961, deals with income from "other sources". The particular type of case we are dealing with is dealt with in s. 56(2)(iii). This section states that if income is not chargeable under any of the other heads mentioned in s. 14, then it is to be charged under the head " Other sources ". The heads mentioned in s. 14 are salaries, interest on securities, etc., and " F " is income from other sources. If the income does not fall under any other head, it is to be treated as income from other sources. Sub-section (2) of s. 56 sets out particular examples of income which is chargeable under the head " Income from other sources ". Those examples are income from dividends, etc., or income from hiring out machinery, plant or furniture when the income is not c....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... also made to Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765 (SC), another judgment of the Supreme Court, wherein it was held that profits from the leasing of the plant and machinery was not a business income. The conclusion of the court was expressed in the following words : "For the reasons already expressed our conclusion is that the intention of the assessee was not to treat the factory, etc., as a commercial asset during the subsistence of the lease. In other words, the intention of the assessee was to go out of the business altogether so far as the factory and the machinery was concerned with effect from 1st June, 1945, and the intention was to use the income arising from the royalty in its capacity as the owner of the factory. It follows therefore that the first question was rightly answered by the High Court in favour of the Commissioner of Income-tax." It will be seen that there is a distinct parallel between the case before the Supreme Court and the one before us. However, the finding of the Tribunal is that in the present case the intention of the assessee was not to abandon the business, but to exploit the factory as best as it could, in the circumstances. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fit by leasing it to somebody else it is difficult to hold that the income thus earned by the commercial asset is not income from the business of the company which has been solely incorporated for the purpose of doing business and earning profits. There is no material whatever for taking the view that the assessee-company was incorporated with any other object than of carrying on business or trade. Owning properties and letting them was not a purpose for which it was formed and that being so the disputed income cannot be said to fall under any section of the Indian Income-tax Act other than section 10. Cases of undertakings of this nature stand on an entirely different footing and are distinguishable from cases of individuals or companies acquiring lands or buildings and making income by letting them on hire." Thus, the conclusion of the court was that even if a commercial asset such as the dyeing plant in question was incapable of being used by the assessee for some valid reason, the letting out of the same could be a commercial exploitation of the asset and not a letting out for merely earning rent. It was a case of the assessee doing the best that was commercially possible. Tur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tory building had not really been completed due to lack of machinery and thus the letting was not an exploitation of a commercial asset for the simple reason that the building was not complete. In the case of the godown and other building the asset was ready and could have been exploited. In Seth Banarsi Das Gupta v. CIT [1977] 106 ITR 559 (All), it was held that a lease of a partnership asset which was let out after the business had been closed did not yield income under the head " Business ". The facts of the case show that the partnership which was running the sugar mill had closed down in the sense that there was a suit for dissolution of partnership and in that litigation the sugar mill was in the custody of receiver who let the mills out for a period of five years. As the partnership had been closed, it would appear that this could not be considered to be an exploitation of a commercial asset pertaining to any business. As noted by the court, a commercial asset is one which can be used for a business. If there is no business, there can be no commercial asset. Mr. Verma relies on this judgment to say that in the present case the business had not been started, but this may not....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e to show that in doing so he intended to reduce or in fact reduced his business capital, the inference drawn by the taxing authorities that the oil mill was only an asset produced by a part of the business capital and retained the character of the capital itself cannot be said to be unjustified. We are, therefore, of opinion that the oil mill was a commercial asset and the first question should be answered in th e affirmative." This is an authority for holding that it is possible to infer that an asset is a commercial asset even though it has not been exploited in any business by the assessee himself. All the cases cited before us have turned on the question as to when an asset is a commercial asset, and when it is merely a capital asset which is not a commercial asset. The test appears to depend on the nature of the asset. If an asset has been exploited commercially before the lease is given, then the question can easily be decided by determining the intention of the parties. But, when the asset has never been previously commercially exploited, then it may be urged that the asset has not become commercial asset, and cannot become a commercial asset by merely letting it out. Thi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and qua those assets the assessee is not carrying on any business, but qua those assets the assessee has become their owner. As an owner the assessee may also exploit those assets and receive income. But the income which it receives is no longer business income because no business is being carried on and the assets are not business assets. In such a case, the income would be an income derived by the owner from his capital assets, and the head of income under which such income would fall for the purpose of the Incometax Act would be section 12 and not section 10. Whether a business is carried or not and whether assets of an assessee are business assets or not are questions of fact, and they must be decided by the Tribunal on the evidence led before it." The last portion of this quotation is very important because it has been inferred that the assessee's intention was a question of fact which had to be determined by the Tribunal and the court was concerned with whether the finding of the Tribunal was based on sufficient material. If this test is applied to the present case, the question for decision boils down to an analysis of the question whether there was sufficient material for....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o represent the lessor for obtaining the permit or licence. Clause No. 5 provides that in case the permit is not obtained within eight months, the lease will come to an end and will be cancelled. Clause No. 13 of the document shows that power connection for 316.2 K.W. will be obtained at the cost of the lessor and the lessee would take steps to get the power connection facility with the active help of the lessor. In this connection, another annexure to the statement of case shows that on 6th June, 1963, there was an agreement between the assessee and the U.P. State Electricity Board about the supply of electricity. But for two years the power connection had not been obtained probably because the flour mill could not start production. One other noteworthy feature of the lease agreement is that the lease is for running the machinery and plant as a flour mill and not for any other purpose. Though, there is no express term in the lease to this effect, this seems to be inherent in most of the terms, particularly because the licence was to be for production of whole meal, atta, suji, rawa, etc. Turning to some of the antecedent facts, i.e., facts before the lease agreement was entered i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e assesseecompany was setting up the factory initially, there was no requirement to get an industrial licence under the Industrial (Development and Regulation) Act, 1951. On 21st June, 1963, this policy was altered. If the assessee-company had started the business within three months of that notification, there would be no necessity to get a licence. But, thereafter an industrial licence under the Act became necessary. There was thus new restriction regarding the commencement of production in the factory. It is impossible to say whether the failure of the assessee-company to get an industrial licence was due to some shortcoming or due to some inability, but the fact remains that the assessee-company did not get an industrial licence and, hence, gave the factory on lease. An impediment of this type is a legal bar to the running of the factory by the assessee. The absence of the licence made it impossible for the assessee to run the factory itself. Of course, possibly the assessee might have obtained this licence. But the factory was not ready before 31st August, 1964. However, the assessee did get the licence when it eventually started running the factory. The fact that there was a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....apparently no intention to close down the proposed commercial activity, but only a new impediment had prevented the company from running the factory by itself. Keeping all these circumstances in view, it cannot be said that the inference drawn by the Tribunal is not based on any material. When two views are possible, and this is a case which stands on the borderline, the court should accept the Tribunal's view. So, it would follow that we would have to concur with the Tribunal. The cases cited before us indicate that when there are commercial assets being used in business which are let out, then it is possible to infer in some cases that there is a continuation of the business even during the letting period; in other cases the nature of the circumstances would indicate whether there has been an abandonment of the idea of using the assets for commercial purposes. These two lines of cases are very distinct and the conclusion depends on the circumstances of the case. There is yet a third line in which assets of a capital nature which are intended to be used for business are not actually used for business. The only case of this type which has come to our notice is the one decided by....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Tribunal that the income derived from the lease of the plant and machinery was income from business and that the income so derived could be set off against losses of the company from the business of the manufacture of textiles brought forward from the preceding year under section 24(2) of the Income-tax Act." This was the case of a company which was forced to let out its factory due to business losses. No doubt, the factory was a commercial asset because it was being run by the company itself. On principle, it is difficult to distinguish the said case from the present case. The mere fact that the assessee-company did not run the factory itself is no distinguishing feature because obviously the company could not run the business due to the absence of an industrial licence. The absence of the industrial licence was a legal bar to otherwise exploiting the business assets of the company. This does not mean that there was no business commercially or commercial assets as commonly understood. The assessee-company intended to run the factory for commercial or business purposes, but was prevented to do so by reasons outside its control. There is another aspect of the case that helps ....