TMI Blog1987 (5) TMI 358X X X X Extracts X X X X X X X X Extracts X X X X ..... f its business in favour of a managing contractor by a lease for a fixed term of ten years with an option to renew by the lessor on the terms of an annual minimum guaranteed amount of Rs. 18,000 and royalty at differential rates on the quantum of coal raised and its manufacture, can still be said to be carrying on the business of the said colliery within the meaning of section 28(1) of the Income-tax Act, 1961?" Pointedly at issue is the correctness of the view of the earlier Division Bench in CIT v. S.K. Sahana Sons Ltd. [1976] 102 ITR 437 (Pat.) answering the identical question in the affirmative. 2. Virtually identical facts may be noticed from Tax Case Nos. 249 to 251 of 1976. S.K. Sahana Sons Ltd., the assessee, is a limited company which, inter alia, derives income from the mining establishment known as New Bansjora Colliery. By an agreement dated 22-4-1959 the assessee-company leased out the colliery to Khas Ganeshpur Coal Mines (P.) Ltd. by appointing the latter as a managing contractor for a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in respect of the assessment years 1963-64 and 1964-65 the High Court had considered the same question and by its judgment dated 20-9-1974 it had been held that the income of this very assessee received from the managing contractor was the income from the business. It was contended that the facts relevant for the assessment years were the same as had been mentioned in the earlier statement of the case for the assessment years 1963-64 and 1964-65. 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 the income from business?" 6. 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 a sharp cleavage of opinion within the Court itself between the cases in S.K. Sahana Sons Ltd. ( supra) and CIT v. Pure Dhansar Coal Co. 1985 Tax LR 336 (Pat.) on one hand and Khas Benedih Colliery v. CIT [1974] BBCJ 440 (Pat.) and CIT v. Kuya Khas Kuya Col ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id connection. 19. That notwithstanding anything hereinbefore contained, so long as reopening permission is not obtained from the authorities concerned, the managing contractor shall not be liable to pay to the proprietor the guaranteed income or profit reserved in this agreement, that is to say during such period the managing contractor shall not have to pay the minimum guaranteed income or profit referred 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of New Bansjora Colliery in such correspondence. (iv)To make out bills for supply of coal and coke against any party or parties to whom the same might have been supplied and delivered and to sign such bills in the name of the proprietor or its business name. (v)To demand and realise all moneys payable to the proprietor of New Bansjora Colliery from such parties and 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 otherwise to collect the proceeds of the cheques. (viii)To enter into siding agreements, with the Railway Administrations and do all other things in connection with obtaining new siding accommodation and/or having additional leading accommodation. 9. That notwithstanding anything contained herein authorising the managing contractor to sell coal or coke, the managing contractor shall no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said colliery the following amounts: (a)Rupees one and annas eight per ton of Run of Nine Coal raised except such coal as is used for manufacture of soft coke and hard coke. (b)Rupees two and annas four per ton of soft coke manufactured. (c)Rupees three per ton of hard coke manufactured. Provided always that the aforesaid payment 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 profits 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igher quantum of royalty on the basis of raised tonnage irrespective of the actual financial loss to the managing contractor. To crown it all, clause 7 in terms stated that the business of the said colliery shall be carried on by the managing contractor. The existing name of New Bansjora Colliery was preserved and all costs, charges and 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 manufac- tured 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 sidin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... let on hire, if the income is not chargeable to income-tax under the head 'Profits and gains of business or profession'; (iii)where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, 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] 12. 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 1522 Act'), though not in pari materia in literality, 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 cases. 13. Mr. B.P. Rajgarhia, the learned senior standing counsel for the revenue, forcefully pointed out the language of section 28(i), namely, 'profits of any business which was carried on by the assessee'. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial activity; a commercial or industrial concern" (p. 175) and again in the New Oxford Illustrated Dictionary as "habitual occupation, profession, trade; commercial transactions; commercial house, firm." It is, thus, somewhat plain that the word 'business' in this context implies commercial transactions with a view to making profit and gain there from. 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 there from, with the inevitable control and direction of such activity or business. Consequently, the two faces of the coin of carrying on a business imply a control or direction of the business activity with a direct or indirect nexus with the profits or losses there from, of course, subject to any express terms of the contract. In the converse, it necessari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ext is that the word 'business' implies 'some real, substantial and systematic or organised course of activity or conduct with a set purpose'. However, where in terms of section 28 such business must be carried on by the assessee not in the abstract but at any time during the previous assessment year for profit and gain thereof then what has been said by their Lordships above would become applicable even with greater rigour. 17. 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 which carries on the real, substantial, systematic and organised activity of working the colliery. Assuming, as would not be unusual, that here ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On these facts, their Lordships observed as under: "We are therefore of the opinion that it was a part of the normal activities of the assessee's business to earn money by making use of its machinery by either employing it in its own manufacturing concern or temporarily letting it to others for making profit for that business when for the time being it could not itself run it. . . ." [Emphasis supplied] (p. 459) 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 gain saying the fact that the observations in Shri Lakshmi Silk Mills Ltd.'s case (supra) 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 (supra) later. However, it is worth recalling that even earlier in Narain Swadeshi Wvg. Mills' case (supra) the Constitution Bench had distinguished and explained the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Ltd.'s case (supra) is correctly understood and, in fact, when it has been authoritatively-interpreted later by the final Court itself to be so, there appears to me no manner of doubt that the issue herein is conclusively covered by the ratio in New Savan Sugar Gur Refining Co. Ltd.'s case (supra). 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 by 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 of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." [Emphasis supplied] To my mind, the aforesaid observations, therefore, cover and conclude identical and similar cases of long fixed 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. 20. The aforesaid view has been taken and consistently adhered to within this jurisdiction barring the case of S.K. Sahana Sons Ltd. ( supra). A Division Bench of this Court presided over by Untwalia, CJ., in Khas Benedih Colliery's case (supra) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... larger Bench considering the correctness of its ratio cannot go into the issue. To this submission there is the conclu- sive answer provided by the Pull Bench in CIT v. Syed Saddique Imam [1978] 111 ITR 475 (Pat.), wherein, relying upon the long line of the Supreme Court decisions, it has been held as under : ". . . 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. . . ." (p. 486) In view of the above, within this jurisdiction, to my mind, the issue stands concluded in favour of the revenue and it is was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding. 25. On precedent, the sheetanchor of Mr. Prasad was yet again the obser-vations in the case of Sri Lakshmi Silk Mills Ltd. ( supra). This has again to he noticed and 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 (supra) in Narain Swadeshi Wvg. Mills' case (supra) and more pointedly in New Savan Sugar Gur Refining Co. Ltd.'s case (supra). 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. (supra) 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 (supra) which, to my mind, is directly applicable to and governs the present case and those akin thereto. 26. Mr. Prasad had then attempted to rely on a 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 par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mself or it is merely let out or rented to another, it would make little difference and income there from would continue to be 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. (supra) was referred to but with the deepest respect its true import and ratio seems to have been missed. With the deepest deference I feel compelled to record a dissent from such a line of reasoning after the watershed case of New Savan Sugar Gur Refining Co. Ltd. (supra) . 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 construed as carrying on a business the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tta High Court 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 (supra): ". . .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. . . ." (p. 209) 30. 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 a 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 another concern on a rent of rupees two lakhs per year. It would appear that New Savan Sugar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ionale runs counter to Khas Benedih Colliery's case (supra) where it was expressly said that the use of the mere 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 co-equal Bench in Khas Benedih Colliery's case (supra) which could only be deviated from by a larger Bench. 33. As noticed earlier, Mr. Rajgarhia, the learned counsel for the revenue, was right in contending that the present case was on much stronger footing than even Khas Benedih Colliery's case (supra). 34. As has been often repeated and is 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. 35. Yet again, the Bench attempted to rely on the tenuous ground that the despatches from the colliery were to be made from the railway siding only and this would imply a control over the running of the business. Suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrying on such business, which admittedly it was not doing even earlier. 39. It seems unnecessary to delve into further detail and I am cons trained to hold with the deepest respect that S.K. Sahana Sons Ltd. 's case (supra) 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 (supra) and equally so to the earlier Division Bench judgment of this Court in Khas Benedih Colliery's case (supra). 40. 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 decisions of the authorities below and the Tribunal, the Division Bench held that the annual rent aforesaid was income from business and not from other sources. Primal reliance was placed by the Bench on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ging contractor, it is the managing contractor which is exploiting the commercial asset and not its proprietor which is merely deriving rent or royalty there from irrespective of the profits or loss and of the actual working of the business by the managing contractor. 44. To finally conclude, both on principle and the binding precedent of New Savan Sugar Gur Refining Co. Ltd.'s case (supra) the answer to the question posed at the very outset is rendered in the negative and it is held that the proprietor of the colliery by abdicating all control of its business in favour of its managing contractor by a renewable fixed term lease of ten years on the terms of an annual minimum guaranteed amount and royalty on the quantum of coal raised and manufactured cannot be said to be carrying on the business of the said colliery within the meaning of section 28(i). 45. In the light of the above, the common question referred to the High Court for all the three assessment years in all these cases is answered in the negative and it is held that on the facts and circumstances of the cases the income of the assessees received from the managing contractor was not an income from business, i.e., i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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