TMI Blog1961 (10) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... nt). ₹ 500 for property described in Schedule C (furniture). ₹ 500 for property described in Schedule D (electric installation). In the assessment of the assessee for the assessment year 1955-56, corresponding to the accounting period ending with 30th September, 1954, and for the assessment year 1956-57 corresponding to the accounting year ending with 30th September, 1955, the assessee claimed that the income derived by it by leasing the cinema theatre and equipment was income from business chargeable under section 10 of the Act and it was, therefore, entitled to deduction under section 24(2) of its business losses in the earlier years. The claim of the assessee was negatived by the Income-tax Officer, who took the view that after leasing out all its buildings, machinery, equipment and everything, the assessee had stopped exhibiting cinema films and had not undertaken any activity in the nature of business in that line ; the income derived from the letting out of the assets could not, therefore, be held to be business income chargeable under section 10 of the Act and the losses of earlier years from business could not be allowed to be carried forward in the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances of the case, the income of the assessee should be computed under section 12 of the Act ? 2.Whether the unabsorbed depreciation for 1954-55 when the assessee was carrying on the business can be set off against the income computed under section 12 in the assessment year 1955-56 under the provisions of the Act ? The assessee, as we have already stated, was carrying on the business of exhibiting motion pictures in its own cinema theatre. In the year 1953, it leased the theatre for the purpose of exhibiting motion pictures to a stranger for a period of five years, with an option to the lessee to renew the lease for a further period of three years. The theatre with its equipment was a commercial asset of the assessee, which was used in its business of exhibiting motion pictures and was capable of being so used at the date when it was leased to the stranger. The lease to the stranger of this asset was also for the purpose of exploiting it for the business of exhibiting motion pictures, which was the business which was carried on by the assessee. It was the contention of the assessee that by leasing out the asset for the duration of the lease, the assessee had not discontinued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny trade or business being embedded in the activity of leasing out of the cinema theatre. In the opinion of the Tribunal, therefore, the assessee had discontinued its business, which it had carried on till it leased its commercial asset to a stranger. The income, therefore, which the assessee received as rent of the leased property was not income from business chargeable under section 10, but income from other sources chargeable under section 12 of the Act. Mr. Palkhivala, learned counsel appearing for the assessee, has argued that the Tribunal has approached the question, which it had to consider, from an entirely wrong point of view. According to him, the view of the Tribunal appears to be that the mere circumstance of the execution of the lease was sufficient to hold that the assessee's business had been abandoned and the lease was executed by it thereafter only as a lease of the property belonging to it as owner. Mr. Palkhivala argued that it is well settled that an asset which was acquired or used for the purpose of a business does not cease to be the commercial asset of that business as soon as it is temporarily put out of use or let out to another person in his busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention to the contrary. For instance, under clause 4(b) of the lease, the lessor is permitted to store machineries and other articles belonging to it within the demised premises free of rent. Clause 4(c) provides for the regular checking of the projection and sound equipment by the lessee and a right to the lessor to inspect the condition of the equipment and machineries from time to time whenever he wants. Clause 4(d) prohibits the removal of any part of the projector or the sound equipment or its use elsewhere than in the leased premises. Under clause 4(e), the lessee is under an obligation to replace all worn out parts by only genuine parts of original manufacture. Under clause 4(g), the head operator and his assistants are to be persons approved by the lessor and they are not to be dismissed or transferred without the written approval of the lessor. Under clause 5(a), the lessee, during the period of the lease, is not entitled to make additions or alterations to the existing building without the previous sanction of the lessor, but the lessor is to be at liberty to execute any work which it deems fit in order to effect any additions or alterations in the demised premises. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of the business does not cease to be a commercial asset of that business as soon as it is temporarily put out of use or let out to another person for use in his business or trade. The yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business. He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else. The view that in order to constitute business income the commercial asset must at the time it was let out be in a condition to be used as a commercial asset by the assessee himself is not correct. By letting out the commercial asset for a period to another, therefore, the assessee may carry on the same business activity which he was carrying on when he was using the asset himself. It may no doubt be that a commercial asset, which the assessee has ceased to use as such because he has abandoned or discontinued his business, may also be let out by him and rent obtained therefrom. Whether, therefore, letting out of the commercial asset is a business activity of the business of the assessee expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to arrive at a conclusion whether the lease is as a result of abandonment of the business or as a part of carrying it on. If the business is not to be abandoned and the lessor intends to resume it, the duration for which the property would be leased would be a short duration. In the present case, says Mr. Joshi, the duration is not a short duration, but a fairly long duration of five years, with a further option to the lessee to extend it to eight years. This, according to Mr. Joshi, would indicate a cessation of business on the part of the assessee. The tenor of the lease, according to Mr. Joshi, again would show that the assessee had not kept any concern or connection with the business and all the terms of the lease are, as pointed out by the Tribunal, only aimed at safeguarding the property, plant, machinery and equipment, which was being used. Even the clauses of the lease obliging the lessee to conform to the regulations and conditions of the licences and requiring him further to maintain the theatre in a working order for all the time are consistent with the assessee being anxious to maintain his property in a proper condition and available to him for the further letti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nger for a period of five years and has, for the said period, ceased to exhibit motion pictures itself, and left such exhibiting of the pictures to the lessee, there is no other circumstance indicating that the assessee has given up its business activity and dealt with what was his commercial asset as an owner of property. It can be taken as well settled that a mere circumstance that a commercial asset, which was being used by the assessee and exploited for his business, and is capable of being so used, has been let out by him temporarily to a stranger, will not amount to a cessation of the business activity by the assessee. If the letting out is a business activity itself and is carried on in the same business which the assessee was carrying on by using the asset himself, the circumstance that the period of the lease is a period of five years with an option to the lessee to renew it for a further period of three years, again, will not be sufficient to indicate that, by letting out the asset for that period, the assessee has made up his mind not to carry on the business which he was carrying on up to that time. It would depend upon the nature of the business and the circumstances a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pinion, therefore, on the facts and in the circumstances of the case, the view taken by the Tribunal that the income, which the assessee received from the letting out of the cinema theatre and its equipment under the lease for the purpose of exhibiting motion pictures, was not the income of the assessee from its business and it fell within the purview of section 12 of the Act is erroneous; and the said income of the assessee is its income from the business which it was carrying on and chargeable under section 10 of the Act. We may refer to the decisions which were cited before us in the course of the argument in the present case. We have already referred to the decision in Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451; [1952] SCR 1 Mr. Palkhivala relied on this decision for the proposition that the yield of the income by a commercial asset is the profit of the business irrespective of whether the asset is exploited by the owner himself or through the instrumentality of another. In this case, the assessee company, which was a manufacturer of silk cloth, and had installed a plant for dyeing silk yarn as a part of its business, let out the dye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn to the lessor. There was, therefore, no question in that case of the lessor either having intended to discontinue its business or to abandon it and, therefore, in those circumstances, the letting out could well be regarded as an advantageous way of exploiting a commercial asset. In the present case, says Mr. Joshi, the entire business of the assessee of exhibiting films in the theatre has come to a cessation as a result of the letting, because the exhibition of the films in the theatre since after the lease is carried on entirely by the lessee. Moreover, there does not appear to be any indication of a temporary difficulty, of the nature which was present in the Supreme Court case, in the way of the present assessee from carrying on its business of exhibiting motion pictures. The leasing out, therefore, by the assessee in the present case is not because of a temporary difficulty, but because of a desire to discontinue the business. Thirdly, in the Supreme Court case, the duration was very short. In the present case, the duration is a long period of five years indicative of abandonment of the business of the assessee. Now, what were the reasons in the present Case for the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income derived by the company from the letting out of the plant and machinery was income from business which could be set off against its losses of the preceding year brought forward. The Tribunal had held in that case that the income derived by the company was income from business. This court held that there was material to justify the finding of the Appellate Tribunal that the income was from business and that the income so derived could be set off against the losses of the business of the manufacture of textiles brought forward from the preceding year under section 24(2) of the Income-tax Act. Mr, Palkhivala argued that the facts of the case before us are much stronger than the facts in the said case decided by this court and if, even on the facts of that case, it was held that the income of the assessee was income from business, there can be no doubt whatsoever that it must be so decided in the case before us. In that case, the business of manufacture by the company had actually stopped before the lease was executed and the company was in the process of being wound up. Under the terms of the lease, the lessee was given an option to purchase the mills outright at a price fix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax [1961] 41 ITR 645 the facts were as follows: The assessee company which owned an oil and rice mill, manufactured groundnut oil and cake and sold them, leased the entire mill during the relevant year at a rent of ₹ 3,000 per month. It also had a small quantity of oil and groundnut in stock at the beginning of the year which it sold. The question before the court was whether the rent realised during the year from the leasing of the mill were profits of the assessee from the same business as that carried on by the assessee during the earlier years, so as to enable it to set off against the said profits the losses which it had sustained in earlier years. The income-tax authorities and the Tribunal had refused the set-off, holding that the rent realised by the assessee did not constitute profits from the same business which was carried on in the earlier years. On a reference to the High Court, it was held that the income realised by the assessee by letting out the entire mill was no less the income of the business which it was carrying on than the income which it would have realised had it itself worked the mill. From the mere fact that the entire manufacturing plant had been ..... X X X X Extracts X X X X X X X X Extracts X X X X
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