TMI Blog1993 (6) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... s situated under the jurisdiction of Sub-registrar of Narsarao Pet in Guntur District. The factory was built in an area of 2 Acres and 84 Cents of land and it was fitted with all necessary plant and machinery, sufficient to run the cotton ginning and oil extraction plant. The objects clause in the Memorandum of Association of the Company, inter alia reads : "To do all or any of the above things in any part of the world, and either as principals, agents, trustees, contractors or otherwise and either along or in conjunction with others and either by or through agents, sub-contractors, trustees or otherwise." It is also stated in the objects clause that the assessee-company is entitled to do all such other things as are incidental or conducive in the opinion of the Board of Directors to the above objects or any of them. The authorised capital of the company was Rs. 10,00,000 divided into 1,000 equity shares of Rs. 1,000 each. Calendar year is the previous year chosen by the assessee-company. During the assessment years 1975-76 and 1976-77, assessee conducted its business by itself running the mill, and derived income from cotton ginning and extraction of cotton oil. When the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s leased out by the assessee as per the Board's resolution dated 20-2-1976 for a rent of Rs. 1,00,000 for the period ending with 31-12-1976. Before the expiry of the said lease, the assessee entered into a regular lease agreement dated 11-11-1976 with M/s. Bharat General and Textile Industries Ltd., Calcutta and Guntur. The lessee was a subsidiary of Birla Group of Companies. The lessee was manufacturing same products in its factory located at Guntur and therefore, it felt it convenient to run the mill of the assessee as lessee. Separate agreements of lease were executed --- one with regard to the building or the mill premises, and the other with regard to plant and machinery. The first agreement of lease was executed on 11-11-1976 for a period of five years beginning from 1-1-1977 to 31-12-1981. The factory building was leased out at an yearly stipulated lease of Rs. 1,20,000. The second lease agreement was executed between the same parties on 23-10-1980 separately for factory building and for plant and machinery. The period stipulated under the second lease agreement was 10 years beginning from 1-1-1982 to 31-12-1991. The factory building was leased out on an yearly rent of Rs. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding cost of installation in respect of machinery in expeller section. In respect of machinery additionally installed after 1-1-1987, the lessor shall have the option to take over the same on payment of its price after deducting 5% per annum as depreciation from the purchase value of such machinery, including cost of installation. This option to purchase shall not be available to the lessor in respect of sharples, Refinery, etc., which has been added by the lessee in March 1980, and this can be purchased by the lessor from the lessee only at such value which may be mutually agreed upon between them. (d) The third lease agreement was executed between the same parties on 31-1-1991, which is for a period of four years and 10 months, i.e., from 1-1-1992 to 31-10-1996. The lease amount agreed upon for the factory building was Rs. 70,000 per annum. Half of the same, viz., Rs. 35,000 should be paid by the month of January and the remaining should be paid in two equal instalments of Rs. 17,500 in April and August of each year of lease. Here also, the plant and machinery was leased out to the same party under another lease agreement dated 24-10-1991. The rent agreed upon was Rs. 2,35,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d relax and rest content only with deriving lease amount from the mill. It has been observing the market conditions and as and when the conditions are found favourable, it wanted to run the mill on its own, after terminating the lease. In fact, the last of the Reports of the Board of Directors clearly shows that they have been approaching the bankers for financial assistance and whenever it is available, the mill would be run by them without leasing it out to outsiders. Thus, he argued that it would be his endeavour to show that the mill is a commercial asset and in whichever way the said asset is exploited, the income resulting therefrom should be considered as part of 'business income' and it can never be considered as 'income from other sources'. He further contended that from the beginning, i.e., from the assessment year 1977-78 to assessment year 1981-82, the lease amount obtained by the assessee from the lease was always considered to be part of its business income, and for the first time, the ITO while framing the assessment for 1982-83, intended to assess the same as 'income from other sources', instead as 'business income' and in order to do so, the ITO issued a show-cause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned CIT (A), Vijayawada had taken up the appeals for assessment years 1982-83 and 1983-84 together and disposed them of, by his appellate order dated 17-2-1988. Similarly, the learned CIT (A) had taken up the appeals for the latter two years together and disposed them of, by an independent order dated 30-3-1988. He dismissed the appeals filed by the assessee for all the four assessment years, and confirmed the finding of the Assessing Officer that the lease amounts received by the assessee from the lease of the mill, in each of the four assessment years was rightly assessed under the head 'other sources'. Having been aggrieved by the impugned orders passed by the learned CIT (A), assessee came up in second appeal before this Tribunal. 7. I have heard Shri Ch. G. Murali, learned counsel for the assessee and Shri S.C. Jaini, learned Senior D.R. for the Department. The learned counsel for the assessee contended mainly that the assessee never intended to lease out the factory building, and plant and machinery installed therein separate from each other. Assessee-company never intended to break the integrity of the mill, and it always intended to lease out the mill to a lessee wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome', and not 'income from other sources'. He cited the following decisions before this Tribunal: (a) Prem Chand Jute Mills Ltd.'s case, (b) Everest Hotels Ltd. v. CIT [1978] 114 ITR 779 (Cal.)(App.), (c) CIT v. Aryan Industries (P.) Ltd. [1982] 138 ITR 718 (AP.), (d) Sundaram Tobaccos v. ITO [1986] 17 ITD 177 (Hyd.). (e) ITO v. Saswad Mali Sugar Factory Ltd. [1986] 17 ITD 833 (Bom.), (f) G.V. Rattaiah Co. v. ITO [1986] 19 ITD 89 (Hyd.), (g) CIT v. Vikram Cotton Mills Ltd. [1988] 169 ITR 597 (SC), (h) CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC), (i) CIT v. New India Industries Ltd. [1993] 201 ITR 208 (Guj.). He also furnished an unreported decision of the Tribunal at page 50 of the paper book filed before this Tribunal, and it represents the order of this Tribunal 'B' Bench in IAC v. Lakshmi Finance Industrial Corpn. Ltd. [IT Appeal No. 1878 (Hyd.) of 1987) in Hyderabad. He strongly contended that the treatment of the lease income in the hands of the assessee, by both the lower authorities is quite wrong and it should have been treated only as business income, and therefore, these appeals of the assessee should be allowed. 8. Learned Depa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd.'s case completely covers the case and is fully applicable to the facts of the case, cannot be accepted. Before discussing the Supreme Court decision and the ratio laid down therein, this Tribunal intends to keep in mind the caution given by the Supreme Court itself while appreciating the ratio of its judgments. A reference to the said caution was made in its decision in CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297 (SC). At page 299, as per the head-note, the following is the caution : "It is neither desirable nor permissible to pick a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the Court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, courts must carefully try to ascertain the true principle laid down by the decision." Firstly, this Tribunal wants to keep the said caution in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opy of which is furnished at page 3 of the paper-compilation, and the points of distinction thus pointed out by the assessee before the ITO, are fully approved by this Tribunal. 12. I hold that majority of the decisions cited on behalf of the assessee, fully apply to the facts on hand, and the ratio of those decisions go to support the case of the assessee in more than one way. This Tribunal has already quoted several clauses of the lease deed. The quoted clauses of the lease deed would clearly show in the opinion of this Tribunal, the eagerness or intention of the assessee to return back and do the business on its own, after it finds the business climate favourable and congenial. Prior to the floating of the assessee-company, assessee was new to this line of business. In the two preliminary years in which it conducted the business on its own, it sustained losses. The ordinary behaviour of any businessman would not be to continue in losses for ever. Every endeavour of the businessman would be how early to get out of the losses and begin earning profits. Birla companies are known for their business acuman. Perhaps, the intention of the assessee is to observe the business tactics a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of a commercial asset. 2. Exploitation of a commercial asset does not necessarily mean exploitation by the assessee himself at all material times. The assessee may temporarily cause it to be exploited by another person against payment of consideration and for this purpose may execute a lease for a fixed period even with option to renew. 3. But, in order that the income derived from the lease should be taxable it must be shown that the lessor's intention was that during the period of the lease the asset leased out must remain and be treated as a commercial asset and be exploited as such. 4. This intention of the lessor has to be ascertained from the cummulative effect of all the terms of the lease and other material circumstances." In the facts of that case, assessee was carrying on the business of manufacture of jute goods. In had incurred heavy losses due to various factors including quarrels amongst the Directors. The company leased out the jute mills for a period of five years, with an option to renew it for another five years. The Tribunal held that the income from lease is the business of the assessee, who is entitled to set off its unabsorbed depreciation and loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent case. In the case before the A.P. High Court Ambica Tobacco Co. (P.) Ltd.'s case machinery purchased for the purpose of manufacture was not used for the purpose of manufacture, and it was mere leased out for Rs. 6,000, and the question that fell for consideration before the Hon'ble High Court was whether it should be considered as 'business income' or as income from 'other sources'. The machinery was in fact purchased for purposes of carrying on manufacture, but there was a definite finding of fact that the said machinery was not used for manufacturing purposes, and the machinery was leased out not for the purposes of manufacture by the lessee, but to use it for some other purposes. When once the machinery, which was first intended for manufacturing purposes was never used for the said purpose, or was discontinued from being used for the purpose, it ceased to be a commercial asset. In fact, that was the finding given by Justice Rama Rao of the A. P. High Court. Their Lordship of the A. P. High Court held that in determining whether the income from lease of machinery is income from business or income from other sources, it should be found out whether the machinery was a commerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in Shri Lakshmi Silk Mills Ltd.'s case was cited before Their Lordships of the Supreme Court, but the Hon'ble Supreme Court distinguished the same on the ground that that was a case where only a part of the machinery was let out on lease and the rest of the machinery was worked by the assessee himself. The letting out of the machinery was for a short period of five months only. It was also pointed out that that was not a case of letting out of the factory as such. In that context, the Supreme Court held that the intention of the assessee was not to treat the factory etc., as a commercial asset during the subsistence of the lease, and the intention of the assessee was to go out of the business, so far as the factory and machinery were concerned with effect from the date of commencement of the lease and that the intention was to enjoy the return on the investment, as the owner of the factory. Their Lordships pointed out that in the earlier of the Supreme Court decisions, viz., Shri Lakshmi Silk Mills Ltd.'s case, the Supreme Court emphasised that in whatsoever manner a commercial asset is used, the income arising therefrom is business income. While in the latter Supreme Court case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l relevant facts have been considered by the Tribunal from the correct stand point, namely, that of an ordinary prudent businessman. The Hon'ble Supreme Court also had agreed with the High Court. It held the following as per the head-note obtaining on p. 598 of the Report (169 ITR 597) : "... applying the correct principle the Tribunal found that the intention of the company was not to part with the assets but to lease them out for a temporary period as a part of exploitation. In such a circumstance, it could not be said that no business was carried on or that the income derived by the company from letting out the machinery was only rental income. There was a temporary suspension of business for a temporary period with the object of tiding over the crisis condition. There was never any act indicating that the company never intended to carry on the business in the future. The High Court was right in its view that the income derived by the respondent company by way of lease rent from the letting out of its assets was assessable to tax under the head 'Profits and gains of business'." Therefore, whether the assessee is carrying on business during the currency of the lease period or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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