TMI Blog1993 (7) TMI 145X X X X Extracts X X X X X X X X Extracts X X X X ..... lessee exercised by it by registered notice in this behalf delivered or served on the lessor... ". Under clause III(7) "the lessor shall not be liable for any of the liabilities arising out of the manufacturing or the business transactions of the lessee during the period of the lease". Under clause III(8) "the lessee shall have nothing to do with the payment or non-payment and the employment or non-employment of any labour or staff that might have been employed by the lessor before the commencement of this lease and all liabilities and obligations in this regard shall solely be that of the lessor. At the expiry of the lease period the lessor shall have nothing to do with the payment or non-payment and employment or non-employment of any labour or staff that might have been kept or employed by the lessee during the lease period and all liabilities in this respect shall solely be that of the lessee". 3. In the course of the assessment proceedings the assessing Officer found that, during the year of account ending on 31-3-1982, being the previous year relevant to the assessment year 1982-83 now before us, the assessee had claimed revenue deduction in respect of an aggregate sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... V.D. Gopal, the learned counsel for the assessee, strongly contended that the lower authorities were not justified in negativing the assessee's claim on this issue. He contended that, as is well known, Sudarsan Chit Funds Co. Ltd. went into liquidation at the instance of the Central Government. Even at the time when the company went into liquidation, it was well known that the company was commercially insolvent. Further, drawing our attention to a letter dated February 23, 1988 from the company, Shri V.D. Gopal highlighted the fact that according to the Kerala High Court order dated 26-1-1983 the company was permitted "to release payment to chit subscribers in a phased manner commencing from sale value Rs. 10,000 and below first, then Rs. 20,000 and below and so on". This letter, according to him, went to show that the chances of the recovery of the sum in question were slim indeed. In any event, there are the provisions of section 41(4) to protect the interest of the Department. In view of the foregoing, contended Shri Gopal, the assessee was entitled to succeed. 8. On his part, Shri Y.R. Rao, the learned Departmental Representative, strongly supported the impugned orders of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances ". 11. Now, what are the facts of the case before us ? All that had happened during the relevant previous year was that the chit company in question was ordered to be wound up by the Central Government. At that point of time nothing was known about the ultimate fate of the debt in question. For a fact, even the February 1988 letter of the company does not contain anything to suggest that the last ray of hope had for ever been extinguished. Again, it may be recalled, the learned Departmental Representative confidently stated that even today the Official Liquidator is making payments to the creditors of the company. And this fact has not been controverted by the assessee. Right from the Lahore case of B.C.G.A. (Punjab) Ltd. v. CIT [1937] 5 ITR 279 we have a long catena of cases in which it has been held that there was no justification in writing off a debt in a particular year as bad simply because the insolvency, liquidation proceedings had been commenced that year--see the Madras case of Alagananda Mudaliar v. CIT [1940] 8 ITR 69 ; the Lahore case of Deoki Nandan Sons v. CIT [1941] 9 ITR 202 ; and the Punjab case of Nanak Chand MamrajMal v. CIT [1964] 52 ITR 410. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e have looked into the facts of the case. We have considered the rival submissions. As we see it, the decision of the lower authorities on this issue too does not invite any interference. 15. It is a matter of record that during his life-time Chandran, the husband of the assessee, was running the foundry as a proprietary concern. After his death in 1976, his widow (the assessee before us) continued the business for some time, and subsequently closed the business being unable to manage the business. It was in connection with the said closure of the business that the compensation came to be paid by the assessee. 16. Secondly, after the closure of the said business, she leased the foundry in its entirety to a firm of "Jaishree Foundry (Lessee of Bharath Foundry)". The provisions of clauses III(7) and III(8) have already been referred to, and they make it clear, in particular, that "the lessee shall have nothing to do with the payment on the employment or non-employment of any labour or staff that might have been employed by the lessor before the commencement of this lease". The said provision is significant in that it was the assessee who was saddled with the responsibility in all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matters connected with the running of the foundry business. In other words, the lessor was clearly excluded from the business to be conducted by the lessee. Clause (2) of the said deed casts on the lessee the obligation "to pay all other taxes, cesses and all other outgoings and impositions including any increase or increases therein payable from the date of lease and for the period of lease". Significantly, the said clause excludes a couple of items which are detailed in clause (2) of Part-II of the deed, which reads as follows : " The Lessor hereby covenants with the Lessee as follows : (2) To pay ground rent to the owner of the land, Door No. 137, T.H. Road, Madras-81 property tax and any other tax relating to the ownership of the Foundry. " [Emphasis supplied] The said provisions also go to support the view that, with the coming into force of the lease deed, the assessee's character had changed from that of the person running a business to that of the owner of the property, namely, the foundry here. 21. On the facts of the case, therefore, we have no hesitation in holding that with the closure of the foundry business and with the lease of the foundry property (incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Usher's Wiltshire Brewery Ltd. v. Bruce (Surveyor of Taxes) 6 Tax Cas. 399, the dominant role of a person as businessman came into focus. There, the assessee, a brewery company, had a number of premises licensed to sell beer. Some of the premises were owned by them, while others had been taken on rent/lease. The question that arose for consideration was whether the assessee-company was entitled to claim deduction of cost of repairs and other expenditure relating to the licensed premises in the computation of its business profits under Schedule-D. It was found that the company had acquired the premises solely in the course of and for the purposes of its business as brewers. The licensed premises were let to 'tied tenants' who were bound under a contract to purchase beer etc. from the company. In such circumstances, it was held that the cost of repairs and other items of expenditure relating to the houses could properly be claimed as deduction in the computation of the business profits of the assessee as being money wholly and exclusively laid out or expended for the purpose of the trade of the assessee. 27. In that regard, Lord Sumner observed that "On the findings here the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as such, then its being let out to others does not result in an income which is the income of the business, but we cannot accept the view that an asset which was acquired and used for the purpose of the business ceased to be a commercial asset of that business as soon as it was 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 buy letting it out to somebody else. Suppose, for instance, in a manufacturing concern the use of its plant and machinery can advantageously be made owing to paucity of raw materials only for six hours in a working day, and in order to get the best yield out of it, another person who has got the requisite raw materials is allowed to use it as a licensee on payment of certain consideration for three hours : can it be said in such a situation with any justification that the amount realised from the licensee is not a part of the business income of the lic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (d) deterioration in the quality of cane crops, the managing agents apprehended that the company would go into the red. They, therefore, suggested that the company's affairs should be put on a "less discouraging basis" by accepting the offer of the lease of the company as a running concern from the Standard Refinery Distillery Ltd. This suggestion was accepted by the shareholders ; and by an indenture of March 15, 1948 the lease was executed to come into effect retrospectively from June 1, 1945. The term of the lease was originally for five years commencing from 1st June, 1945, with an option to the lessee to continue for further five years. The lessee was also given the option thereafter to continue the lease for two further periods of five years each, subject, of course, to the payment of higher rates of royalties. The lessor (the assessee-company therein) had the right to terminate the lease at the stipulated time. This right was not exercised. 31. In the assessment for the assessment year 1955-56 the assessee's main contention was that the lease granted under the indenture of 15th March, 1948 was a lease of a commercial asset and, that therefore, the income from the lease s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ratio of the decision in Lakshmi Silk Mills Ltd. is therefore not applicable to the present case...... " The Supreme Court also noticed its own ruling in an earlier case, namely Narain Swadeshi Wvg. Mills v. CEPT [1954] 26 ITR 765--which was also a case of discontinuation of business--in which it had been held that the letting out of plant and machinery by the assessee-firm therein to another company could not fall within the definition of "business" under section 2(5), and that as the assessee had no business during the relevant period to which the Excess Profits Tax Act applied, section 10A could not be invoked by the excess profits tax authorities. 32. It may here be highlighted that the Supreme Court decision in the case of New Savan Sugar Gur Refining Co. Ltd. was based on : (a) the fact that vis-a-vis the factory and the machinery the intention of the assessee was to go out of the business altogether, and (b) the further fact that the assessee's intention was to use the income arising from the royalty in his capacity as the owner of the factory. 33. As we see it, the ruling of the Supreme Court in the said case is squarely applicable to the facts of the case before u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Supreme Court, in the facts and circumstances of that case, held that the assessee had stopped using the factory as a commercial asset during the subsistence of the lease, in the former case, it held that is did not. In both the cases it was emphasized that the question whether in a given cases an asset is being used as a commercial asset or as an income-yielding property is a question of fact to be determined in the given facts and circumstances of each case. " 35. The Punjab and Haryana case of Capital Foundry Engg. Works was one of the cases referred to and relied upon by the learned Counsel for the assessee. Since the said case was decided by applying the rulings of the same High Court in two earlier cases, namely Dal Chand Sons v. CIT [1968] 69 ITR 247 and Nauharchand Chananram v. CIT [1971] 82 ITR 189 it is necessary to notice the three cases chronologically. 36. In Dal Chand Son's case a Hindu undivided family in 1937 acquired a ginning factory for a sum of Rs. 39,650 in settlement of a debt owed to it by another party. During the years 1937 to 1939 the assessee made additions to the plant and machinery, building, and electricity fittings of the ginning facto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... divided members of the family was reconstituted. On April 20, 1957 ten divided members of the aforesaid larger HUF entered into a partnership for purposes of running the factory "either by itself or by giving it on lease to others". As a matter of fact, however, the firm leased the factory to another party. Relying on the said circumstances, the Assessing Officer held, first, that the firm was not engaged in any business, and secondly that, by the same token, no partnership ever came into existence. He, therefore, refused to give the assessee registration under section 26A of the old Act. The assessee was successful before the AAC. The Tribunal, however, reversed the decision of the AAC. The major factor, which weighed with the ITAT in this regard was that the assessee firm since its inception had acted like a 'rentier' and had never carried on any business. On a reference at the instance of the assessee, the High Court held that the assessee could not be denied the benefit of registration under section 26A of the old Act. In this regard it observed : " The only argument addressed by the learned counsel for the department was : that earning of rental income is not income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 263, cancelled the registration on the ground that no business was carried on by the assessee during the relevant accounting years. This order was confirmed by the Tribunal. On reference, applying its own rulings in the case of Dal Chand Sorts and Nauharchand Chananram, the High Court of Punjab and Haryana decided the issue in favour of the assessee and against the revenue. Now, not only in Capital Foundry Engg. Work's case but also in Nauharchand Chananram's case, the Punjab and Haryana High Court referred to the following observations of Mehar Singh C.J. in Dal Chand Sons' case--observations obviously made in the context of the Supreme Court ruling in the case of Shri Lakshmi Silk Mills Ltd. : " ...A business may be done in a number of ways and one of the ways is to run a commercial asset as such and another way may be that the commercial asset, at a particular time, is found to be more responsive to profit if allowed to be run as such by another as lessee. In either case the owner of the factory carried on the business of earning profits and gains from such an asset. The number of cases already referred to lends support to this approach, and the side of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase before us is one where the foundry business was closed first and thereafter the plant and machinery etc. were leased. Therefore, the case is squarely covered by the Supreme Court ruling in the case of New Savan Sugar Gur Refining Co. Ltd. Consequently, the lease rent must be brought to tax under the head 'Other sources'. 43. Now, what are the legal consequences of the aforesaid finding in relation to the assessee's claim for revenue deduction in the sum of Rs. 36,411 paid by her to her employees as and by way of retrenchment compensation ? The Supreme Court decision in the case of Gemini Cashew Sales Corpn. is the authority for the proposition that the liability to pay retrenchment compensation arises for the first time after the closure of the business and not before ; that it arises not in the carrying on of the business but on account of the transfer of the business ; and that the liability, which arose on transfer of the business, is not of revenue nature : and that it is not allowable as a deduction either under section 10(1) of the old Act (corresponding to section 28(i) of the new Act), or under section 10(2)(xv) of the old Act [corresponding to section 37(1) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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