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M/s Maltex Malsters Ltd. Versus Commissioner of Income Tax, Patiala and another

2016 (9) TMI 910 - PUNJAB AND HARYANA HIGH COURT

Income arising out of the leasing out of the business assets - business income or income from other sources - Held that:- Clause-7 clearly indicates that the assessee did not intend the lease arrangement to continue for an indefinite period of time. That as a matter of fact the lease is now terminated is a different matter. We cannot base our decision on that fact for it has not been brought on record. However, even otherwise, clause-7 is in favour of the assessee. The Tribunal has merely specul .....

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hts or interest in its property in any manner whatsoever if the assessee intended continuing with the system indefinitely. The fact that the assessee insisted upon its employees being retained is a strong indication that it intended coming back into the business using the same assets and properties. This was an important term of the contract. - There are other factors also which together with clause-7 support the assessee’s case. For instance, the second paragraph of clause-1 provides that a .....

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read with clause-4 makes this clearer. Clause-4 requires the parties to mutually decide regarding the capital expenditure for upgrading the technologies and the facilities. - Clause-2 also indicates that the assessee retained an interest in the plant and machinery and the property for otherwise it would not have agreed to expand the installed capacity at its costs. - It was contended on behalf of the Revenue that clause-2 indicates that there was no necessity on account of financial har .....

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oncerns. In any event, the Tribunal ought to have considered the agreement as a whole. - The findings of the Tribunal, therefore, are perverse. We, however, confirm the finding of the Tribunal that the decision of the Department to treat the income for the previous years in respect of the first lease deed as business income does not bind the Department with respect to the income received under the second lease deed.In the circumstances, the question of law is answered in favour of the assess .....

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05. 2. The appeal was admitted on the following substantial question of law:- Whether in the facts and circumstances of the case, the income arising out of the leasing out of the business assets is business income or income from other sources? The other questions that are sought to be raised by the appellant relate to this question. 3. The appellant/assessee filed a return declaring a loss of about ₹ 48.46 crores. The return was processed under Section 143(3). The question is whether the a .....

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from this property and with its equipment for about 20 to 30 years. 5. To determine the question, it is necessary to refer to two lease agreements entered into between the assessee and UB Ltd. in detail. 6. The assessee and UB Ltd. entered into a Lease Deed dated 01.04.1998 (hereinafter referred to as the first lease deed ) wherein the assessee and UB Ltd. are referred to as the lessor and the lessee, respectively. The recitals in the lease deed inter alia state that UB Ltd. required large quan .....

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g facility capable of producing 12,000 MT of malt per month along with the entire plant and machinery and storage spaces of the requisite capacity. Routine minor repairs were to the account of UB Ltd. and major repairs and replacement of assets which had become obsolete, redundant and irreparable were on the assessee s account. Clause-7 of the agreement read as under:- 7. The LESSEE shall utilise the services of such employees on the rolls of the LESSOR as on 31.3.1998 during the term of this Ag .....

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ctive of variation in level of production. The LESSOR undertakes to pay all statutory dues in respect of their employees under all Statutes/laws including inter alia, labour laws, Provident Fund, ESI and such other laws as are applicable. The LESSOR shall keep the LESSEE indemnified at all times in the event of any action taken or prosecution initiated against the LESSEE in connection with any of the LESSOR s employees. However, additional expenses incurred on festival occasions on its employees .....

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se deed ). The parties terminated the first lease deed dated 01.04.1998. The recitals were similar to those under the first lease deed. The Department relied upon the fact that the recitals do not indicate the business expediency or reason for the assessee s having entered the second lease deed. Mr. Abhishek Sanghi, the learned counsel appearing on behalf of the appellant/assessee, rightly relied upon clauses-1, 2, 3, 4 and 7 of the second lease deed which read as under:- 1. LESSOR doth hereby g .....

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e date of this Lease Deed, the parties shall discuss on the revision of annual consideration mentioned above payable by the LESSEE to the LESSOR for the years 2005-2006 and thereafter. 2. The LESSOR further undertakes to take necessary steps to expand the installed capacity from the present level of 12,000 MT to 18,500 MT during the year 2003 along with the upgradation of the existing environmental facility as well as technological upgradation in the kilning system and other facilities as deemed .....

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eds and storehouses exclusively for the period of this Agreement. 3. It has been agreed between LESSOR and the LESSEE that a technical audit will be jointly carried out of the Plant & Machinery. The LESSOR undertakes to handover the Malting operations to the LESSEE which is fully operational at present. The LESSEE shall be responsible for carrying out routine minor repairs, renewals and maintenance of plant and machinery at its cost. However, it is agreed between the parties that in case of .....

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decided between the LESSEE and the LESSOR before finalisation. …. ….. ……. ……. ……. 7. The LESSEE shall utilise the services of such employees on the rolls of the LESSOR as on the date of this Lease Deed during the term of this Agreement. These employees shall continue to be on the rolls of the LESSOR and in no manner shall it be construed or deemed that such employees have been taken or transferred to LEESSEE s rolls. The LESSEE shall reimb .....

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laws as are applicable. The LESSOR shall keep the LESSEE indemnified at all times in the event of any action taken or prosecution initiated against the LESSEE in connection with any of the LESSOR s employees. However, additional expenses incurred on festival occasions on its employees and others on whose rolls the employees are working shall be borne by the LESSOR. We will construe the lease deed later. 9. The Assessing Officer noted that no operation had to be carried out by the assessee and th .....

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refore, the income is taxable under the head Income from other sources . That, however, is not sufficient to decide the issue. It is necessary to construe the entire lease deed and the other facts. 10. The Assessing Officer, however, rightly rejected the assessee s contention based on the fact that its case for the Assessment Year 2000-01 was completed under scrutiny and its income from the first lease deed was held to be business income. On the other hand, the CIT (A) held in the assessee s fav .....

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s regard. 11. The Assessment Year 2000-01 pertained to the period covered by the first lease deed and not the second lease deed. It was rightly held that merely because the income under the first lease deed during Assessment Year 2000-01 was considered to be business income, it does not necessarily follow that the income under the second lease deed also constitutes business income. 12. In a case such as this, it is imperative to ascertain whether the income under a fresh lease deed ought to be c .....

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to tide over a difficult period, it would be required to be computed under the head Profits and gains from business . The stand taken by the Department/Revenue in respect of the earlier lease deed cannot, therefore, be binding on the Department/Revenue in respect of the subsequent lease deed. The principle of consistency cannot be applied for the fact situation under each lease deed is fundamentally different. If, however, the fact situation including as to the intention of the assessee in leas .....

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der:- 22. It is evident from the terms and conditions of the fresh lease deed executed during the previous year that the assessee company does not have any intention of carrying on the business of its own with the help of plant and machinery owned by it. The mere fact that the employees shall continue to be in employment of the assessee may not cloud the fact that the assessee has leased plant and machinery for a period of 10 years in addition to its earlier period of 5 years. It has to be borne .....

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iewing the terms and conditions of the lease deed with reference to the decision of the Hon ble Supreme Court referred to earlier in para Nos.9 to 12, we do not have any doubt in our mind that there does not appear to be any intention of the assessee to restart the business of its own. The termination of earlier lease agreement, and execution of fresh agreement for a period of 10 years was not under any compelling circumstances, financial or otherwise. As per the terms of the agreement, it is ev .....

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24. Taking the totality of the facts and circumstances of the case into consideration, we are of the view that the income from letting out of the plant and machinery to the sister concern falls under the head income from other sources. 14. A duration of 10 to 15 years of a lease of this nature does not indicate an intention on the part of the lessor to part with its business assets permanently or for an inordinate period of time indicating that its intention is to discontinue its business activi .....

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hort period. The return of investment would not be adequate if the lease is for a short duration. 15. In Universal Plast Ltd. vs. Commissioner of Income Tax, Calcutta, (1999) 5 Supreme Court Cases 189, the Supreme Court considered the following questions:- Whether on the facts and in the circumstances of the case, the Tribunal was correct in law that the income received by the assessee by leasing out the factory was business income? …. ….. ……. ……. &helli .....

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n whether income (referred to by whatever nomenclature, lease amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head profits and gains of business or profession ; (2) it is a mixed question of law and fact and has to be determined from the point of view of a business in that business on the facts and in the circumstances of each case including true interpretation of the agreement under which the assets are let out; (3) where all the as .....

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e business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets. 16. No precise test can obviously be laid down, even where some of the clauses in two lease deeds are the same. Their importance and weightage may differ in each of the lease deeds. Moreover, it will be necessary to construe the documents as a who .....

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rry on a hotel business in the same building. It was, therefore, held that letting out the building did not amount to carrying on the business and, therefore, the income under the lease could not be assessed as income from business. As held by the Supreme Court in that case:- Whether a particular letting is business, has to be decided in the circumstances of each case. Each case has to be looked at from a business man s point of view to find out whether the letting was the doing of a business or .....

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that the assessee desired parting with the machinery, the factory and the premises with the obvious purpose of earning rental income and not to treat the factory and the machinery as a commercial asset during the subsistence of the lease. It was found, as a matter of fact, that the intention of the appellant was to go out of business altogether. It was, therefore, held that the income was not assessable as business. In Universal Plast Ltd. (supra) itself, it was found, as a matter of fact, that .....

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ut any basis. Our attention has not been invited to anything that indicates that they are sister concerns. The Tribunal s interpretation of clause-7 is, therefore, based on a fundamentally erroneous factual basis. 20. Clause-7 clearly indicates that the assessee did not intend the lease arrangement to continue for an indefinite period of time. That as a matter of fact the lease is now terminated is a different matter. We cannot base our decision on that fact for it has not been brought on record .....

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services of the employees in accordance with law, it would not have affected the assessee s rights or interest in its property in any manner whatsoever if the assessee intended continuing with the system indefinitely. The fact that the assessee insisted upon its employees being retained is a strong indication that it intended coming back into the business using the same assets and properties. This was an important term of the contract. 21. There are other factors also which together with clause .....

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