TMI Blog1987 (12) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... 31-12-1962, is assessable to tax under the head 'Profits and gains of business' or under the head 'Income from other sources' ? " The assessee-company was a limited company. It carried on the business of manufacture of textiles. From 1949, the assessee-company started running into losses. At the end of December, 1953, the position was that as against the capital of Rs. 11,00,000, the accumulated liabilities of the assessee-company amounted to Rs. 26,00,000. Because of this, the assessee-company stopped its manufacturing activity from December, 1953. This state of affairs continued till May 21, 1956, when one of the creditors of the company filed a winding up petition in the High Court. M/s. Industrial Finance Corporation, one of the major creditors of the company, had, in exercise of its powers under an English mortgage of the fixed assets of the company, taken actual physical possession of the immovable properties hypothecated to them. Under section 153 of the Indian Companies Act, 1913, the High Court with the approval of the assessee-company and the creditors evolved a scheme whereunder the business assets of the assessee-company were let out to M/s. General Fibres Dealers (P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to treat the income arising out of the letting out of the assets as business income. The High Court noted in the judgment under appeal which incidentally is reported in CIT v. Vikram Cotton Mills Ltd. [1977] 106 ITR 829, that the assessee's case was that the income received by it from the lease of the plant and machinery was business income and was liable to be adjusted against the unabsorbed loss of the preceding year. It is here that the question arises. If it was business income, then the unabsorbed loss of the preceding year could be adjusted against such income. If, on the other hand, it was not, then such income could not be adjusted against the loss of the previous year. The hub of the matter lies there. It is well-known that section 24 of the Indian Income-tax Act, 1922, deals with set off and carry forward of losses. Under sub-section (1), where an assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year. Sub-section (2) provides that where an assessee suffers loss in any business and the lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rarily 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 was the profit of the business irrespective of the manner in which that asset was exploited by the owner of the business. He was entitled to exploit it to the best advantage and he might 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 was not correct. In that case, the assessee-company was a manufacturer of silk cloth and as a part of its business, it installed a plant for dyeing silk yarn. During the chargeable accounting period, January 1, 1943, to December 31, 1943, owing to difficulty in obtaining silk yarn on account of the war, it could not make use of this plant and it remained idle for some time. In August, 1943, it was let out on a monthly rent. The question was whether such sum representing the rent for five months realised by the assessee was chargeable to excess profits tax as profits of business or was income from other sources and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company had carried on the business of motor car agents and repairers on land held on lease from 1935 to 1956 at an annual rent of 750 pounds. By 1940, the company's business had dwindled under war conditions to such an extent that no more than one-third of the land was required. In those circumstances, the remainder was sublet for fourteen years at an annual rent of 1,150 pounds. The General Commissioners of Income-tax decided that the difference of 400 pounds between the outgoing of 750 pounds for the land retained and the incoming of 1pounds, 150 for the land disposed of was " income received from an investment ", and the business not being one within the special categories mentioned in the Finance Act, 1939, that 400 pounds was not taxable. Lord Scott J. held that the word " investment " must be construed in the ordinary popular sense of the word as used by businessmen and not as a term of art having a defined or technical meaning and that it was impossible to say that the Commissioners had erred in law in coming to the conclusion that the transaction resulted in an investment. Lord Scott J. emphasised on the point that after the business of the company had dwindled, it parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee-firm. The company was director-controlled and the directors were N, his three sons, R, G and S and a brother-in-law of G. The company purchased only the buildings and leasehold rights from the assessee-firm but took over from it on lease at an annual rent the plant and machinery. The assessee-firm did not thereafter manufacture anything and it had accordingly no further trading or commercial activity. In July, 1940, the company executed a managing agency agreement in favour of U Co. consisting of R and G as partners. In January, 1941, the company appointed as its selling agent R Co. consisting of R, G and S as partners. In April, 1941, the shares of the partners in the assessee-firm were adjusted so as to equalise, as far as possible, the share of N with the shares which his sons got in the several firms. All the three firms were registered under section 26A of the Indian Income-tax Act, 1922. The question was whether the excess profits tax authorities were justified in amalgamating the income of U Co. and R Co. with the income of the assessee-firm under the provisions of section 10A of the Excess Profits Tax Act, 1940. It was held that in the facts and circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the portion of the building let out was liable to excess profits tax and could be included in the profits of the business under rule 4(4) of the First Schedule to the Excess Profits Tax Act, 1940. It was held that the realisation of rental income by the assessee was in the course of its business in prosecution of one of its objects in the memorandum. It depends on the facts and circumstances of each case. In New Savan Sugar and Gur Refining Co. Ltd. v. CIT [1969] 74 ITR 7, this court was dealing with a case where the appellant-company was carrying on the business of crushing sugarcane and gur refining. Its managing agents wrote a letter addressed to its shareholders referring to the alarming increase of Government interference in the affairs of the sugar industry in Bihar and the increase of wages of the workers, the levy of a cess and deterioration in cane crops and advising the acceptance of an offer of the lease of the company as a running concern. There, after examination, it was found that the cumulative effect of different clauses of the deed suggested that the assessee would have no concern with the production of the company. It was, therefore, held, on the terms of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he context of these facts, it appears that it was a possible conclusion that the assessee intended that there should be a temporary suspension of the business for the purpose of reconstruction of the company and for that matter, there must be stoppage of the user of the machinery by the assessee. It was a temporary lease though for 10 years or 19 years on renewal and after the expiry of the period, the property reverted back to the assessee. It is predominantly a matter of intention. Intention is an inference to be drawn from the relevant facts. All the relevant facts, it appears, have been considered by the Tribunal from the correct standpoint, i. e., an ordinary prudent businessman or as in England, it used to be " man on the top of the platform omnibus " or " director's arm chair ". If, on that test, a plausible conclusion has been drawn, no objection can be taken. On that basis, applying the correct principle, the Tribunal found that the intention was not to part with the machinery but to lease it out for a temporary period as a part of exploitation. In such a circumstance, it cannot be said that no business was carried on and their income derived from the machine letting w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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