TMI Blog1999 (3) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... ence No. 17 of 1991 under section 256(2) of the Income-tax Act, 1961 (for short, "the Act"), passed on February 6, 1992 (hereinafter referred to as the "UPL case"). Civil Appeals Nos. 1685-1687 and 1700 of 1999 arising out of Special Leave Petition Nos. 10912-14 and 10984 of 1986, in which leave is granted, are preferred by the assessee-The Guntur Merchants Cotton Press Company Limited, Guntur-aggrieved by the judgment and order of a Division Bench of the Andhra Pradesh High Court (see [1985] 154 ITR 861) in Case Referred No. 22 of 1979, under section 256(1) of the Act dated August 9, 1984 (hereinafter referred to as "Guntur Merchants' case"). The points for consideration in these appeals are similar. In the UPL case ([1992] 197 ITR 1 (Cal) the question of law referred to the Calcutta High Court, at the instance of the Revenue, reads : "Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the income received by the assessee by leasing out the factory was business income ?" The following is one of the questions of law referred to the Andhra Pradesh High Court, at the instance of the assessee in Guntur Merchants' case [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appearing for the assessee, has contended that under the "leave and licence" agreement, the assessee exploited the business assets ; the intention in receiving a share in the profit of the business as part of the consideration and in ensuring that the amounts due by the company to the creditors are paid regularly was to keep the business running so that it might continue the business after the expiry of the lease period. He invited our attention to various clauses of the agreement and pointed out that the High Court has not considered clauses 15 and 16 which unmistakably point out that the agreement was only a temporary measure and the intention of the assessee was to go back to the factory. Therefore, submitted learned counsel, the High Court had erred in not treating the amount in question as business income. Mr. K. N. Shukla, learned senior counsel for the Revenue, supported the judgments under appeal in these cases. The question whether the amount earned by an assessee by leasing out the assets of the business would be income from business carried on by it, has been the subject-matter of consideration by this court as well as by various High Courts and it would be useful t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of the assets did not cease to be commercial assets of that business and accordingly, the income from the assets would be the profit of the business irrespective of the manner in which that asset was exploited by the company. Noticing the facts in the case before the court that the assessee had already sold the land and building to the company ; it was not having any manufacturing, trading or commercial activity ; and let out the plant and machinery on an annual rent of rupees forty thousand and applying the common sense principle to the facts, this court found that the transaction of lease was quite apart from the ordinary business activity of the company, so it was impossible to hold that the letting out of the plant and machinery, etc., was at all a business operation when its normal business activity had come to a close. In CIT v. Calcutta National Bank Limited [1959] 37 ITR 171 (SC), the case arose under the Excess Profits Tax Act. The assessee was a banking company. It owned a six-storeyed building of which only a part was under its occupation and the rest was let out to tenants. The question was whether the rent received from the tenants of the building was the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , that the intention of the appellant-assessee was to part with the machinery of 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 ; the intention of the appellant was found to go out of the business altogether, therefore, the income was not assessable as business income. CIT v. Vikram Cotton Mills Ltd. [1988] 169 ITR 597 (SC), is again a case arising under the Indian Income-tax Act, 1922. One of the creditors filed a petition in the High Court for winding up. The Industrial Finance Corporation took possession of the fixed assets under an English mortgage of those assets. The assessee-company had gone into losses and had stopped its manufacturing activity. Under the scheme evolved by the High Court under the Companies Act, the business assets were let out for ten years with an option for renewal for another ten years. The management of the company was transferred to a board of trustees approved by the High Court. The question which fell for determination was whether the rental income was assessable in the relevant assessment years as business incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business assets otherwise than employing them for his own use for making profit for that business,; but if the 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. Now adverting to the facts of the UPL case, the High Court referred to the findings of the Tribunal that the leasing out of the factory was not a sequel to the assessee's decision to go out of the business in respect of the subject factory and that it was just a make-shift transient alternative means of commercial exploitation of the commercial assets, so income from such letting could not be treated as the fruits of ownership simpliciter of the asset. The High Court also referred to various clauses in the agreement, particularly clauses 1, 2, 4, 7, 19, 20, 21 and 22 and concluded that "licensee exercising its vested right of option to purchase the licensed premises, the assessee stands completely out in the cold". The High Court recorded the following findings : "Therefore, it can very well be presumed that, at the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the licensor, shall be liable for payment of retrenchment/retirement compensation, if any, in case of workmen retrenched or retired after the termination of the licence : Provided, however, that on the termination of the licence, the licensee shall be liable for any retrenchment compensation payable to workmen on account of removal by them of any plant and machinery acquired and installed by the licensee. 15. In the event of the licensee committing a breach of any of the terms of this agreement or making default in payment as provided in clause 2(ii) of any two quarterly instalments, the licensor shall be entitled to terminate this agreement upon the expiry of the period of one month from the service of notice in writing by the licensor to the licensee to remove the breach or to make payment, as the case may be, if the licensee fail to remove the breach or to make payment, as the case may be, within the said period. 16. If the licensees pass a resolution for winding up or are ordered to be wound up (except for the purpose of amalgamation or reconstruction) or if the licensee shall do or cause to be done or permit or suffer any act or thing whereby the licensor's right in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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