TMI Blog1999 (1) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... ee to Buckau Wolf is a permissible deduction under section 37(1) of the Income-tax Act, 1961 ? 4. Whether, on the facts and in the circumstances of the case, the assessee-company is entitled to the deduction of travelling expense of Rs. 25,000 under section 37(1) of the Act ?" The assessee-company was carrying on the business of manufacture and sale of sugar up to the end of the accounting year 1970-71 (assessment year 1972-73). On March 31, 1971, the sugar factory machinery and the premises were leased out to Saswad Mali Sahakari Sakhar Karkhana Ltd., on an annual rent of Rs. 3 lakhs. The Saswad Mali Sahakari Sakhar Karkhana Ltd., is hereinafter referred to, for the sake of brevity, as "the said society". According to the assessee-company, the State Government was approached for financial assistance when it was made clear to the assessee-company that the State Government favoured only such sugar factories which were run as co-operative societies. Accordingly, the society was registered on December 21, 1970. Under the circumstances, a lease came to be executed on March 31, 1971. By the lease agreement, the entire sugar plant was leased out to the society initially for two years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w the suit bearing No. 115 of 1973 and suit bearing No. 86 of 1974. Accordingly, Company Petition No. 9 of 1973 came to be disposed of. This reference relates to the assessment year 1973-74 for the relevant accounting year ending July 31, 1972. The company filed its return on July 13, 1973, followed by a revised return on September 23, 1975. During the year in question, the assessee-company's sources of income were income from property, sale of sugar including sugar export incentive, interest from loans and advances, dividends and lease rent from the society. As regards business income, the Income-tax Officer found that the lease rent received from the society, as per the lease agreement dated March 31, 1971, represented income from other sources. That, it did not constitute business income. This finding was given by the Income-tax Officer on the basis of the terms of the lease and the surrounding circumstances, referred to hereinabove. The assessee had further claimed deduction of Rs. 3,91,104 for interest payments made by the assessee-company to United Western Bank for purchase of machinery. The said amount was claimed as business expenditure. The Income-tax Officer came to the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hown and assessed as income from property. Being aggrieved by the order passed by the Income-tax Officer, the matter was carried in appeal to the Commissioner who allowed the appeal on all counts. The Appellate Assistant Commissioner, inter alia, came to the conclusion that the intention of the assessee-company was to carry on the business through its instrumentality, viz., the said co-operative society. The Appellate Assistant Commissioner accordingly concluded that income from lease constituted income from business. Being aggrieved by the order passed by the Appellate Assistant Commissioner of Income-tax, Pune, the Department carried the matter in appeal to the Tribunal. After considering the terms and conditions of the lease and the surrounding circumstances, the Tribunal came to the conclusion that the assessee's intention was not to carry an its business, but merely to let out the business assets. In view of the above finding, viz., that the assessee's intention was not to carry on business, but to merely let out the business assets, the Tribunal disallowed the claim of the assessee for deduction in respect of compensation paid by the assessee to Buckau Wolf Limited. Similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee-company further pointed out that although initially the assessee-company entered into lease-cum-sale agreement with the society, subsequently, the same was substituted by a revised lease. Learned counsel for the assessee-company further pointed out that in the proceedings before the High Court, all earlier resolutions passed by the company stood cancelled and in the circumstances, he contended that in view of the revised lease, the intention of the assessee-company was to exploit the assets as commercial assets and, therefore, the income received by the assessee-company as rent under the revised lease constituted income from business. Learned counsel for the assessee further contended that a bare perusal of the terms and conditions of the revised lease indicates that the assets were required to be used only for manufacture of sugar. That no other purpose was permitted under the lease and, therefore, the assessee had an interest in the society carrying on sugar manufacturing business. He further pointed out that even the licence to manufacture sugar stood retained by the assessee-company and, therefore, the company retained all its rights over the assets and the licence r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... travelling expenses to the extent of Rs. 25,000. We do not find any merit in the contentions advanced on behalf of the assessee-company. Under section 28 of the Income-tax Act, 1961, profits and gains of any business carried on by the assessee-company at any time during the previous year are chargeable to tax under the head "Profits and gains of business or profession". In such a case, a large number of deductions, reliefs and benefits are available under the Act as mentioned in section 30 onwards. Section 56 provides that chargeable income of every kind not included under the heads shall be charged under the head "Income from other sources". The question as to whether a particular factory or plant is used as a commercial asset or whether it is used as property has become a vexed question for which no general principle can be laid down. Hence, each case has to be decided on its own circumstances. Basically, it will depend on the intention. Intention is an inference to be drawn from the relevant facts. Where, either by word or conduct, the assessee expresses its intention to go out of business by converting the commercial asset into property, the income that accrues to such an as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revised lease. However, the intention of the assessee-company in entering into the lease-cum-sale agreement with the society was to sell the plant and machinery and the premises to the society for which a price was also fixed. Even the revised lease clearly indicates the intention of the assessee-company to go out of business and to convert the assets into property. The long duration of the revised lease is also one of the factors which supports our finding regarding the intention of the assessee-company in treating the assets as income-yielding properties. The period of the revised lease may not be a conclusive factor, but it is certainly a relevant factor to be taken into account. Even the memorandum of the company did not contemplate leasing to be a business activity of the assessee. In view of our finding that the assessee's intention was not to carry on business, but to let out the business assets as income-yielding properties, the claim of the assessee-company for deduction regarding the compensation paid to Buckau Wolf Ltd. and for deduction on account of interest paid to the United Western Bank as also the claim for deduction on account of travelling expenses cannot be gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness. Hence, the judgment of the Supreme Court in the case of CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 has no application to the present case. In the case of CIT v. Vikram Cotton Mills Ltd. [1988] 169 ITR 597 (SC), the Tribunal held that the company had an intention to restart the business and the intention of the company in letting out its assets was to exploit the commercial assets for business purposes and, therefore, the rental income was business income. The Supreme Court laid down in the said judgment that the question as to whether the assessee was exploiting the asset as a commercial asset or as an income-yielding property is predominantly a matter of intention. That intention is an inference to be drawn from the relevant facts. That, it would depend on the facts of each case. In the present matter, as stated hereinabove, the evidence on record indicates that the assessee-company intended to dispose of the assets. Initially, they entered into lease-cum-sale arrangement for two years. That, under the said arrangement, the assets were required to be sold at the end of two years. That, even under the revised lease, the tenure and the other terms and conditions, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heatre was composite and, therefore, the assessee was entitled to the deduction of the interest paid on the loans in question under section 36(1)(iii) of the said Act, 1961. On the facts, therefore, the judgment of the Supreme Court in Veecumsees' case [1996] 220 ITR 185 has no application to the facts of the present case. In the present case, the supply of tractors cannot give the right to the assessee to claim deduction of interest on loans raised. On the facts, we have come to the conclusion that the total business of manufacturing and selling sugar came to be closed down. In the judgment of the Supreme Court, there existed two distinct and separate businesses, viz., running of cinema theatre and business of jewellery. The cinema business came to be shut down. On the facts, it was found that the jewellery business continued. In the present matter, supply of tractors was incidental to the main business of manufacturing and selling sugar which, as stated hereinabove, stood closed. Hence, under the circumstances, interest on loans raised cannot be claimed as an item of deduction and the judgment of the Supreme Court, therefore, has no application to the facts of the present case. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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