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Issues Involved:
1. Classification of income from leasing out a factory as business income or income from other sources. Issue-wise Detailed Analysis: 1. Classification of Income from Leasing Out a Factory: The primary legal question addressed in this judgment is whether the income received by the assessee from leasing out its factory should be classified as business income or income from other sources. The assessee, a limited company, had set up a factory for its business operations but faced financial difficulties and leased out the factory to Messrs Leatherite Industries Ltd. under an agreement effective from January 1, 1977. The lease was for seven years with an option for an additional three years, and the leave and licence money was determined at Rs. 24 lakhs plus 25% of the net profit of the factory. The Income-tax Officer classified the income as income from other sources without providing reasons for this classification. However, the Commissioner of Income-tax (Appeals) held that the income should be classified as business income, a decision affirmed by the Tribunal. The Tribunal emphasized that the lease was a temporary measure under financial duress and that the assessee maintained a commercial interest in the factory's profits, indicating an intention to resume business operations. The Tribunal's analysis of the lease agreement highlighted several clauses demonstrating the assessee's continued commercial interest in the factory, such as the right to inspect the premises and the obligation to maintain the factory in good condition. The Tribunal concluded that the leasing was a temporary alternative mode of exploiting the commercial asset, not a decision to exit the business. The judgment references three Supreme Court decisions to resolve the issue: 1. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC): This case established that leasing out a commercial asset temporarily during a financial crisis does not change the asset's commercial character. 2. Sultan Bros. Pvt. Ltd. v. CIT [1964] 51 ITR 353 (SC): This case differentiated situations where an asset is leased out from the outset without any intention of using it for business, classifying the income as arising from ownership simpliciter. 3. New Savan Sugar and Gur Refining Co. Ltd. v. CIT [1969] 74 ITR 7 (SC): This case involved an assessee leasing out a factory after deciding to exit the business, with the income classified as arising from ownership simpliciter. The court concluded that the present case aligns more closely with New Savan Sugar and Gur Refining Co. Ltd., as the lease agreement contained clauses indicating an intention for an ultimate sale of the factory, not a temporary measure. Clauses (19), (20), and (21) of the agreement, which provided the licensee with an option to purchase the factory and required the transfer of licences and permits, were pivotal in this determination. These clauses suggested that the assessee intended to dispose of the factory rather than resume business operations. The court held that the Tribunal erred in classifying the income as business income, as the lease agreement indicated a decision to exit the business. The income was thus classified as income from other sources. The court answered the question in the negative, in favor of the Revenue, and against the assessee, with no order as to costs.
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