1951 (9) TMI 1 - SC - Income Tax

Whether or not excess profits tax is payable on the sum of 20, 005 received by the respondent from Messrs. Parakh Co. by way of rent for the dyeing plant let out to them during the chargeable accounting period? Held that - It was a part of the normal activities of the assessee s business to earn money by making use of its machinery by either employing it in its own manufacturing concern or temporarily letting it to others for making profit for that business when for the time being it could not itself run it. The High Court therefore was in error in holding that the dyeing plant had ceased to be a commercial asset of the assessee and the income earned by it and received from the lessee Messrs. Parakh Co. was not chargeable to excess profits tax. The result therefore is that we hold that the answer returned by the High Court to the question referred to it by the Tribunal was wrong and the correct answer to the question would be in the affirmative and not in the negative. Appeal allowed.

Issues Involved:
1. Whether excess profits tax is payable on the rent received from letting out a dyeing plant.
2. Whether the income from letting out the dyeing plant constitutes "profits from business" under Section 2(5) of the Excess Profits Tax Act.

Detailed Analysis:

1. Whether excess profits tax is payable on the rent received from letting out a dyeing plant:

The primary issue in this case revolves around the taxability of Rs. 20,005 received by the respondent from Messrs. Parakh & Co. as rent for a dyeing plant during the chargeable accounting period. The Excess Profits Tax Officer included this amount in the respondent's business profits, a decision upheld by the Appellate Assistant Commissioner and the Income-tax Tribunal. However, the High Court answered negatively when asked whether this income was "profits from business" under Section 2(5) of the Excess Profits Tax Act, leading to the present appeal.

2. Whether the income from letting out the dyeing plant constitutes "profits from business" under Section 2(5) of the Excess Profits Tax Act:

The Commissioner contended that the dyeing plant was a commercial asset of the respondent's business, and any income derived from it, regardless of its use, should be considered business income. The High Court, however, opined that if a commercial asset is not in a condition to be used as such by the assessee, then income derived from letting it out is not business income.

The Supreme Court disagreed with the High Court's view, emphasizing that the nature of a commercial asset does not change merely because the assessee is temporarily unable to use it. The Court held that the yield of income by a commercial asset remains a profit of the business, irrespective of how the asset is exploited. The Court illustrated this with an example: if a manufacturing concern allows another party to use its plant due to a shortage of raw materials, the income from this arrangement remains business income.

The Court further differentiated between cases involving land and those involving machinery or commercial assets. It cited various cases to support its stance, including the judgment in Sutherland v. Commissioners of Inland Revenue, which held that a commercial asset's income remains business income regardless of its use.

The Court concluded that the dyeing plant, even though temporarily idle, did not cease to be a commercial asset of the respondent's business. The income derived from letting it out was part of the business income and thus subject to excess profits tax. The High Court's decision was deemed incorrect, and the Supreme Court held that the correct answer to the Tribunal's question should be affirmative.

Conclusion:

The Supreme Court allowed the appeal, ruling that the income received from letting out the dyeing plant was indeed profits from business and therefore liable to excess profits tax. The High Court's interpretation was overturned, and the Tribunal's original assessment was upheld. No order as to costs was made.

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