1969 (2) TMI 7 - SC - Income Tax

Lease of company - intention was to use the income arising from the royalty in its capacity as the owner of the factory - income of the assessee-company was liable to be assessed under s. 12 of the IT Act and not under s. 10 - additional depreciation and development rebate can not be allowed as a deduction - Assessee appeal dismissed

Summary

Issues Involved:
1. Whether the income of the assessee-company was liable to be assessed under section 12 of the Indian Income-tax Act and not under section 10 of the said Act.
2. Whether additional depreciation and development rebate can be allowed as a deduction.

Detailed Analysis:

Issue 1: Assessment Under Section 12 vs. Section 10
The primary issue was whether the income derived from the lease of the sugar factory should be assessed under section 10 (profits and gains of business) or section 12 (income from other sources) of the Indian Income-tax Act. The assessee argued that the lease was of a commercial asset, thus the income should be assessed under section 10, allowing for depreciation and development rebate.

The court examined the terms of the lease agreement dated 15th March 1948, which included:
- A term of five years with options for renewal.
- The lessee's entitlement to run the factory and use all machinery.
- Payment of royalties based on production, with a minimum annual royalty.
- Responsibility of lessee for running expenses, while the lessor was responsible for insurance and capital expenses.

The court concluded that the intention of the assessee was to part with the entire machinery and premises to earn rental income, not to treat the factory as a commercial concern during the lease. The primary condition for section 10 is that the assessee must carry on business, which was not the case here. The royalty was a measure of payment, not indicative of business income. Therefore, the income was rightly assessed under section 12.

Issue 2: Additional Depreciation and Development Rebate
The second issue was whether the assessee could claim additional depreciation and development rebate under clauses (via) and (vib) of section 10(2). The assessee argued these clauses should be implied within section 12(3), which allows certain deductions for machinery, plant, or furniture let on hire.

The court noted that:
- Clause (via) was introduced in 1949 and clause (vib) in 1955, each with specific conditions and periods.
- These clauses introduced a new scheme and were not ancillary to clause (vi).
- Parliament did not amend section 12(3) to include these clauses when they amended section 10(2).

The court emphasized that it cannot supply gaps or make up deficiencies in legislation. Therefore, the assessee was not entitled to additional depreciation and development rebate under section 12(3).

Conclusion
The court upheld the High Court's judgment that the income of the assessee was liable to be assessed under section 12 and not under section 10 of the Income-tax Act. Additionally, the assessee was not entitled to additional depreciation and development rebate. The appeal was dismissed with costs.