1994 (2) TMI 99 - AT - Income Tax

Summary

Issues Involved:
1. Classification of income from the Leave and Licence Agreement.
2. Taxability of gains on the sale of gold bonds.
3. Allowability of expenses incurred for valuing the assets of the flour mill.

Issue-wise Detailed Analysis:

1. Classification of Income from the Leave and Licence Agreement:
The primary issue was whether the income received by the assessee under the Leave and Licence Agreement should be taxed under the head 'business' or 'other sources.' The assessee, a partnership firm, had entered into a Leave and Licence arrangement with another firm to operate its flour mill. The Income Tax Officer (ITO) had classified this income under 'other sources' for the assessment years 1982-83 and 1986-87, contrary to the earlier assessments where it was taxed as 'business income.'

The CIT(A) found that the arrangement was temporary and that the assessee retained significant control over the mill's operations, indicating a business intention. The Appellate Tribunal upheld this view, emphasizing that the assessee's intention was to resume the flour mill operations when conditions improved. The Tribunal noted several clauses in the agreement that indicated the assessee's control and intention to exploit the mill as a commercial asset, such as the right to inspect the mill, appoint key personnel, and the stipulation that the licence fee would be reduced if the mill was non-operational beyond a month. These factors led to the conclusion that the income should be classified as 'business income.'

2. Taxability of Gains on the Sale of Gold Bonds:
The second issue was whether the gains from the sale of gold bonds were taxable. The CIT(A) had directed the ITO to exempt these gains, and this decision was challenged by the revenue. The Tribunal noted that the Calcutta Bench had previously ruled that there would be no capital gains on the sale of gold bonds, following the Tribunal's order in the case of the partners of the assessee firm. Additionally, the Tribunal referenced the Third Member decision of the Madras Bench, which held that gold bonds are not capital assets within the meaning of section 2(14)(iv) of the Income-tax Act, thus the surplus from their sale is not taxable. Consequently, the Tribunal upheld the CIT(A)'s decision to exempt the gains from tax.

3. Allowability of Expenses Incurred for Valuing the Assets of the Flour Mill:
The third issue was whether the expenses of Rs. 3,255 incurred for valuing the assets of the flour mill should be allowed as business expenditure. The ITO had disallowed these expenses, and the CIT(A) had allowed them, categorizing the flour mill as a commercial asset. However, the Tribunal reversed this decision, noting that the valuation was for the purpose of negotiating the sale of the flour mill, not for carrying on the business. The Tribunal referenced the Calcutta High Court judgment in CIT v. Asiatic Oxygen & Acetylene Co. Ltd., which allowed valuation expenses for improving creditworthiness but not for fixing the sale price of assets. The Tribunal concluded that the expenses were related to the closure of business activities and therefore could not be allowed as business expenditure, aligning with the Supreme Court's ruling in CIT v. Gemini Cashew Sales Corpn. and the Calcutta High Court's decision in Binani Printers (P.) Ltd. v. CIT.

Conclusion:
The Tribunal upheld the CIT(A)'s decision regarding the classification of income from the Leave and Licence Agreement as 'business income' and the exemption of gains from the sale of gold bonds. However, it reversed the CIT(A)'s decision on the allowability of expenses incurred for valuing the flour mill's assets, categorizing them as non-business expenditures. The appeal for the assessment year 1982-83 was partly allowed, and the appeal for the assessment year 1986-87 was dismissed.