1968 (8) TMI 44 - HC - Income Tax

Assessee who owned power looms permitted by an agreement, another person to use the power looms - user of the machinery was to pay the assessee a fixed sum by way of share of the net profits - said sum was not a payment of lease and hence, was taxable under the head Income from Business and not under the head Income from Other Sources

Summary

Issues:
Assessment under section 12 instead of section 10 of the Income-tax Act for the year 1961-62.

Analysis:
The case involved the assessment of income derived by a firm from leasing out powerlooms and related equipment. The firm had previously manufactured handloom cloth but had stopped the manufacturing activity, leading to the powerlooms lying idle. The income from leasing out the powerlooms was initially treated as income from other sources but was later charged as income from business for certain years. However, for the assessment year 1961-62, the department reverted to treating the income as from other sources under section 12. The revenue and the Tribunal concluded that the income from leasing out the powerlooms did not constitute income from business under section 10. They viewed the agreement as a lease for a fixed period with a fixed monthly payment to the assessee, emphasizing that the firm did not resume manufacturing but leased out the powerlooms instead.

The second agreement in question was styled as a deed of agreement of agency. The firm appointed another party as its managing agent for a fixed period, authorizing the agent to shift and operate the powerlooms at a new location. The ownership of the powerlooms remained with the firm, and the agent was responsible for managing and operating the looms, including making a fixed monthly payment to the firm. The terms of the agreement indicated a principal-agent relationship, with the firm retaining control over the assets and the agent managing the operations.

The court analyzed whether the income derived from the agreements could be classified as "Profits and gains of a business carried on by him" under section 10. The court emphasized that the term "business" has a broad scope and includes various income-generating activities conducted by the assessee. Examining the terms of the agreements, the court concluded that they did not constitute leases but established a principal-agent relationship. The fixed monthly payment to the firm did not negate the business nature of the activity, as some businesses may operate with fixed profits without taking additional risks.

Comparing the case to a precedent from the Punjab High Court, the court determined that the agreements did not amount to leases but rather established a principal-agent relationship. The court rejected the argument that fluctuation in yield is a conclusive test for determining a business activity, emphasizing that fixed profits do not necessarily negate the business nature of an activity. The court also dismissed the argument that the subject matter of the agreement was only the powerlooms, clarifying that the purpose was to operate the machinery and produce handloom cloth, constituting a business activity.

In conclusion, the court ruled in favor of the assessee, holding that the income derived from the agreements was from a business activity. The court emphasized the principal-agent relationship established by the agreements and rejected the notion that fixed profits or the nature of the subject matter negated the business character of the activity. The court awarded costs to the assessee and answered the question in their favor.