1987 (5) TMI 358 - HC - Income Tax

Business income - Whether the proprietor of a colliery abdicating all control of its business in favour of a managing contractor by a lease for a fixed term of ten years with an option to renew by the lessor on the terms of an annual minimum guaranteed amount of Rs. 18,000 and royalty at differential rates on the quantum of coal raised and its manufacture, can still be said to be carrying on the business of the said colliery within the meaning of section 28(1) of the Income-tax Act, 1961

Issues Involved:
1. Whether the income received by the proprietor from the managing contractor can be classified as income from business under section 28(1) of the Income-tax Act, 1961.
2. Interpretation of the lease agreement terms between the proprietor and the managing contractor.
3. Applicability of the precedent set by the Supreme Court in New Savan Sugar & Gur Refining Co. Ltd. v. CIT.
4. Validity of the contract under the Minor Mineral Concession Rules.

Detailed Analysis:

1. Classification of Income:
The primary issue was whether the income received by the proprietor from the managing contractor could be classified as income from business under section 28(1) of the Income-tax Act, 1961. The court concluded that the income received by the proprietor was not from carrying on the business of the colliery but was instead income from other sources. The court emphasized that the proprietor had abdicated all control over the business to the managing contractor and was only receiving a fixed minimum guaranteed amount and royalty based on the quantity of coal raised and manufactured.

2. Interpretation of Lease Agreement Terms:
The court analyzed the terms of the lease agreement between the proprietor and the managing contractor. Key clauses highlighted included:
- The colliery was closed and required reopening permission, which was the responsibility of the managing contractor.
- The managing contractor was to install machinery and equipment at its own cost.
- The managing contractor had full authority to manage the colliery, employ personnel, and handle all business operations.
- The proprietor was to receive a minimum guaranteed income of Rs. 18,000 per annum and additional royalties based on coal production.
The court noted that the practical effect of the agreement was that the managing contractor was carrying on the business, while the proprietor was only receiving a fixed rental income and royalties, with no involvement in the business operations.

3. Applicability of Precedent:
The court relied heavily on the precedent set by the Supreme Court in New Savan Sugar & Gur Refining Co. Ltd. v. CIT. In that case, the Supreme Court held that when an assessee does not carry on business but leases out the business for a fixed term, the income received is not from business but from other sources. The court distinguished the present case from the earlier case of CEPT v. Shri Lakshmi Silk Mills Ltd., emphasizing that the latter involved a temporary letting out of part of the business, whereas the present case involved a long-term lease of the entire business.

4. Validity of the Contract:
The court dismissed the argument that the lease agreement was void under the Minor Mineral Concession Rules due to a lack of government consent. The court stated that this issue was not relevant to the income-tax reference and had not been raised at any stage in the proceedings before the income-tax authorities.

Conclusion:
The court held that the income received by the proprietor from the managing contractor was not income from business under section 28(1) but income from other sources. The court overruled the earlier decision in S.K. Sahana & Sons Ltd.'s case and affirmed the consistent view within the jurisdiction that such income should be classified under section 56 as income from other sources. The common question referred to the High Court for all the assessment years was answered in the negative, in favor of the revenue and against the assessees.

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