9911796707
TMI Blog1991 (4) TMI 204X X X X Extracts X X X X X X X X Extracts X X X X ..... at the maximum marginal rate." 2. The assessee is a private trust which came into existence under the provisions of the trust deed dated 1-4-1982 executed by Smt. SAP Lakshmi Achi, widow of Shri Palaniappan Chettiar. The trust was executed for the benefit of six beneficiaries, the first of the beneficiaries being one SAP Annamalai, the trustee of M/s. Kumudam Endowments, which was a trust under the indenture dated 1-1-1971. The second beneficiary is his son Shri A. Jawahar Palaniappan, who is now said to be a nonresident and working as a cardiologist in USA. The third and fourth beneficiaries under the trust deed are minor son and daughter of Shri Palaniappan. The fifth and sixth beneficiaries under the deed are the sons of Shri P.V. Parthasarathy, one of the trustees appointed under the deed. The second trustee Shri Swamynarayanan is the brother of Parthasarathy, the first of the trustees. Each of the beneficiaries are given the corresponding shares shown against them in the table below : 1. SAP Annamalai, Trustee on behalf of Kumudam Endowments 80% 2. Jawahar Palaniappan 5% 3. Ranjit Annamalai 5% 4. Anjana Kothai 5% 5. P. Srinivasan 2.5% 6. P. Varadarajan 2.5% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the first beneficiary under the assessee trust holds 1000 shares as an individual and 2,600 shares as a Hindu undivided family in Kumudam Publications Pvt. Ltd. So also Smt. SAP Lakshmi Achi, the author of the assessee-trust held 300 shares and Smt. Meena Jawahar Palaniappan, wife of Jawahar Palaniappan, one of the beneficiaries held 100 equity shares out of the total 4,300 shares of Kumudam Publications Pvt. Ltd. It is significant that till 1984-85 assessment year the assessee-trust was doing business as the distributor of the magazines published by Kumudam Publications Pvt. Ltd. In the accounting year relevant to the assessment year 1985-86 more exactly under the terms of the agreement dated 1-4-1984 the distributorship rights of the assessee-trust were made over to a partnership firm M/s Varalakshmi Agencies, in which Shri Parthasarathy and Shri Jawahar Palaniappan were the only two partners. A copy of the said agreement is provided at pages 17 to 19 of the paperbook-I. Under the terms of the deed Varalakshmi Agencies should pay Rs. 10,000 per month as consideration for taking over the distribution rights of Kumudam, Kalkandu and Malaimathi for all the territories over which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) by the Finance Act, 1984 with effect from 1-4-1985 the consideration received for appointing Varalakshmi Agencies as sub-distributors of the three periodicals mentioned above would represent nothing but exploiting income yielding asset and the amount derived from leasing out the distributorship is nothing but business income and it cannot be considered as income from other sources. Further by virtue of the provisions of section 161(1A) the whole of the business income is liable to be charged with maximum marginal rate since the provision of section 161(1A) prevails notwithstanding anything contained in section 161(1). Therefore there is no question of distributing the returned income among the beneficiaries under the trust and making the trustees liable to the same extent as that of the beneficiaries. Thus he brought the whole of Rs. 1,27,475 to tax at maximum marginal rate and levied a sum of Rs. 78,875 as tax under his assessment order dated 11-3-1987 framed under section 143(3) for the assessment year 1985-86. 4. For the assessment year 1986-87 the assessee declared a net income of Rs. 1,69,565 under the head other sources. The assessee contended that the income received fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 1985-86 and dated 1-11-1989 for the assessment year 1986-87 the assessee came up in second appeal before this Tribunal and thus the matter stands for our consideration. We have heard Shri Ramamani, the learned counsel for the assessee and Shri Ravindran, the learned departmental representative. The learned counsel for the assessee contended that the main question in this appeal is to decide whether the assessee-trust was carrying on the business in the accounting years relevant to the assessment years 1985-86 and 1986-87 or only enjoying the ownership rights of the property represented by the distributorship agreement held by the assessee from M/s. Kumudam Publications Pvt. Ltd. If we agree with his contention that the assessee is enjoying only the ownership rights under the distributorship agreement obtained from Kumudam Publications Pvt. Ltd., then section 161 (1A) is inapplicable. It is next contended that even our answer to the first question is held against the assessee then also only the so-called business income received by the assessee is taxable with the maximum marginal rate but not the whole income derived by the assessee for the each of the accounting years in questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting a consolidated amount of Rs. 10,000 per month during the accounting year relevant to the assessment year 1985-86 and Rs. 15,000 per month for the accounting year relevant to the assessment year 1986-87. Thus in this case the intention of the parties in entering into the sub-distributorship contract dated 1-4-1985 would appear to be that the assessee-trust wanted to insulate itself from commercial risk and leave the actual exploitation to another agent for a fixed price agreed upon. Thus the amounts received under the sub-distributorship contracts were received passively. The assessee withdrew itself from business. It ceased to carry on the business from 1-4-1984 itself or in the alternative from 12-4-1984 from which date M/s. Kumudam Publications Pvt. Ltd., recognised the distributorship rights of Varalakshmi Agencies. Thus the income derived by the assessee-trust under the agreements dated 1-4-1984 and 1-4-1985 which it had entered into with Varalakshmi Agencies yielded only income from other sources but not business income since it does not involve any exploitation of the distributorship rights. 7. The learned departmental representative, opposing the contentions of the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of page No. 5. That means the agreement at page 5 was filed mainly to show that Varalakshmi Agencies was recognised as the distributor from 12-4-1984 by Kumudam Publications Pvt. Ltd., distributor at the following places : Alwarpet, Mint, Puruswalkam in Madras city, cities of Golden Rock, Madurai, Coimbatore, Bangalore, Dadar and VT in Bombay. The number of copies of the periodicals which the distributor sought from the publishers were all mentioned in that agreement. Condition No. 16 of the distribution agreement in favour of Varalakshmi Agencies itself would show that they have to pay Rs. 9 per copy of Kumudam, Rs. 5 per copy of Kalkandu and Rs. 3 per copy of Malaimathi as advance to the publishers. If this advance was in fact paid to the publishers on 12-4-1984 then also we can so say that the distributorship agreement in favour of Varalakshmi Agencies is genuine. For this purpose we have verified the original of the income-tax records in Varalakshmi Agencies' file. The learned departmental representative filed before us the balancesheet of Varalakshmi Agencies as on 31-3-1985. The said balance-sheet disclosed only loans and advances of Rs. 20,216. The details of loans and adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation the following amounts should have been dcposited by the assessee-trust with the publishers : 1,16,655 x 7 Rs. 8,16,585 37,000 x 4 Rs. 1,48,000 14,675 x 2.50 Rs. 36,687 -------------------------- Rs. 10,01,272 -------------------------- If the assessee-trust entertained an idea to retire from the business then the first thing to be expected of it is that it would take back the advance which it had deposited with the publishers since it is a substantial amount of more than Rs. 10 lakhs. However, no such withdrawal of advance was either pleaded or proved. Further when it was the case of the assessee that it completely retired from the business after making over of the distributorship rights to Varalakshmi Agencies then it should have got back the advance of about Rs. 10 lakhs mentioned above from the sub-distributors. However, as already noted neither Rs. 10 lakhs or any amount whatsoever was paid either as advance or as repayment of advance by Varalakshmi Agencies. This itself would show, according to the learned departmental representative that the assessee never had the intention to go out of business but was only made over the business to Varalakshmi Agencies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s consider whether the distributorship rights which the assesseetrust got under the agreement dated 15-4-1982 which it had entered into with the publishers of the periodicals is a commercial asset or is mere enjoyment of a proprietary right or income derived from other sources. In this connection it is admitted that out of the accounting period relevant to the assessment year 1985-86 the assessee carried on the business of distributorship from 1-4-1984 to 11-4-1984. It is the case of the assessee that from 12-4-1984 it stopped its business and allowed Varalakshmi Agencies to act as distributors. For so allowing them to act as distributors it had charged a sum of Rs. 1000 per month in the accounting year relevant to the assessment year 1985-86 and a sum of Rs. 15,000 per month in the accounting year relevant to the assessment year 1986-87. What is the inherent nature of the distributorship agreement dated 15-4-1984 in favour of the assessee-trust. Is it a commercial asset which is capable of producing income only on exploitation or is it an asset like an immovable property like a building, plant, machinery, which are capable of being leased out and in which case there may be difficu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation to pay Rs. 1,20,000 per annum during the accounting year for the assessment year 1985-86 and Rs. 1,80,000 per annum for the accounting year relevant to the assessment year 1986-87. Further the assessee-trust did not withdraw the advance of over Rs. 10 lakhs which it had deposited with the publishers before supplying the assured number of copies to it at several places at which places it was working as distributors. All this would clearly show that the assessee never intended to quit the business as distributor of the abovesaid periodicals but only merely suspended its business temporarily. It is no doubt stated to us that ultimately the assessee's agency came to an end in 1987. That itself would show that the assessee continued to be an agent till 1987, i.e., after the end of the two accounting periods relevant to the assessment years 1985-86 and 1986-87, with which we are concerned in these appeals. If really the assessee wanted to withdraw from business and Varalakshmi Agencies were appointed as distributors of the periodicals in place of the assessee-trust, then the advance paid to the publishers by the assessee-trust should have been replaced or substituted with the adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elf personally or by letting it out to somebody else." While laying down the above ratio their Lordships approved and followed an English case in Sutherland v. IRC [1918] 12 Tax Cas. 63, which laid down the following proposition as stated at page 456 of the reported decision: "That a commercial asset susceptible of being put to a variety of different uses in which gain might be acquired, and whichever of these uses it was put to by the appellant, the profit earned was a user of the asset of the same business. A mere substituted use of the commercial asset does not change or alter the nature of the asset. Whatever the commercial asset produces is income of the business of which it is an asset, the process by which the asset makes the income being immaterial." 11. In G.R. Narasimier Co. v. CIT [1969] 73 ITR 257 (Mad.) a partnership firm carried on a powerloom factory up to April 12, 1954 and thereafter the manufacturing was stopped and the machines and the buildings were lying idle. The powerlooms were commissioned again to work by R with effect from 1-11-1956 under an agreement dated 13-6-1957 and which was renewed on 16-4-1958. Under the agreement, though R was at liberty to sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssable to tax under the head 'profits and gains of business'. The Tribunal had pointed out that the company had no intention to permanently discontinue its business. It adopted the method of using its business assets through another company by way of a lease in order to resolve its very serious financial difficulties. Since the liabilities were liquidated, the assessee-company was able to regain possession of its business assets and utilise them for carrying on its manufacturing business. There was sufficient material to justify the finding of the Tribunal that the income derived from the lease of the plant and machinery was income from business and that the income so derived could be setoff against losses of the company from the business of the manufacture of textiles brought forward from the preceding year under section 24(2) of the Act. The lessee utilised the business assets of the company to carry on the same kind of business as was being carried on by the assessee, namely, manufacture of textiles. So, it could not be said that the business in which the losses occurred was not continued to be carried on in the assessment years in question within the meaning of sub-section (2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the alleged result of any enquiry under section 10 or section 10A of the Excess Profits Tax Act those were not transactions of the assessee firm. The assessee firm was, therefore, left only with some property which at one time was a commercial asset but had ceased to be so. The assessee firm thereupon let out that property on rent. The question is whether such letting out in such circumstances amounted to carrying on of a business". In that case their Lordships had distinguished their own earlier decision in Shri Lakshmi Silk Mills Ltd.'s case. It was stated that in Shri Lakshmi Silk Mills Ltd.'s case the respondent company was continuing its business of manufacturing silk cloth. Only a part of its business, viz., that of dyeing silk yarn on account of war was discontinued. However, in the case before them the assessee firm's business had been entirely closed. It no longer manufactured any ribbons and laces. It had accordingly no further trading or commercial activity. It could not in fact use the plant, machinery, etc. after the land and the buildings where they were installed had been sold to the company. In the circumstances the assessee firm let out plant and machinery, etc. o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iodicals in the cities and towns specified under the agreement. It is only during a part of the accounting year relevant to the assessment year 1985-86 it had leased out its rights of distributorship to Varalakshmi Agencies and therefore there is clear evidence in this case of the assessee carrying on business previous to the leasing out and the fact that the lease was only for a temporary period of two years in two spells also would disclose that after lease period is over, the assessee intended to carry on the business again as a distributor. Further the distributorship rights under the agreement dated 15-4-1982 in favour of the assessee-trust cannot be compared with the rights of an owner in a building fitted with furniture and fittings in which a hotel can be run. Whereas the distributorship agreement is necessarily a business asset, the building need not necessarily be a business asset. The income derived from building can be a property income, income from other sources or business income depending upon the circumstances of each case. Therefore, in our opinion the ratio of Sultan Bros. (P) Ltd. cannot be applied to the facts on hand. 15. Now, coming to the Tribunal decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... donors had already entered into such film distribution agreements with the seven distributors, for the distribution of the two films in respect of the various territories and as such there was nothing to be done by the appellant-trust, except to receive the net income from the said distributors for the three charitable objects of the appellant trust and as empowered under the trust deed dated 12-8-1971 and carry out the said trust objects." It was further found that the total amount received from the distributors of these two films,was Rs. 1,06,304. The amount received from the distributors of 'Bidaai' was Rs. 1,05,410 and the paltry sum of Rs. 894 was received towards the overflow rights from the distributors of the film 'Shaadi ke baad'. The settlement deed dated 15-5-1975 by which overflow rights were conferred on the assessee-trust contain clause 2, which is as follows: "This agreement shall not confer on the settlee any right to interfere with the rights of distributors to distribute the picture in accordance with the agreement already entered into by the settlor and the settlee's right is only confined to the collections of the 'overflow rights' as defined hereinabove, for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. There is an ambiguity in the wording of the section which could have been easily avoided if the Parliament had used clear language to state that the trust itself would not be eligible for exemption." When there is ambiguity only, the question how to resolve the ambiguity arises and the question of application of the ratio in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC), would arise, according to which when there are two constructions possible, the one in favour of the assessee should be preferred and adopted. However, in our opinion in the wording of section 161(1A) there is no ambiguity whatsoever present and so there is no warrant to apply the ratio of Vegetable Product's case in the present case. Section 161(1A) was inserted by the Finance Act with effect from 1-4-1985. Not only the provisions of section 161(1A) are very clear and unambiguous they were also explained lucidly in CBDT circulars reported are as follows: "26.1 Trustees of a private trust are ordinarily not expected to carry on any business because, implicit in the nature of business is the possibility of incurring loss and no prudent trustee would risk the trust's property in business venture. However, i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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