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TMI Blog1987 (5) TMI 358X X X X Extracts X X X X X X X X Extracts X X X X ..... correctness of the view of the earlier Division Bench in CIT v. S.K. Sahana & Sons Ltd. [1976] 102 ITR 437 (Pat.) answering the identical question in the affirmative. 2. Virtually identical facts may be noticed from Tax Case Nos. 249 to 251 of 1976. S.K. Sahana & Sons Ltd., the assessee, is a limited company which, inter alia, derives income from the mining establishment known as New Bansjora Colliery. By an agreement dated 22-4-1959 the assessee-company leased out the colliery to Khas Ganeshpur Coal Mines (P.) Ltd. by appointing the latter as a managing contractor for a period of ten years with an option of renewal for a further period of three years. The terms of the agreement, inter alia, were for the payment of the minimum guaranteed amount of Rs. 18,000 per year to the assessee and further to pay a guaranteed profit of Rs. 1.50 paise per ton of coal raised from the colliery, and an additional payment of Rs. 2.25 paise per ton for every ton of soft coke manufactured and Rs. 3 per ton for hard coke manufactured by the managing contractor. 3. For the assessment years 1967-68 to 1969-70, it was contended on behalf of the assessee before the ITO that the minimum guaranteed amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4-65. On these premises, the Tribunal referred the following question to the High Court for the three assessment years: "Whether, on the facts and in the circumstances of the case, the income of the assessee received from the managing contractor was the income from business?" 6. These cases originally came up for consideration by a Division Bench presided over by my learned brother, Uday Sinha, J. In his lucid order of reference to the larger Bench it was noticed that there appeared a sharp cleavage of opinion within the Court itself between the cases in S.K. Sahana & Sons Ltd. ( supra) and CIT v. Pure Dhansar Coal Co. 1985 Tax LR 336 (Pat.) on one hand and Khas Benedih Colliery v. CIT [1974] BBCJ 440 (Pat.) and CIT v. Kuya & Khas Kuya Colliery Co. [1985] 156 ITR 206 (Pat.) on the other. It was consequently found appropriate that the question of the interpretation of the lease granted by the assessee should be considered by a larger Bench for deciding whether the earlier case in S.K. Sahana & Sons Ltd. (supra) was correctly decided or not. To facilitate the resolution of the point, it was further directed that the agreements executed by the assessee, S.K. Sahana, in the present c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... machineries existing at the said colliery the managing contractor shall be entitled at its own cost to instal such machineries and to bring in such chattels and utensils at the said colliery as it may in its discretion think fit and proper for the purpose of working the said colliery. The said machineries so to be installed and the said chattels and utensils so to be brought shall remain the absolute properties of the managing contractor and on determination of these presents subject to the provisions of clause 5 hereof, the managing contractor shall be entitled to remove such machinery, chattels and utensils as may be installed at or brought in by it to the said colliery without any objection on the part of the proprietor. 2. The managing contractor shall have full power and authority to search for get quarry win and dig coal by all (torn) required mode of coal mining in the said colliery and manufacture coke and otherwise to work the said colliery according to the Indian Mines Act and the Rules and Regulations framed or to be framed there under and all other statutes, bye-laws, rules and regulations applicable to the said colliery and business and in connection therewith to use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suits and other proceedings for recovery of price of coal and coke (torn) and delivered and for the purposes aforesaid to sign Vakalatnama, plaints, petitions and other cause papers. (vii)To enforce (sic) or otherwise negotiate any cheques that may be drawn in favour of the proprietor of New Bansjora Colliery by any such party as aforesaid otherwise to collect the proceeds of the cheques. (viii)To enter into siding agreements, with the Railway Administrations and do all other things in connection with obtaining new siding accommodation and/or having additional leading accommodation. 9. That notwithstanding anything contained herein authorising the managing contractor to sell coal or coke, the managing contractor shall not sell or dispose of any coal or coke otherwise than by despatching the same by Railway except with the express written consent of the proprietor and in the presence of the representatives of the proprietor. 10. The proprietor hereby undertakes to execute in favour of the managing contractor or its nominee or nominees a power of attorney authorising it to exercise all or any of the aforesaid powers and such other power as may be necessary and required for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y per annum, that is to say, in case the guaranteed income or profits on the basis of raisings of coal and coke falls short of Rs. 18,000 (rupees eighteen thousand) only, in any particular year or years the managing contractor shall be bound to pay to the proprietor the fixed sum of Rs. 18,000 only. That the said sum of Rs. 18,000 will be payable in three instalments of Rs. 5,000 (rupees five thousand) each in the months of April, July and October of the particular year and the balance by the month of January of the succeeding year." In accordance with clause 10, the proprietor also executed a general power of attorney in favour of the managing contractor authorising it to exercise all such powers as may be necessary and required for the purpose of working, managing and carrying on the business of the colliery. 9. Now, what admittedly emerges from the aforequoted terms of the deed and deserves to be saliently put in the forefront is first the fact that the colliery in question was not even a working one and was undisputedly lying closed since long. There was, thus, no existing or continuing business of colliery as such and the burden of applying for the opening of the said collie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further the managing contractor was to keep the proprietor indemnified in respect of the coal raised and manufac- tured in the colliery during the term of the lease and the managing contractor was at full liberty to sell or otherwise dispose of the coal raised or manufactured in the colliery without let or hindrance. The other terms of the contract would leave no manner of doubt that the actual carrying on of the business of the colliery after the same was got reopened was done by the managing contractor who was entitled to realise the price of the products raised, to enter into all contracts for their sale, to carry on correspondence, to make bills, to institute suits for recovery of amounts due, to enter into siding agreement with the railway administration and to employ labour and personnel for its working without let or hindrance by the proprietor. 10. It is against the aforesaid backdrop of the salient terms of the contract betwixt the proprietor and the managing contractor that the crucial tests of statutory provisions and principle have to be applied to determine whether it was the proprietor which was carrying on the business of running the colliery or was it the managing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erhaps at this very stage it may be pointedly recalled (in order to appreciate the earlier binding precedent) that the earlier provisions of sections 10 and 12 of the Indian Income-tax Act, 1922 ('the 1522 Act'), though not in pari materia in literality, were nevertheless the closely corresponding sections of the aforequoted provisions and the principles laid down under the said sections by the earlier precedents of the final Court and the High Court would be equally attracted in the present cases. 13. Mr. B.P. Rajgarhia, the learned senior standing counsel for the revenue, forcefully pointed out the language of section 28(i), namely, 'profits of any business which was carried on by the assessee'. Herein he rightly highlighted two basic aspects, namely, in order to carry on the business one must have the control, even if not all pervasive, yet the ultimate power to direct the working and conduct of such a business. Unless such control or authority to direct is manifest, a person cannot be said to be carrying on such a business. The other thing rightly highlighted is that both the statute and the concept of business in the commercial sense inevitably imply a participation or sharin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be borne in mind is that section 28 does not use the word 'business' in isolation but in express terms talks of profits and gains from such a business which has been carried on by the assessee. Therefore, carrying on a business connotes some substantial, essential, systematic and organised activity with the object of making gain or profit there from, with the inevitable control and direction of such activity or business. Consequently, the two faces of the coin of carrying on a business imply a control or direction of the business activity with a direct or indirect nexus with the profits or losses there from, of course, subject to any express terms of the contract. In the converse, it necessarily follows that if there is neither control or direction of the activity of business nor a direct nexus with its gain or profit then a person or an assessee cannot possibly be said to have carried on such a business. 15. Perhaps it is somewhat unnecessary to over-elaborate this aspect because it appears to me as well borne out by binding and unbroken precedent of the final Court itself. Way back in Narain Swadeshi Wvg. Mills v. CEPT [1954] 26 ITR 765 (SO), the Constitution Bench had observed: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngle. Another test which would be relevant, if not crucial in this context is the position (as in the present case) of the proprietor vis a vis the managing contractor which carries on the business of the colliery for the fixed term lease or its renewal thereafter. It would seem somewhat axiomatic that both the proprietor and the managing contractor cannot be said to be carrying on the identical business of the said colliery for the relevant assessing years. The terms of the agreement leave no manner of doubt that it is the managing contractor which carries on the real, substantial, systematic and organised activity of working the colliery. Assuming, as would not be unusual, that herein both the proprietor and the managing contractor are income-tax assessees, the issue would naturally arise as to which one of them is carrying on the business of the colliery and making profits and gains therein during the previous assessment years. Obviously, both the proprietor and the managing contractor would not come within the ambit of section 28 and plainly enough on the litmus test laid down by their Lordships of the Supreme Court, it is only the managing contractor which would come within th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that leasing or renting out the whole business for a fixed period of ten years with renewal terms would still make the proprietor or the lessor a person carrying on the business for profit or gain for the previous assessment year. There is, however, no gain saying the fact that the observations in Shri Lakshmi Silk Mills Ltd.'s case (supra) were misconstrued in some jurisdictions till the matter was finally set at rest by the authoritative interpretation of its ratio in New Savan Sugar & Gur Refining Co. Ltd.'s case (supra) later. However, it is worth recalling that even earlier in Narain Swadeshi Wvg. Mills' case (supra) the Constitution Bench had distinguished and explained the ratio of Shri Lakshmi Silk Mills Ltd.'s case (supra) as under: "The case of CIT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 , decided by this Court is clearly distinguishable. There, the respondent company which was formed for the purpose of manufacturing silk cloth installed a plant for dyeing silk yarn as a part of its business. During the relevant chargeable accounting period, owing to difficulty in obtaining silk yarn on account of the war, it could not make any use of this plant and it remained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a running concern. After approval by an extraordinary general meeting, a lease was executed for a period of five years with three options to renew for a similar period on the part of the lessee. The consideration of the lease was a royalty payable on the manufacture of sugar and gur at the rate specified therein subject to a minimum royalty of Rs. 65,000 per annum. The lessee was entitled to use the railway siding during the period of the lease and was responsible for all the running expenses of the factory and excise duty on sugar, etc. On these premises, the question was whether the income which arose to the appellant for the assessment year 1955-56 should be assessed under sections 10 and 12 of the 1922 Act. On behalf of the assessee, the main plank was the contention resting on the observations in the case of Shri Lakshmi Silk Mills Ltd. ( supra). Repelling such a contention and distinguishing the said case, their Lordships affirmed the High Court's view that the case fell clearly within section 12 and holding in favour of the revenue, observed as under: ". . . Mr. Choudhury referred to clause 6 which entitled the lessee to use the railway siding during the period of the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a whole business which is to be carried on by the lessee during the said term and where there is no direct nexus between the income of the lessor and the production of the leased factory, colliery or any other business. 20. The aforesaid view has been taken and consistently adhered to within this jurisdiction barring the case of S.K. Sahana & Sons Ltd. ( supra). A Division Bench of this Court presided over by Untwalia, CJ., in Khas Benedih Colliery's case (supra) first rightly observed that the use of the phraseology in the terms of the contract cannot in any way be conclusive and what one has to look for is the substance and not the form thereof and secondly the mere use of the words 'principal' and 'agent' employed in an agreement would not necessarily mean that the principal was carrying on the business through his agent, if the basic elements of control and carrying on the business and sharing of the profits and losses were absent. The Division Bench further categorically held in an almost identical situation that the colliery having been let out on a fixed income (including rates of royalty on the raising and manufacture of coal) such income would become income from other so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er proceedings the Tribunal took a different view of those deeds is not a conclusive circumstance. The decision of the Tribunal reached during those proceedings does not operate as res judicata.' Therefore, the earlier decision in Tax Case No. 10 of 1968 will not operate as res judicata and estop this Court from considering" the true import of the transaction whether the transfer of the house by the husband to the wife in lieu of dower debt was a gift or a sale, every year's assessment being based on a separate cause of action. . . ." (p. 486) In view of the above, within this jurisdiction, to my mind, the issue stands concluded in favour of the revenue and it is wasteful to refer to earlier judgments by way of analogy on which the learned counsel for the opposite party assessee had attempted to rely. The submission in this context must necessarily fail. 23. Yet again Mr. Prasad attempted to go off on a tangent by contending on the basis of Sudhansu Kanta v. Mahindra Nath AIR 1965 Pat. 144 that the very agreement between the parties was wholly void because, according to him, it amounted to a sub-lease or a transfer thereof and rule 37 of the Mineral Concession Rules rendered it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and incongruous on the part of the High Court to hold to the contrary and to read the ratio of Shri Lakshmi Silk Mills Ltd. (supra) contrary to how it has been authoritatively interpreted and, thus, to override and skirt the considered view in New Savan Sugar & Gur Refining Co. Ltd.'s case (supra) which, to my mind, is directly applicable to and governs the present case and those akin thereto. 26. Mr. Prasad had then attempted to rely on a passing observations of a Division Bench of the Delhi High Court in Addl. CIT v. Rajindra Flour & Allied Industries (P.) Ltd. [1981] 128 ITR 402 . That case, in my view, does not in any way advance the stand of the opposite party. Therein the Division Bench, as an issue of fact, merely affirmed the finding of the Tribunal that as a temporary and compelling measure, in order to tide over business difficulty unforeseenly arising from the sudden death of its managing director, his widow had to take over as such in difficult circumstances and to overcome the same she was forced to let out the factory for a period of 5 years. On the expiry of the lease, the flour mill was restored to the assessee and the assessee started working the mill itself afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... feel compelled to record a dissent from such a line of reasoning after the watershed case of New Savan Sugar & Gur Refining Co. Ltd. (supra) . To my mind, the issue herein is not the character of the commercial asset. The salient question under section 28 is as to who has derived the profit and gain by carrying on the business with that commercial asset during the previous assessment year. In the aforesaid section carrying on the business or exploitation of the commercial asset in my view, means such exploitation by the person who actually carries on such business by the employment of such a commercial asset. It cannot be construed as carrying on a business therewith if it is merely let out or rented to another on a rental or with a fixed minimum guaranteed amount or royalty there from irrespective of the losses or profits of that business. The view that even a long-term lease of 10 years renewable for the same period is a temporary phase is directly contrary to New Savan Sugar & Gur Refining Co. Ltd.'s case (supra) where, in fact, the period was only 5 years. It is somewhat plain that with the same commercial asset two persons cannot be said to be carrying on the business thereof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the business as a whole, is let out, the income (i.e. , the rent) would not be liable to be assessed as income from business. . . ." (p. 209) 30. What has been said above applies equally to the case of CIT v. Vikram Cotton Mills Ltd. [1977] 106 ITR 829 , a Division Bench judgment of the Allahabad High Court which again adumbrated the theory of a commercial asset and there being no intention to dismantle or discontinue the business, even though a long-term lease of 10 years with an option for renewal for another 10 years had been executed after letting it out to another concern on a rent of rupees two lakhs per year. It would appear that New Savan Sugar & Gur Refining Co. Ltd.'s case (supra) was not even brought to their Lordships' notice and finds no reference in the judgment. With deference it is not possible to subscribe to the view in the aforesaid Allahabad High Court case. 31. Yet again to my mind the aforesaid judgments of the Calcutta and Allahabad High Courts seem to miss the salient features of carrying on the business, namely, some nexus or connection with at least the profits or gains of the business or its losses. Where there is no direct nexus either with the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue, was right in contending that the present case was on much stronger footing than even Khas Benedih Colliery's case (supra). 34. As has been often repeated and is virtually a hackneyed legal adage one has to go to the root and substance of the contract and not merely to its form and name because otherwise it would be open to the parties to camouflage the substance of an agreement by merely employing the labels of principal and agent. 35. Yet again, the Bench attempted to rely on the tenuous ground that the despatches from the colliery were to be made from the railway siding only and this would imply a control over the running of the business. Such a view is in headlong conflict with New Savan Sugar & Gur Refining Co. Ltd.'s case (supra) wherein also their Lordships of the Supreme Court noticed that there was a term of the use of the railway siding and despatch there from and held that it was in no way relevant for the determination of the issue of carrying on the business. 36. Yet another ground for holding in favour of the assessee was the fact found that the lessee was carrying on the business in its old name. It has to be kept in mind that the licence to run the colliery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e earlier Division Bench judgment of this Court in Ray Talkies v, CIT [1974] 96 ITR 499 which had been relied upon. Therein also the assessee had let out the cinema premises along with all the apparatus, machineries, furniture and building appurtenant thereto to Jharia Talkies and Cold Storage Ltd., for a consideration under the deed of lease at an annual rent of Rs. 50,000. The lease was to be effective for a period of 10 years. Reversing the decisions of the authorities below and the Tribunal, the Division Bench held that the annual rent aforesaid was income from business and not from other sources. Primal reliance was placed by the Bench on the case of Shri Lakshmi Silk Mills Ltd.'s case (supra) which as already shown above, is distinguishable and not attracted to a situation of the kind aforesaid. It seems the learned counsel for the revenue was solely remiss in not bringing to the notice of the Division Bench the landmark case of New Savan Sugar & Gur Refining Co. Ltd. (supra ). Therefore, oblivious of the binding precedent of the said case, the Division Bench seems to have arrived at a conclusion directly contrary thereto. With the deepest respect, Ray Talkies' case ( supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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