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TMI Blog2016 (9) TMI 910X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee intended continuing with the system indefinitely. The fact that the assessee insisted upon its employees being retained is a strong indication that it intended coming back into the business using the same assets and properties. This was an important term of the contract. There are other factors also which together with clause-7 support the assessee’s case. For instance, the second paragraph of clause-1 provides that after completion of two years the parties would discuss the revision of the annual consideration of ₹ 30 lakhs for the year 2005-06 onwards. If the parties had not agreed to the revised consideration, the agreement would have come to an end. In the normal course of events, a party intending to continue such an arrangement for an indefinite period of time, would have finalized the consideration payable and not have left such a crucial aspect open-ended. The second paragraph of clause-1 read with clause-4 makes this clearer. Clause-4 requires the parties to mutually decide regarding the capital expenditure for upgrading the technologies and the facilities. Clause-2 also indicates that the assessee retained an interest in the plant and machinery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lease rent is assessable under the head Profits and gains from business or under the head Income from other sources . 4. The assessee is the owner of plant and machinery, fixtures and fittings and equipment and apparatus installed in a building constructed on land admeasuring about 10 acres also owned by it. The assessee had been manufacturing its products from this property and with its equipment for about 20 to 30 years. 5. To determine the question, it is necessary to refer to two lease agreements entered into between the assessee and UB Ltd. in detail. 6. The assessee and UB Ltd. entered into a Lease Deed dated 01.04.1998 (hereinafter referred to as the first lease deed ) wherein the assessee and UB Ltd. are referred to as the lessor and the lessee, respectively. The recitals in the lease deed inter alia state that UB Ltd. required large quantities of malt for brewing its products; that it had been purchasing the malt from various suppliers; that it was facing difficulty in procuring the right quality and quantity of malt and that it was facing difficulties. Clause-1 stated that the lease was for a period of five years commencing from 1st April, 1998 and at an an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess expediency or reason for the assessee s having entered the second lease deed. Mr. Abhishek Sanghi, the learned counsel appearing on behalf of the appellant/assessee, rightly relied upon clauses-1, 2, 3, 4 and 7 of the second lease deed which read as under:- 1. LESSOR doth hereby grant to the LESSEE and the LESSEE doth hereby accepts the lease (more particularly the entire Malting Facility on the land admeasuring 10 acres for a period of Ten years commencing from the date of this Deed at a annual consideration of ₹ 30,00,000 (Rupees Thirty lacs only) payable in quarterly instalments at the end of each quarter. All taxes and levies on the said amount shall be to the account of the LESSOR. It is agreed between the Parties that after the completion of two years from the date of this Lease Deed, the parties shall discuss on the revision of annual consideration mentioned above payable by the LESSEE to the LESSOR for the years 2005-2006 and thereafter. 2. The LESSOR further undertakes to take necessary steps to expand the installed capacity from the present level of 12,000 MT to 18,500 MT during the year 2003 along with the upgradation of the existing environmental fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay all statutory dues in respect of their employees under all Statutes/laws including inter alia, labour laws, Provident Fund, ESI and such other laws as are applicable. The LESSOR shall keep the LESSEE indemnified at all times in the event of any action taken or prosecution initiated against the LESSEE in connection with any of the LESSOR s employees. However, additional expenses incurred on festival occasions on its employees and others on whose rolls the employees are working shall be borne by the LESSOR. We will construe the lease deed later. 9. The Assessing Officer noted that no operation had to be carried out by the assessee and that it was merely to hand over possession of the assets to UB Ltd. and that the working expenses were to be paid by UB Ltd. That, however, does not justify the Assessing Officer s conclusion that the income from the lease agreement cannot be said to be business income. The Assessing Officer referred to the judgment of the Supreme Court in Sultan Bros (P) Ltd. vs. CIT , [1964] 51 ITR 353 (SC) and held that in the present case, the assessee and UB Ltd. had entered into a composite agreement and, therefore, the income is taxable under the he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, the fact situation including as to the intention of the assessee in leasing its assets remains unchanged, the Assessing Officer must continue to assess the income as business income. Whether this is so or not must, however, be examined and the Assessing Officer cannot blindly assume it to be so. We have, however, upheld the decision to treat the income as business income and not under the head Income from other sources for different reasons which we will come to while dealing with the order of the Tribunal. 13. The Tribunal, after setting out the clauses, held as under:- 22. It is evident from the terms and conditions of the fresh lease deed executed during the previous year that the assessee company does not have any intention of carrying on the business of its own with the help of plant and machinery owned by it. The mere fact that the employees shall continue to be in employment of the assessee may not cloud the fact that the assessee has leased plant and machinery for a period of 10 years in addition to its earlier period of 5 years. It has to be borne in mind that the agreement is between the two sister concerns. Therefore, continuing the employees on its roll b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hort period. The return of investment would not be adequate if the lease is for a short duration. 15. In Universal Plast Ltd. vs. Commissioner of Income Tax, Calcutta , (1999) 5 Supreme Court Cases 189, the Supreme Court considered the following questions:- Whether on the facts and in the circumstances of the case, the Tribunal was correct in law that the income received by the assessee by leasing out the factory was business income? . .. . . . Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the letting of godowns at Guntur and Narsaraopet and the letting of the factory with machinery at Narsaraopet and at Guntur did not constitute business of the assessee? After reviewing several judgments of the Supreme Court, it was held:- 18. In the light of the above discussion, the propositions may be summarised as follows: (1) no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, lease amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head profits and gains of business or profession ; (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. vs. Commissioner of Income-tax Calcutta , [1969] 74 ITR 7 (SC), the assessee had leased its building, machinery and plant for a period of five years with three options to the lessee to renew the same for similar periods. The lessee never exercised its options to terminate the lease after the first two years. The Supreme Court interpreted the terms of the lease deed to come to the conclusion that the assessee desired parting with the machinery, the factory and the premises with the obvious purpose of earning rental income and not to treat the factory and the machinery as a commercial asset during the subsistence of the lease. It was found, as a matter of fact, that the intention of the appellant was to go out of business altogether. It was, therefore, held that the income was not assessable as business. In Universal Plast Ltd. (supra) itself, it was found, as a matter of fact, that the lease was a veiled agreement for a lease-cum-sale. 18. Applying these tests, it is necessary to construe the two lease deeds. 19. It is evident that one of the main reasons for the Tribunal s decision in paragraph-22 which we set out earlier is that the Tribunal assumed that UB Ltd. and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the capital expenditure for upgrading the technologies and the facilities. 22. Clause-2 also indicates that the assessee retained an interest in the plant and machinery and the property for otherwise it would not have agreed to expand the installed capacity at its costs. 23. It was contended on behalf of the Revenue that clause-2 indicates that there was no necessity on account of financial hardship for the assessee leasing the property. However, as Mr. Abhishek Sanghi, the learned counsel appearing on behalf of the appellant pointed out, the financial difficulties faced by the assessee would have been alleviated on account of the lease rentals that it was to receive under the agreement. 24. The construction of a term in an agreement is a question of law. Moreover, as we indicated, the Tribunal proceeded on an erroneous presumption, namely, that UB Ltd. and the assessee are sister concerns. In any event, the Tribunal ought to have considered the agreement as a whole. 25. The findings of the Tribunal, therefore, are perverse. We, however, confirm the finding of the Tribunal that the decision of the Department to treat the income for the previous years in respect of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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