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TMI Blog1992 (2) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... he agreement was for seven years with an option for a further three years. The leave and licence money was determined at Rs. 24 lakhs and 25 per cent. of the net profit of the UPL Factory with effect from April 1, 1977. The leave and licence for the relevant assessment year was in operation only for three months. The UPL Factory did not earn any profit and, consequently, the assessee was paid the leave and licence fees of Rs. 6 lakhs. The assessee included this licence fee as part of its business income, obviously on the ground that the lease was also one mode of exploitation of its commercial assets. The Income-tax Officer, however, treated the said licence fee as income from other sources. He did not assign any reasons for the classification of the income under the head " Other sources " instead of business income. Thus, the facts relating to the question as to the nature of the leave and licence had not been discussed by the Income-tax Officer in the assessment order. The Commissioner of Income-tax (Appeals), however, held that the leave and licence fee received by the assessee was its income from business and the Income-tax Officer was wrong in classifying the income under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e licensee to look after and maintain the said factory in a proper state and condition, and, in clause 3(v), the assessee reserved to itself the right to enter the factory premises and inspect the premises, plant and machinery with or without their agent, inspector, engineer or other personnel. This also, according to the Tribunal, indicates that the assessee was interested in the preservation of the assets for future exploitation by it as commercial assets. From this factual backdrop, the Tribunal drew the inference that its earning through the leave and licence fee was a temporary and an alternative mode of exploiting the commercial asset, and it had an intention to restart the factory. In short, the Tribunal's finding was that the leasing out of the factory was not a sequel to the assessee's decision to go out of the business in respect of the subject factory. It was just a make-shift transient alternative means of commercial exploitation of the commercial assets and the income from such leasing cannot be treated as the fruits of ownership simpliciter of the assets. The narrative of the lease arrangement as set out by the Tribunal in its order were all meant to point out the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng it to start a hotel business. It was held that, in such a situation, the property though specifically meant to be utilised as a hotel building, cannot be claimed to be a commercial asset in the hands of the assessee as the assessee never had any commerce subsisting in the said asset. Whatever income by way of lease the assessee earned was income arising from ownership simpliciter of an asset. The third case, i.e., New Savan Sugar and Gur Refining Co. Ltd. [1969] 74 ITR 7 (SC), is a case presenting altogether a different fact situation. In that case, the assessee found its business to be hopelessly in shambles which the assessee considered to be beyond the point of recovery. The assessee, therefore, leased out its factory to a third party and derived lease rent from the ownership of the property. The Supreme Court held that this is a case where the act of leasing was the outcome of the assessee's decision to go out of business. Thus, the assessee ceased to be a trader and the factory also shed its character as a commercial asset in the hands of the assessee. The factory became merely an asset of the assessee and the lease rent derived was the fruits of ownership simpliciter. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l view of the agreement and it is on the conspectus of such total effect of the agreement that the ultimate decision should be arrived at. The material clauses are as follows: " And whereas the licensor has resolved upon and agreed with the licensee to grant to licensee leave and licence to use and run the said UPL factory upon certain terms and conditions. And whereas the parties hereto are desirous of reducing the terms into writing. Now this agreement witnesseth and it is hereby agreed by and between the parties hereto as follows : (1) The licensor hereby agrees to grant and the licensee hereby agrees to take on licence the said UPL factory for a minimum period of seven years . . . . (2) The licence fee during the continuance of this agreement for the use of the said UPL factory shall be Rs. 24,00,000 (Rupees twenty-four lakhs) per year and 25 per cent. of the net profits from the UPL factory with effect from April 1, 1977. The net profits shall be calculated after allowing all expenses, licence fees and interest at the rate of 15 per cent. on the funds employed by the licensee in the UPL factory and depreciation on straight-line method on actual block additions of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d after the termination of the licence : Provided, however, that, on the termination of the licence, the licensee shall be liable for any retrenchment compensation payable to workmen on account of removal by them of any plant and machinery acquired and installed by the licensee. . . . (10) The licensee will be entitled to the use of all trade marks, trade names, numbers, industrial licences, quotas for raw materials, etc., and special allotments, statutory or otherwise, at present enjoyed by the licensor or as may accrue hereafter during the continuance of this licence in the name of the licensor, but shall not do anything that may prejudice or adversely affect any such trade names, numbers, licences, quotas and special allotments, etc. . . . (13) The licensee shall take over and pay for all the raw materials in stock and/or the outstanding contracts of such raw materials including goods-in-process at prices to be settled mutually ; and if the existing cash credit account which the licensor have with the American Express International Banking Corporation, New Delhi, is transferred to the licensee, the licensee shall take over the stocks of manufactured goods also It the book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration for determination of the issue. Again, clause (10) says that the licensee shall be free to use all trade marks, trade names, numbers, industrial licences, quotas for raw materials, etc., and thereby allotments, statutory or otherwise, as available to the licensor or as may accrue to the licensor during the continuance of tile licence but the clause safeguards the interest of the licensor for taking over the business to continue it without any let or hindrance because the said covenant also provides that the licensee shall not do anything that may prejudice or adversely affect any trade marks, trade names, industrial licences, quotas for raw materials, etc., and thereby allotments, etc. If the licensor, i.e., the assessee, were not interested in taking over the business in future, this particular precautionary covenant would have no purpose. But what we find discordant is the covenant contained in clause (19) of the deed. The clause gives the licensee an absolute option to purchase the premises. The clause confers on the licensee such power as enables the licensee to compel the assessee to sell the licensed premises after the expiry of the term of 10 years, i.e., at the end ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision in this case. The decision of this court in CIT v. Prem Chand Jute Mills Ltd. [1978] 114 ITR 769 does not help because this court in that case found that the leasing was only for a temporary period and tile leasing was not because of the assessee's decision to go out of the business. The same call be said of the decision of this court in CIT v. Katihar Jute Mills Pvt. Ltd. [1979] 116 ITR 781. There also, the intention of the assessee was found to be the exploitation of the asset of the company as a commercial asset and the various Clauses showed that, on the expiry of the lease, the leased mill would have been taken over by the assessee for operation of its own business. In those two cases, there were significant pointers indicating that the lease was nothing but a means whereby the assessee wanted the exploitation of the commercial asset to tide over the temporary difficulty. But here we find contra-indications. Clauses (19), (20) and (21) are unmistakable indicators that what the assessee truly had in mind is ultimately to get rid of the property. Clause (19) virtually creates for the assessee an irreversible situation whereby the assessee, at the will of tile lessee, wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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