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TMI Blog1982 (7) TMI 86X X X X Extracts X X X X X X X X Extracts X X X X ..... ocesser, as the company may from time to time think fit.Having established a factory for that purpose, the assessee carried on the business until about 1962 by which year it ran into certain financial difficulties and was unable to meet its obligations. The assessee entered into an agreement dated December 7, 1962, with the Tungabhadra Industries Ltd., Kurnool (hereinafter referred to as " the licensee "), whereunder the licensee was allowed to carry on the business of the said factory on certain terms and conditions, for a period of one year. It provided for an extension of the agreement for one more year, which option was availed of by the licensee. On March 18, 1964, a fresh agreement was entered into for a period of three years with effect from October 1, 1963. (The godown, which was not the subject-matter of the earlier agreement, was also added by another agreement). This agreement too contained a clause for a renewal of the agreement for another period of three years and the licensee availed of this option. During this period, yet another agreement was entered into between the assessee and licensee on January 4, 1969, whereunder the period of the agreement was extended to 18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreements. (The Tribunal has referred to these agreements as lease deeds and no exception has been taken to the said expression. We too shall, therefore, employ the same expression). The last lease deed dated January 4, 1969, expressly recites cl. 9 that : "All other conditions of the previous agreements dated 7-12-1962, 25-1-1963, 15-2-1963, 18-3-1964, and 20-3-1964, which are not inconsistent with the conditions set out hereinabove will remain unchanged and in force till the expiry of the period of licence, i. e., 30-9-1987." Indeed, the main terms of the lease are to be found only in the first agreement. The first agreement recites that the assessee has agreed to allow the licensee to crush V.N.E. Oil and to manufacture hydrogenated groundnut oil, etc., at the company's premises on the consideration and on the terms and conditions thereafter mentioned. It is called an agreement of licence whereunder the licensee is permitted to enter upon the demarcated premises and to use the same for the aforesaid purpose. It is recited that the said agreement shall not be construed as creating any rights, interests or tenancy in favour of the licensee in respect of the plant, machinery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into on January 4, 1969, while confirming and reiterating the terms and conditions of the earlier agreements, in so far as they are not inconsistent with the terms and conditions of the last deed, extended the period of agreement to 18 years. Further, it empowered the licensee to instal a new machinery for manufacturing 25 tonnes of hydrogenated oil per day. The licence fee was increased to Rs. 1,65,000 per year. Clauses 4 to 7 of this agreement are relevant. Clause 4 provides that the value of the machinery, plant, etc., to be set up by the licensee to achieve the higher capacity will be debited to the assessee as and when the same is installed or erected. The assessee agreed that the value of the said machinery shall be recovered by the licensee by adjusting Rs. 35,000, every year, from out of the licence fee payable to the assessee with effect from January 1, 1975, and in the event of the entire value of the additional machinery not being recovered in this manner by the last date of the agreement, i. e., September, 30, 1977, the licensee was entitled to recover the balance amount from the assessee. Clause 5 provided that any additional machinery, plant, etc., over and above tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd, therefore, not chargeable to excess profits tax. At the instance of the assessee, the question whether the said income was profits from the business and liable to excess profits tax was referred to the Bombay High Court which held that it was not. Thereupon the Revenue took the matter up to the Supreme Court. The Supreme Court, while substantially agreeing with the principles evolved by the High Court, disagreed with, in so far as it held (p. 455) : "...that a commercial asset of a business concern which yields income must at the time it was let out be in a condition to be used as a commercial asset by the assesses himself. The Supreme Court observed that there was no reason to provide the qualification that it should be in a condition to be used as a commercial asset " by the assessee himself ". Then the court observed (p. 455): " We respectfully concur in the opinion of the learned Chief justice that if the commercial asset is not capable of being used as such, then its being let out to others does not result in an income which is the income of the business, but we cannot accept the view that an asset which was acquired and used for the purpose of the business ceased to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as soon as it became available. It was accordingly held that the assessee had not stopped using it as commercial asset and, therefore, the income derived by leasing it out should be treated as profit from business and liable to excess profits tax. If the broad and liberal test evolved by this decision is to be applied there would hardly be a case where the income from a factory or plant can be taxed under any other head than " Income from business ". Naturally, therefore, Mr. Anjaneyulu, the learned counsel for the assessee, relied upon the above observations, and particularly on the following (p. 455): " The yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business and he is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else. " and also the subsequent observation (p. 456) 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee contended that it should be taxed as income from business. On a consideration of the several clauses in the lease deed, the Supreme Court came to the conclusion that (p. 14 of 74 ITR) : ".. ...... the intention of the assessee was to part with the entire machinery of the factory and the premises with the obvious purpose of earning rental income. It was not the intention of the assessee to treat the factory and machinery, etc., as a commercial concern during the subsistence of the lease ....... When an assessee does not carry on business at all, section 10 cannot be applicable and the income that he receives cannot bear the character of profits of business. As we have already shown, there is no direct nexus between the income of the assessee and the production of the factory. " When the decision of the Supreme Court in CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451, was brought to the notice of the court, it distinguished the same on the ground that that was a case where only part of the machinery was let out on lease and the rest of the machinery was worked by the assessee himself. The letting out of the machinery was for a short period of five months. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not a relevant circumstance, must be understood and confined to the facts of those particular cases. We have to apply a commonsense approach in determining the relevancy and, in our opinion, the length of the period in this case is certainly relevant and is a factor in favour of the Revenue. We cannot deny the force in the arguments of Mr. M. S. Murthy that there are several indications in this case which go to support the view taken by the Department and that each of the clauses upon which the Tribunal has relied upon is equally capable of being explained on a hypothesis consistent with the intention of the assessee to use the factory as an income-yielding asset. But, the question which we have to answer in this case is " Whether, on the facts and in the circumstances of the case and on a proper interpretation of the terms of the agreements, the Appellate Tribunal was justified in holding that the income from the lease was assessable under the head 'Business' " and we are unable to say that it was not. We find that two views are possible in this case-indeed, borderline case and the Tribunal has adopted one such view. We shall now refer to the main clauses in the agreements wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clause found in the first agreement has become illusory and is of little relevance when the long-term agreement was entered into, and when there is no knowing that it will not be leased out again. (d) The additional machinery installed for expanding the production capacity of the factory was to be paid for and retained by the assessee itself. This circumstance too is capable of two interpretations. (e) The power supply was to continue in the name of the assessee only. (This clause too is of the same nature as that mentioned under clause (d) (above)). (f) The Department itself continued to treat the income from the lease deeds as business income until 1969 but suddenly changed its stand when the long-term agreement was entered into. The mere duration of the lease deed is of no significance (We have already expressed our opinion on this aspect). (g) The broad and liberal test evolved by the Supreme Court in CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451. We are unable to say that on a cumulative consideration of the above facts and circumstances, the Tribunal was not justified in coming to the conclusion it did. The broad and liberal test evolved in CEPT v. Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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