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TMI Blog1977 (8) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... that the rent income or the hire charges of machine received by the assessee from M/s. Jasmine Mills Pvt. Ltd. was assessable as income from business ? The assessee is a private limited company carrying on manufacture and sale of art silk cloth. During the assessment period 1968-69 it imported two machines, viz., Raschel Lace Machine and High Speed Warp Knitting Machine, on a licence which was issued in its name. On their arrival in India, these machines were installed at the premises of M/s. Jasmine Mills Pvt. Ltd., a sister concern of the assessee, under a lease agreement with that sister concern. The sister concern was to pay a monthly rent of ₹ 2,280 for the first machine and ₹ 2,200 for the second machine to the assessee. In the first assessment year as these machines were given on hire only for a part of the year, the assessee received only ₹ 10,600 by way of rent and/or hire charges and the same was declared as income from business. The Income-tax Officer rejected the assessee's claim that the said amount of ₹ 10,600 was business income and considered it to be income from other sources. In appeal, the Appellate Assistant Commissioner, howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to terminate the lease agreement by giving three months' notice. The Tribunal further held that it was not disputed that the sister concern M/s. Jasmine Mills Private Ltd., used these two machines for a business which is identical with the assessee's business. The Tribunal also relied upon clause 3(o) of the memorandum of association which provided as one of the objects, ......to purchase or otherwise acquire, and to sell, exchange, surrender, lease, mortgage, charge, convert, turn into account, dispose of and deal with the property and rights of all kinds, and, in particular, mortgages, debentures, patents, annuities ...... privileges and choses-in-action of all kinds . Therefore, the object of this manufacturing concern was also to give its properties on lease. Applying the settled legal position in Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC) and Commissioner of Income-tax v. National Mills Co. Ltd. [1958] 34 ITR 155 (Bom) and having particular regard to the object clause 3(o) as above, the Tribunal held that the income of hire in question in these years by giving these two machines on hire to the sister concern was its bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... personally or by letting it out to somebody else. Suppose, for instance, in a manufacturing concern the use of its plant and machinery can advantageously be made owing to paucity of raw materials only for six hours in a working day, and in order to get the best yield out of it, another person who has got the requisite raw materials is allowed to use it as a licensee on payment of certain consideration for three hours, can it be said in such a situation with any justification that the amount realised from the licensee is not a part of the business income of the licensor. In this case the company was incorporated purely as a manufacturing concern with the object of making profit. It installed plant and machinery for the purpose of its business, and it was open to it if at any time it found that any part of its plant for the time being could not be advantageously employed for earning profit by the company itself, to earn profit by leasing it to somebody else. It is difficult to hold that the income thus earned by the commercial asset is not income from the business of the company that has been solely incorporated for the purpose of doing business and earning profits. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng on exploitation of part of that land by selling gravel out of it, was prima facie held to fall under section 9 of the Indian Income-tax Act, as income earned, no matter by whatever method from land, and specifically dealt with by that section. It was, therefore, held that the facts in Iles' case [1947] 1 All ER 798 (KB) being thus different could have no apposite application to the case of a manufacturing concern letting out a part of its machinery temporarily which it could not advantageously use itself. Thereafter their Lordships considered that line of decisions where the question had arisen in the context of a part of the company's property becoming redundant, it was sublet purely to produce income,---a transaction quite apart from the ordinary business activities of the company. It was pointed out that the question whether a particular source of income was income or not must be decided according to ordinary commonsense principles. Their Lordships pointed out that the short question which must be decided in such cases was whether on the facts found it could be said reasonably that the dyeing plant had become redundant for its business as a silk manufacturing concern, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the machinery was let out on lease and the rest of the machinery was worked by the assessee. The letting out of the machinery was for a short period of five months and there was also no letting out of the premises of the factory by the assessee. Their Lordships held that in this case, on the terms of the lease deed, the intention of the appellant was to part with the entire machinery of 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. The intention of the appellant was to go out of the business altogether so far as the factory and machinery was concerned. The income from the lease could not be assessed under section 10 but was liable to be assessed under section 12. Therefore, it was held that the appellant was not entitled to the allowance of additional depreciation or development rebate. This later decision makes it abundantly clear as to what cases it would fall within its ambit, e.g., when there would be intention to get out of the business altogether so far as the factory and machinery were concerned with the obvious purpose of earning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the fact that the objects clause made a clear difference because one of the objects was to lease the property as per the relevant clause in the memorandum and, therefore, this redundant asset which could not be used had been let out by the assessee. These contentions are under a complete misconception. The concern is a manufacturing concern and there was no dispute that these two machines can be used by the assessee in its own manufacture and were actually used by the sister concern in identical business. Merely because for want of air-conditioning facilities the assessee at present could not instal them in its premises, it could not be said that these two machines were not part of commercial assets of the assessee's business in which it can be used. There was no question of any redundancy when the intention was so eloquently expressed in the terms of the lease of these machines, reserving therein the priority rights whenever occasion arose as per the need of the assessee's business and even the right was reserved to terminate the lease before it got further renewed for five years' term. It would be completely a misreading of the objects clause when such a manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X
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