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TMI Blog1984 (10) TMI 74X X X X Extracts X X X X X X X X Extracts X X X X ..... be income from business on the ground that the leasing activity formed part of the assessee's business. For the assessment year 1973-74 a similar claim was made before the ITO supported by the authority of various High Court decisions cited. Holding that as in the earlier decision in the case of New Savan Sugar Gur Refining Co. Ltd. v. CIT [1969] 74 ITR 7 (SC) applied to the facts of the case, the ITO treated the lease amount received as income assessable under section 56 of the Income-tax Act, 1961 ('the Act'). According to him, the machinery and the premises had been leased out to the co-operative society with the permanent intention of discontinuing the sugar manufacturing business and in consonance with the Government policy to help industries in the co-operative sector. Following the decision of the AAC for the assessment year 1973-74, the AAC held that the lease income has to be assessed under the head 'Profits and gains of business or profession' and accepted the assessee's claim. This is challenged in the departmental appeals. 3. The learned counsel for the department has pointed out that the AAC's order for 1973-74 was the subject-matter of appeal before the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of conducting the business through the co-operative society could not be inferred from the conduct of the assessee. 5. The shareholders of the company having objected to the sale, the matter was taken to the High Court. The High Court granted a stay order on 27-7-1973. There was a compromise order approved by the High Court. The details covered by the agreement and the compromise order, according to the learned counsel, can in no way be considered as an agreement of management. It gave clear indications of an agreement of lease with absolutely no intention of continuing the business by the assessee. That this process continued subsequent to the assessment year 1978-79 further supported the department's case. Even facts which came to light after the assessment year or the assessment can, according to the learned departmental counsel, be taken into consideration for arriving at the intention of the assessee in this regard. Reliance is placed to support his case on the decision in New Savan Sugar Gur Refining Co. Ltd.'s case, Sultan Bros. (P.) Ltd. v. CIT [1964] 51 ITR 353 (SC), Seth Banarsi Das Gupta v. CIT [1977] 106 ITR 559 (All.) and Seth Puran Chand (HUF) v. ITAT [1981] 127 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts in the documents themselves were disputed as would be clear. The matter was thus taken to the Court. According to the learned counsel, the effect of this fact itself was that the alleged lease-cum-sale of 31-3-1971 has to be properly read in the light of the attendant circumstances. If this is done, all the clauses in the agreement dealing with the alleged sale go out and the property remains that of the assessee and only with a view to carry on the business in sugar. 8. The assessee had to collect sugarcane of proper variety. For this purpose the assessee owned its own lands extending to several acres. The lands were cultivated by the assessee and some of them through agents. The assessee had also taken on lease certain lands for cultivation. Since the sugarcane was to be grown and the good quality of the crops had to be maintained, facilities for irrigation have also to be secured by the assessee. The assessee had a tractor and this was made available to the cultivators of the sugarcane used exclusively in the assessee's own factory. 9. Referring to the balance sheets and the profit and loss account for several years, it is pointed out that after the lease of 31-3-1971 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be used even during this period. 10. Referring to the facts leading to the lease, it is pointed out that even in 1932, the assessee-factory was established with a crushing capacity of about 1,000 tonnes. To increase the crushing capacity to 1,250 tonnes per day which could be further extended to 2,000 tonnes, an agreement dated 24-10-1969 was entered into. There was no question of the assessee giving the lease of the factory to anyone and certainly not on a permanent basis. According to the learned counsel, the lease was forced on the assessee in order to maintain the business intact on account of financial difficulties and a non-co-operative governmental policy. The assessee having entered into agreements for the purchase of substantial amount of machinery was liable to pay nearly Rs. 1.44 crores towards price of the machinery. A sum of Rs. 36 lakhs had to be paid by December 1969. The assessee could pay only Rs. 26 lakhs by that date ; the balance could not be raised and paid. The assessee could not raise any money from the public sector. It went to the United Western Bank borrowing a sum of Rs. 37 lakhs in 1973. This is indicated in paragraph 12 of the report of the directors. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal was not before the ITO and this particular evidence should not be admitted. This, however, is a matter of fact and though may have a relevance to the decision on the point at hand, we are not relying on this information. 13. Reference is made to the decisions in Velji Deoraj Co. v. CIT [1968] 68 ITR 708 (Bom.) and Everest Hotels Ltd. v. CIT [1978] 114 ITR 779 (Cal.). The learned counsel for the assessee has pointed out that the case of New Savan Sugar Gur Refining Co. Ltd. was considered by the Gujarat High Court in CIT v. Vania Silk Mills (P.) Ltd. [1978] 112 ITR 701. The Andhra Pradesh High Court decision in CIT v. Aryan Industries (P.) Ltd. [1982] 138 ITR 718 is also relevant. In fact, according to the learned counsel, in New Savan Sugar Gur Refining Co. Ltd.'s case the assessee had no concern with the production done by the factory at all---a fact which distinguishes the present appeals from that case. 14. We have considered the matter. Normally we would have followed the decision of the earlier Bench on this point, but as pointed out by the learned counsel for the assessee the order of the Bench was subjected to substantial corrections on the application of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tinction between the two legal entities may cast doubts on the above questions, but ultimately the owners of the company and the owners of the society being almost the same, the resulting position as regards the business cannot be ignored. It is in this context that the cancellation of the earlier resolutions for the sale of the business, etc., have to be seen. The compromise before the High Court also projects the same facts in clearer light. Thus, on the one hand there are facts which go to show that the assessee was prevented from carrying on an extended business and was trying to carry on the business even on an extended scale by adopting other legal modalities. In the face of this position prima facie it would not be correct to say that the assessee was trying to wind up its business. 16. It is also seen that with the failure of the alleged attempt to sell the business to a co-operative society mainly comprised of the same members, the assessee took an alternate method of retaining control over the business by entering into a lease. Even if for the purposes of argument we ignore the common members of the company and the co-operative society for this purpose, there is substan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee advanced loans to the agriculturists for the production of sugarcane ; incurred expenditure on ploughing, irrigation, etc., and the supply of materials to the agriculturists. The assessee maintained during these years a good number of tractors for helping the agriculturists. If the intention of the assessee was not to carry on the sugar manufacturing business, it need not have laid much stress on carrying on the agricultural activity in the first place. Its extra concern for advancing loans to the sugarcane growers and persuading them to produce better quality sugarcane and sell the same to the factory of the co-operative society also stresses its extra interest and concern in the continuance of the sugar manufacturing business. Even though, therefore, for the department certain clauses of the lease deeds and also certain observations in the directors' report have been pointed out to indicate that the assessee had no intention of carrying on the business, from the conduct of the assessee and the financial and other commitments entered into by it, the department's stand in this regard cannot be accepted as correct. During the period of the lease and also later on all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oing of a business or the exploitation of his property by the owner. In that case a private company constructed a building on a certain plot of land, fitted it up with furniture and fixtures and let it on lease fully equipped and furnished for the purposes of running a hotel. Apparently the assessee was not running the hotel earlier and the question of continuing a business did not arise. This decision does not help the department. In Seth Banarasi Das Gupta's case, the Allahabad High Court held that the leasing out of a sugar mill did not amount to a business on the clear finding that the business was stopped and the assets employed in the business ceased to be commercial assets. The facts in the present case are that the assessee was adopting every possible method, including conversion of a company into a co-operative society and carrying on ancillary activities, to continue and not stop the business. In Seth Puran Chand (HUF)'s case also there was a factual finding that there was no intention to carry on the business of sugar mills originally carried on by an HUF subsequently transferred to a limited company. In CIT v. Prem Chand Jute Mills Ltd. [1978] 114 ITR 769, their Lordshi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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