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PETITIONER: UNIVERSAL PLAST LIMITED ETC.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, CALCUTTA

DATE OF JUDGMENT:       23/03/1999

BENCH: Syed Shah Mohammed Quadri, S.P.Bharucha

JUDGMENT:

QUADRI,J.

     Civil Appeal No.207 of 1995 is filed by the assessee - Universal  Plast Limited - from the judgment and order of  a Division  Bench  of  the Calcutta High Court in  Income  Tax Reference No.  17 of 1991 under Section 256(2) of the Income Tax  Act, 1961 [for short, ‘the Act’] passed on February  6, 1992 [hereinafter referred to as ‘UPL Case’].  Civil Appeals Nos.__________  of  1999  @ Special Leave  Petition  c  Nos. 10912-14  and 10984 of 1986, in which leave is granted,  are preferred  by  the  assessee - The Guntur  Merchants  Cotton Press  Company  Limited, Guntur - aggrieved by the  judgment and  order  of a Division Bench of the Andhra  Pradesh  High Court  in Case Referred No.22 of 1979, under Section  256(1) of  the Act dated August 9, 1984 [hereinafter referred to as ‘Guntur  Merchants’ case’].  The points for consideration in these appeals are similar.  In UPL case, the question of law referred  to the Calcutta High Court, at the instance of the revenue,  reads  :   "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?"

     The  following is one of the questions of law referred to  the  Andhra Pradesh High Court, at the instance  of  the assessee  in Guntur Merchants’ case :  "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?"

     Both  the  Calcutta High Court as well as  the  Andhra Pradesh  High  Court  answered  the said  questions  in  the negative, in favour of the Revenue and against the assessee. The  assessees are thus in appeal before us.  To resolve the controversy in these cases, we refer to the facts in the UPL case.   The  appellant-assessee set up a factory  styled  as "UPL  Factory" for carrying on the business of manufacturing PVC  sheets  and allied products.  It appears that from  the venture the assessee suffered losses for two years.  It then entered  into  an  agreement styled as ‘leave  and  licence’ agreement   with   M/s.    Leatherite   Industries   Limited

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[hereinafter  referred to as ‘the licensee’] for a period of 7  years on March 13, 1977.  The agreement contains  renewal clause  giving  option  to the licensee to renew  it  for  a further  period  of  three years.  The licensee was  to  pay licence  fee of Rupees twenty four lakhs and twenty per cent of  the  net profit of the factory in question  with  effect from  April 1, 1977.  For the first three months which  fell in  the  accounting  year relevant to  the  assessment  year 1977-78,  the  assessee received only licence fee of  Rupees six lakhs as no profit was earned by the licensee during the said  period.  That amount was shown by the assessee as part of  the  business  income.  The Income Tax Officer  did  not accept  that it was business income and assessed the same as income  from  other sources.  However, the  Commissioner  of Income   Tax   (Appeal)   accepted     the   plea   of   the appellant-assessee  that  it  was its  business  income  and allowed  the  appeal  on  April   27,  1985.   The   Revenue unsuccessfully  appealed against the order of the  Appellate Authority  before the Income Tax Appellate Tribunal.  On  an application filed by the Revenue under Section 256(2) of the Act,  the  High  Court  directed the  Tribunal  to  draw  up statement  of case and refer the aforementioned question  to it.   On  February  6,  1992 the  High  Court  answered  the question  in  the  negative, in favour of  the  Revenue  and against  the  assessee,  as noted  above.   Mr.   M.L.Verma, learned  senior  counsel  appearing for  the  assessee,  has contended  that under the ‘leave and licence’ agreement, the assessee  exploited  the business assets;  the intention  in receiving  a share in the profit of the business as part  of the  consideration  and in ensuring that the amounts due  by the  Company to the creditors are paid regularly was to keep the  business running so that it might continue the business after  the  expiry  of  the lease period.   He  invited  our attention  to  various clauses of the Agreement and  pointed out that the High Court has not considered Clauses 15 and 16 which  unmistakably point out that the Agreement was only  a temporary  measure and the intention of the assessee was  to go  back  to the factory.  Therefore, submitted the  learned counsel, the High Court had erred in not treating the amount in  question as business income.  Mr.  K.N.  Shukla, learned senior  counsel  for  the Revenue, supported  the  judgments under  appeal  in  these cases.  The  question  whether  the amount  earned  by an assessee by leasing out the assets  of the  business would be an income from business carried on by it,  has  been the subject matter of consideration  by  this Court  as  well  as by various High Courts and it  would  be useful  to  refer to the judgments of this Court bearing  on the  issue.   In Commissioner of Excess Profits Tax,  Bombay City  Vs.  Shri Lakshmi Silk Mills Limited [1951(20)  I.T.R. 451],  the assessee-company was carrying on the business  of manufacturing  silk cloth and dyeing silk yarn.  Due to lack of  supply  of  silk yarn during the relevant  period  while keeping  idle  other plant and machinery, it let out  dyeing plant  for  five  months.  The question which  came  up  for consideration  before  this  Court   was  whether  the  rent received  from letting out the dyeing plant would fall under the  head  "Income  from  business" or  "income  from  other sources".   If it was "Income from business", it would  have been  chargeable  to  excess  profits   tax;   if  not,  the liability  would  not arise.  Mahajan,J., speaking  for  the Court, observed that no general principle could be laid down which  was  applicable to all cases and each case had to  be decided  on its own circumstances.  It was held that it  was part  of the normal activities of the assessee’s business to earn  money  by  making  use  of  its  machinery  by  either

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employing it in its own manufacturing concern or temporarily letting  it  to others for making profit for  that  business when  for the time being it could not itself run it and  for that  reason  the  dyeing  plant  had not  ceased  to  be  a commercial  asset  of the assessee, so the sum  representing the  rent  for five months received from the lessee  by  the assessee  was  income  from business and was  chargeable  to excess  profits  tax.  In Narain Swadeshi Weaving Mills  Vs. Commissioner  of Excess Profits Tax [1954 (26) I.T.R.  765], a  Constitution  Bench  of this Court considered  a  similar question  which also arose under the Excess Profits Tax Act, 1940.   In  that  case, the assessee-firm  was  carrying  on manufacturing  business.   A  Public   Limited  Company  was incorporated   to   take   over   the  business   from   the assessee-firm.   The  company purchased the building of  the assessee-firm  and took over from it the plant and machinery on  lease at an annual rent.  One of the questions that fell for consideration there was whether the lease money obtained by the assessee from the company could be legally treated as business    profit   liable   to    excess   profits    tax. Distinguishing  Shri Lakshmi Silk Mills case (supra), it was pointed out that only a part of the business of the assessee therein,  namely  dyeing silk yarn, was temporarily  stopped owing to difficulty in obtaining silk yarn on account of war so  that  part of the assets did not cease to be  commercial asset  of that business and accordingly, the income from the assets  would be the profit of the business irrespective  of the manner in which that asset was exploited by the company. Noticing  the  facts in the case before the Court  that  the assessee  had already sold land and building to the Company; it  was not having any manufacturing, trading or  commercial activity;   and let out the plant and machinery on an annual rent  of Rupees forty thousand and applying the common sense principle   to  the  facts,  this   Court  found  that   the transaction  of  lease  was quite apart  from  the  ordinary business  activity  of the company, so it was impossible  to hold  that  the letting out of the plant and machinery  etc. was  at  all a business operation when its  normal  business activity  had  come to a close.  In Commissioner  of  Income Tax,  West Bengal Vs.  Calcutta National Bank Limited  [1959 (37)  I.T.R.  171], the case arose under the Excess  Profits Tax  Act.   The assessee was a banking company.  It owned  a six-storeyed  building  of which only a part was  under  its occupation  and  the  rest  was let  out  to  tenants.   The question  was whether the rent received from the tenants  of the  building  was the business income of the company.   The majority  opinion  was that realisation of rental income  of the  assessee  was  in the course of its business  being  in prosecution  of one of its objects in its memorandum and was liable  to  be  included  in its business  profits  and  was assessable  to  excess  profits tax.   That  conclusion  was reached  on the premise that the term ‘business’ as  defined in that Act was wider than the definition of that term under the  Income Tax Act.  The minority, however, took a contrary view.  In Sultan Brothers Private Ltd.  vs.  Commissioner of Income  Tax,  Bombay  City-II  [1964  (51  I.T.R.353)],  the assessee constructed a building, fitted it up with furniture and  fixtures  and  let it out on lease fully  equipped  and furnished  for  the purpose of running a hotel.   The  lease amount  provided separately for running of the building  and hire  charges for furniture and fixtures.  The question that fell  for  consideration  was whether the  rent  income  was business  income taxable under the Income Tax Act, 1922?  It was  held that as the assessee never carried on any business of  a hotel in the premises let out or otherwise at all  and

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there  was  nothing to show that it intended to carry  on  a hotel  business itself in the same building, the letting  of the  building  did  not  amount  to the  carrying  on  of  a business,  so  the  income  under the  lease  could  not  be assessed  as  income from business.  The Constitution  Bench formulated  the  principle  thus :   "Whether  a  particular letting  is business, has to be decided in the circumstances of  each  case.   Each  case has to be looked  at  from  the businessman’s  point of view to find out whether the letting was  the  doing  of a business or the  exploitation  of  his property by an owner..".

     In  New  Sevan  Sugar and Gur  Refining  Co.Ltd.   vs. Commissioner  of  Income Tax, Calcutta [1969 (74)  I.T.R.7], the  appellant-company was carrying on business of  crushing sugarcane  and  gur refining.  The building,  machinery  and plant  of  the factory mill were leased out initially for  a period of five years with three options to renew for similar periods  on  the  part  of the lessee.   The  assessee  had, however,  the option to terminate the lease after first  two years  which  option  was not exercised.  The  question  was whether  the  income  which arose to the  assessee  for  the Assessment  Year  1955-56 from the lease was  assessable  as income  from business or income from other sources?  It  was held, on interpretation of the terms of the lease deed, that the intention of the appellant-assessee was to part with the 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 commercial asset  during  the subsistence  of  the lease;  the intention of the  appellant was  found  to go out of business altogether, therefore  the income  was not assessable as business income.  Commissioner of  Income Tax, Lucknow vs.  Vikram Cotton Mills Ltd.  [1988 (169)  I.T.R.597]  is again a case arising under the  Income Tax Act, 1922.  One of the creditors filed a petition in the High  Court  for  winding   up.   The  Industrial  Financial Corporation took possession of fixed assets under an English mortgage  of  those assets.  The assessee company  had  gone into  losses  and  had stopped its  manufacturing  activity. Under  the  scheme  evolved  by the  High  Court  under  the Companies  Act,  the  business assets were let out  for  ten years with an option for renewal for another ten years.  The management  of  the  company was transferred to a  Board  of Trustees  approved  by the High Court.  The  question  which fell  for  determination was whether the rental  income  was assessable  in  the  relevant assessment years  as  business income?   The findings of the Tribunal were that on  account of  financial  crisis, the company found it advantageous  to let out the machinery on hire for a temporary period and the company  was  able to liquidate its liability at the end  of the lease period and regained possession of its assets;  the company  did  not sell or otherwise dispose of  its  assets; there  was  nothing on record to show that the  company  was formed to let out plant and machinery on hire.  The Tribunal came  to  the conclusion that the maintenance of the  assets meant  that  the  Company had an intention to  re-start  the business  and  that the intention of the Company in  letting out  its assets was to exploit the commercial assets for the purpose  of its business and therefore the rental income was assessable   as  business  income.    On   reference,   that conclusion  was upheld by the High Court.  On appeal to this Court,  while  affirming the decision of the High Court,  it was  noted that all relevant facts were correctly considered from  the  standpoint of an ordinary prudent businessman  by the  Tribunal and it was also pointed out that the  stoppage

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of the business by the company was a temporary suspension of business  for  a temporary period with the object of  tiding over  the  crisis  condition  and there was  never  any  act indicating  that  the  company  intended  to  carry  on  the business  in future.  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) it is a mixed question  of law and fact and has to be determined from the point of view of  a  businessman in that business on the facts and in  the circumstances  of each case including true interpretation of the agreement under which the assets are let out;  (3) where all  the assets of the business are let out, the period  for which  the  assets are let out is a relevant factor to  find out  whether  the intention of the assessee is to go out  of business  altogether  or to come back and restart the  same. (4)  if  only  or a few of the business assets are  let  out temporarily  while  the assessee is carrying out  his  other business  activities  then  it is a case of  exploiting  the business  assets  otherwise than employing them for his  own use  for  making  profit  for that  business;   but  if  the business  never  started or has started but ceased  with  no intention  to  be resumed, the assets also will cease to  be business   assets   and  the   transaction  will   only   be exploitation  of  property  by  an owner  thereof,  but  not exploitation of business assets.  Now adverting to the facts of  UPL case, the High Court referred to the findings of the Tribunal  that  the  leasing out of the factory  was  not  a sequel  to the assesee’s decision to go out of the  business in  respect  of the subject factory and that it was  just  a make-shift   transient  alternative   means  of   commercial exploitation  of the commercial assets, so income from  such letting  could  not  be treated as the fruits  of  ownership simplicitor  of the asset.  The High Court also referred  to various  clauses in the Agreement, particularly Clauses 1,2, 4,7,19,20,21  and 22 and concluded that "licensee exercising its  vested  right  of  option   to  purchase  the  licenced premises,  the assessee stands completely out in the  cold". The   High   Court  recorded   the  following   findings   : "Therefore,  it  can very well be presumed that at the  time the licence agreement was entered into, the intention of the ultimate  outright sell out was already there.  The assessee was already committed to the licensee for such a sell-out at licensee’s  pleasure  and there is no means of the  assessee falling  back from that commitment.  Therefore, it can  very reasonably be inferred that the assessee in the case decided to  go out of business as far as this particular factory was concerned..

     The  lease agreement is in fact a veiled agreement for lease-cum-sale....We  are of the opinion that the  licensing is  not  meant  to be a temporary stop gap  exploitation  of commercial  assets.  It could not be in the contemplation of the  assessee  at  the  time it  entered  into  the  licence agreement,  to  retain the assets any more as  a  commercial asset."

     It was contended by Mr.  Verma that the High Court did not  consider  Clauses 2(ii)c, 3(v), 4, 7 15 and 16  of  the Agreement.  The clauses read thus:  "2(ii)c.  The 25% of the net  profit,  if  any,  within 60 days of  the  accounts  of licensee being adopted and passed by the Shareholders.

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     3.   The licensee hereby agrees and covenants:  (v) to permit the licensor on reasonable previous notice in writing to  enter the UPL factory premises and inspect the premises, plants,  machinery  etc.   with  or  without  their   agent, inspector,  engineer  and  other personnel and  provide  all necessary facilities to them;

     4.   The  Licensee shall use the said UPL factory  for the  purpose of business of manufacturing;  provided  always that  the  Licensor shall not in any way be responsible  for any  debt or responsibility incurred by the Licensee  during the  subsistence of this Agreement including that in respect of  expenses,  such as working expenses, rates and taxes  in respect  of  property,  except of capital  nature  insurance premia,  interest  on  all advances, depreciation  on  newly acquired assets, bonus and gratuity to employees nor for any liability in respect of Sales Tax or tax on incomes, profits and  gains made by the Licensee so far as they relate to the Licensee’s  part of the income from the UPL factory and  the Licensee  hereby  indemnified the Licensor against all  such debts,  liabilities, costs, charges and expenses in  respect thereof.

     7.The   Licensee  shall  be   liable  for  payment  of retrenchment/retirement compensation, if any, to the workmen in  case  such  workmen  are retrenched or  retired  by  the Licensee.  However, the Licensor shall be liable for payment of  retrenchment/retirement compensation, if any, in case of workmen  retrenched or retired 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.

     15.In the event of the Licensee committing a breach of any  of  the  terms of this Agreement or making  default  in payment  as  provided in clause 2(ii) of any  two  quarterly instalments,  the  Licensor shall be entitled  to  terminate this  agreement  upon the expiry of the period of one  month from the service of notice in writing by the Licensor to the Licensee  to  remove the breach or to make payment,  as  the case may be, if the Licensee fail to remove the breach or to make payment, as the case may be, within the said period.

     16.   If the Licensee pass a resolution for winding up or  are  ordered to be wound up (except for the  purpose  of amalgamation  or reconstruction) or if the Licensee shall do or  cause  to be done or permit or suffer any act  or  thing whereby  the Licensor’s right in the UPL factory and in  the building,  plant,  machinery  and equipment therein  may  be prejudiced  or put in jeopardy, the Licensor may without any notice determine this Agreement and the licence and it shall thereupon  be  lawful  for the Licensor to  enter  upon  and retake possession of the UPL factory.

     From  a plain reading of the clauses noted above, what is  clear is that they deal with a situation arising out  of the  breach  of  the terms of the  Agreement  entitling  the Licensor  to  terminate the Agreement on the expiry  of  the period  of  one month from the service of the notice to  the Licensee.   Clause 16 deals with a situation of the Licensee

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being  wound up in which situation the Licensor reserved his right  to determine the Agreement and retake the  possession of  the  factory.   These clauses do not  whittle  down  the conclusion  arrived  at by the High Court with reference  to the  rights  of the assessee-lessor coming to an end on  the exercise  of  option  by the lessee under clause 19  of  the Agreement.  Applying the afore-mentioned tests, we are clear in  our  mind  that the High Court has reached  the  correct conclusion  which does not warrant interference.  So far  as Guntur  Merchants’ case is concerned, the Agreement of Lease is  not  placed on record and there is no challenge that  in recording  its  findings the Tribunal and in  answering  the question  the High Court has ignored any vital clause of the Agreement.   The Tribunal recorded the findings as follows : "The assessee stopped its business of ginning cotton in 1964 for  the sole reason of non- availability of cotton and that it  did not start the same even in 1977;  there was  nothing to  show  that the non-availability of cotton  continued  or could  continue for such a long period;  the godowns of  the assessee were let out to a tobacco merchant and the assessee could  not be said to be carrying on the business of  cotton with godowns so let out;  the assessee could be said to have only  exercised his right as an owner of the property in the leasing out its properties;  the machinery remained idle for a  very  long  period  and the assessee  had  separated  the machinery  from the godown and let out the pressing  factory to  a metal pressing factory;  the assessee did not continue its  business  for  an unusual long time and  give  out  its godown to different business than the one which the assessee was  carrying  on;   the  conduct of the  assessee  did  not support  that  it  was  using the godown  and  machinery  as business asset and not as the owner of the property."

     On considering these findings, the High Court answered the  question  referred to it in favour of the Revenue.   On the  face of these findings, it cannot but be concluded that the  assessee  had dismantled its business never  to  return back to it.  Applying the aforesaid principles, it has to be held  that  the  answer recorded by the High  Court  to  the question  referred to it is correct in law.  In the  result, we  hold  that both the High Courts were right in  answering the questions referred to them, in favour of the Revenue and against  the  assessee.   These   appeals  are,   therefore, dismissed with costs.