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PETITIONER: VIBHUTI GLASS WORKS

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, LUCKNOW

DATE OF JUDGMENT28/04/1989

BENCH: PATHAK, R.S. (CJ) BENCH: PATHAK, R.S. (CJ) MISRA RANGNATH

CITATION:  1989 AIR 1443            1989 SCR  (2) 797  1989 SCC  Supl.  (2) 431 JT 1989 (2)   257  1989 SCALE  (1)1141

ACT:     Income  Tax Act,  1961: Section 28--Income--Accrual  of- Factory  owned  by  assessee--State  Government  allowed  to manage for 20 years as condition for grant of  loan--Profits earned--Applied  by  managing State  Government  for  paying assessee’s debts--Whether assessee assessable.

HEADNOTE:     The  assessee Company had a glass factory besides  other business. Since the glass factory business had been  suffer- ing losses for several years, resulting in increasing  debt, the assessee took loans from the State Government and  mort- gaged the land, buildings and machinery. Later, under a deed executed by it the assessee allowed the State Government  to take  over running of the glass factory for a period  of  20 years  and permitted it to have a share of the business,  if and when they exceeded a prescribed limit, as conditions for guaranteeing  repayment of a loan of Rs.20 lakhs granted  by the Industrial Finance Corporation.     During  assessment proceedings for the  assessment  year 1962-63,  the assessee contended that the profits earned  by the  glass  factory  business during that  period  were  not assessable  in  its  hands, but in the hands  of  the  State Government, which had taken over the factory and was running the  business,  and  that, in any event, only  half  of  the profit  could  be included in its assessment  as  the  State Government was entitled to 50 per cent of profits under  the deed. Rejecting the contentions, the Income-tax officer held that  the assessee was liable to be assessed in  respect  of the entire profits earned by the glass factory.     The assessee’s appeals were dismissed by both the Appel- late Assistant Commissioner and the Appellate Tribunal. On a reference  made at assessee’s instance, the High  Court  af- firmed the Tribunal’s finding that the entire profits of the factory,  and not half of them accrued to the  assessee.  It also  rejected  assessee’s contention that  the  income  was diverted  through an overriding title before it reached  the assessee. Dismissing the appeal of the assessee, this Court, 798     HELD:  The present case is one where the income  accrued

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to the assessee directly and was merely, upon such  accrual, applied to discharge an obligation of the assessee. [.801B]     Although the Deed executed by the assessee is  described as  a  lease-deed  and provides that the  glass  factory  is demised to the State Government, in substance possession  of the factory was transferred to the State Government only for the  purpose of enabling it to manage and run the  business. [800F]     The entire income earned during the year under consider- ation  was the income of the assesee and was merely  applied by  the  managing State Government for the  payment  of  the assessee’s  debt,  and there was no over-riding  title.  The profits earned during the year under consideration were  not sufficient for the State Government to enjoy a share in  the profits in accordance with the terms of the Deed, and there- fore, no part of the profits could be regarded as assessable in  the hands of the State Government. In point of fact,  no part of the profits was actually taken by the State  Govern- ment. [801C-D]     Commissioner  of Income-tax, Bombay City H  v.  Sitaldas Tirathdas, [1961] 41 ITR 367, relied on.

JUDGMENT:     CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1442 (NT) of 1975.     From  the  Judgment  and Order dated  14.3.1974  of  the Allahabad High Court in I.T.R. No. 437 of 1971. E.C. Agarwala for the Appellant.     S.C.  Manchanda, Ms. A Subhashini and M.B. Rao  for  the Respondent. The Judgment of the Court was delivered by     PATHAK,  CJ. This appeal by certificate granted  by  the Allahabad  High Court is directed against a judgment of  the High  Court answering the following questions in  favour  of the Revenue and against the assessee in an income tax refer- ence:                     "(1)  Whether  on the facts and  in  the               circumstances  of the case, and on  a  correct               interpretation of the leasedeed               799               dated  22.8.1960,  the Tribunal was  fight  in               holding  the  profits  of  the  Glass  factory               during the relevant accounting year accrued to               the assessee-company?                     (2) If the answer to the question no.  1               is  in the affirmative, whether  the  Tribunal               was  right in holding that the entire  profits               and  not one half of the profits of the  glass               factory  during the relevant  accounting  year               accrued to the assessee-company?"     The  assessee, Messrs. Vibhuti Glass Works is  a  public limited company. It has a glass factory and also carries  on other business. The accounts of the glass factory are closed on  31  March each year, while the assessee closes  its  ac- counts on 30 September each year. We are concerned with  the assessment year 1962 -63.     For  several years the glass factory business  had  been suffering losses resulting in increasing debt. It took heavy loans  from  the  Banaras State Bank,  Varanasi,  for  which purpose its stocks and stores were hypothecated to the Bank. It also took loans from the Uttar Pradesh Government and the land,  buildings and machinery were  mortgaged  accordingly. The assessee found it difficult to emerge out of its  finan-

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cial  embarrassment. It discovered also that it needed  cer- tain equipment in order to produce better quality goods  and also required funds for its working capital and for repaying loans  to  other  creditors. It  approached  the  industrial Finance Corporation, New Delhi, and the State Finance Corpo- ration  for financial assistance and the Industrial  Finance Corporation agreed to grant a loan of Rs.20 lakhs on  condi- tion (a) that the State Government guaranteed repayment  and (b)  that the State Government postponed their charge  under the mortgage deeds and the Industrial Financial  Corporation was  allowed to have the first charge. The State  Government agreed to those conditions provided the assessee allowed the State  Government  to  take over the running  of  the  glass factory for a period of 20 years. The State Government  also stipulated  that  if and when the profits  of  the  business exceeded a prescribed limit, a share of those profits  would go  to  the State Government. The assessee  agreed  to  this arrangement  and executed a document dated 22  August,  1960 incorporating the requisite conditions.     For  the  relevant accounting period the  glass  factory business disclosed a profit of Rs.92,960 while the  assessee suffered  a  loss of Rs.3,47,656 according to  its  separate profit and loss account. During 800 assessment  proceedings for the assessment year  1962-63  it was contended by the assessee before the Income Tax  Officer that  the  profit of Rs.92,960 earned by the  glass  factory business was not assessable in the hands of the assessee but in the hands of the Uttar Pradesh Government which had taken over  the factory and was running the business. It was  con- tended  that in any event only half of the profits could  be included  in the assessment of the assessee,  the  remaining profit being assessable in the hands of the State Government which  was entitled to 50 per cent of the profits under  the Deed  dated 22 August, 1960. Both contentions were  rejected by  the Income Tax Officer, who held that the  assessee  was liable  to  be  assessed in respect of  the  entire  profits earned  by the glass factory. He set off the profit  against the loss declared by the assessee and computed a net loss of Rs.2,54,785.     The assessee appealed to the Appellate Assistant Commis- sioner  of Income Tax, but without success. A second  appeal by the assessee filed before the Income Tax Appellate Tribu- nal was also dismissed. At the instance of the assessee  the Appellate  Tribunal  referred the two questions of  law  set forth earlier to the High Court of Allahabad. The High Court considered  the  various  provisions of the  Deed  dated  22 August,  1960 and answered both the questions in  favour  of the Revenue and against the assessee.     It is apparent that this appeal must be disposed of on a consideration  of  the terms of the Deed  dated  22  August, 1960. A perusal of the conditions set forth in that document discloses  that the State Government was given the power  to manage  the glass factory business for a period of 20  years from  the date it assumed possession. Although the  Deed  is described  as  a lease-deed and it provides that  the  glass factory  is  demised to the State Government,  in  substance possession of the glass factory was transferred to the State Government only for the purpose of enabling it to manage and run  the business. The High Court has given good reason  for reaching that conclusion.     Clause (c) of paragraph 7 of the Deed provides "that  if upon  the expiration or sooner determination of this  demise it is found that the working of the factory has shown  prof- its after meeting the entire liabilities of the company  the

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balance  profits, after accounting for all charges  and  ex- penses  incurred by the State Government, shall  be  divided between the company and the Governor in equal proportion." It was contended by the assessee before the High Court  that the 801 income  was diverted through an overriding title  before  it reached  the assessee. The High Court. in our  opinion,  has rightly  rejected the contention, holding that there was  no overriding title and in fact it was a case of mere  applica- tion of the income. The proper test to be applied in such  a case  has  been laid down by this Court in  Commissioner  of Income-tax, Bombay City H  v. Sitaldas Tirathdas, [1961]  41 ITR  367 and we are satisfied that the present case  is  one where  the income accrued to the assessee directly  and  was merely applied upon such accrual to discharge an  obligation of  the assessee. The entire income earned during  the  year under  consideration was the income of the assessee and  was merely  applied  by the managing State  Government  for  the payment of the assessee’s debts.     We  are also in agreement with the High Court  that  the profits earned during the year under consideration were  not sufficient for the State Government to enjoy a share in  the profits  in  accordance with the terms of the Deed,  and  no question, therefore, arises of any part of the profits being regarded as assessable in the hands of the State Government. In point of fact, it appears that no part of the profits was actually taken by the State Government.     In the result, the appeal fails and is dismissed but  in the circumstances there is no order as to costs. N.P.V.                                Appeal dismissed. 802