Madras H.C : the assessee’s income from letting out its factory is to be treated as business income, when there was nothing on record to show that the assessee had only let out the same temporarily and intended to resume its business

High Court Of Madras

CIT vs. Venkateswara Agro Chemicals and Minerals (P.) Ltd.

Assessment Years : 1997-98 To 1999-2000

Section : 56, 28(I)

Elipe Dharma Rao And M. Venugopal, JJ.

Tax Appeal Case Nos. 201 To 203 Of 2008

April 29, 2011

JUDGMENT

Elipe Dharma Rao, J. – These appeals are preferred by the Revenue against the common order passed by the Income-tax Appellate Tribunal (in short “the Tribunal”), Madras “C” Bench, dated March 8, 2007, in I.T.A. Nos. 1538 to 1540/Mds/2005 for the assessment years 1997-98 to 1999-2000. Since the issue involved in these appeals are one and the same and they are inter-connected, they were heard together and disposed of by this common judgment.

2. The facts in brief are as follows :

In the present appeals, we are concerned with the returns filed by the assessee in respect of the assessment years 1997-98 to 1999-2000. The assessee is a private limited company. It has submitted its returns in the previous years showing nil income. However, the case was reopened by issue of notice under section 148 of the Income-tax Act, 1961 (in short “the Act”). On scrutiny, it was found that the assessee had let out its factory with all machinery with effect from September 8, 1993. Although the assessee had credited the same as “other income” in its profit and loss account for income-tax purposes, it claimed the same as business income and adjusted it against business losses. The Assessing Officer by order dated February 27, 2004, assessed the income as income from other sources. Aggrieved by the order of the Assessing Officer, the assessee preferred appeals before the Commissioner of Income-tax (Appeals), who, by a common order dated March 7, 2005, in I. T. A. Nos. 98, 99 and 100/2004-05, allowed the appeals partly by holding that the lease rental income should be treated as business income and not under “other sources”. Against the aforesaid order, the Revenue preferred appeals before the Income-tax Appellate Tribunal, which, by a common order dated March 8, 2007, confirmed the decision of the appellate authority by relying upon the decision of the Supreme Court in CIT v. Vikram Cotton Mills Ltd. [1988] 169 ITR 597 / 36 Taxman 1 Challenging the order of the Tribunal, the present appeals are preferred by the Revenue.

3. While admitting these appeals, the following substantial question of law has been formulated for consideration :

“Whether, in the facts and circumstances of the case, the Tribunal was right in applying the decision of the Supreme Court in the case of Vikram Cotton Mills Ltd. [1988] 169 ITR 597 (SC)) and holding that the assessee’s income from letting out its factory is to be treated as business income, when there was nothing on record to show that the assessee had only let out the same temporarily and intended to resume its business ?”

4. It is seen that the assessee with effect from September 8, 1993, had leased out its entire factory building to M/s. Premier Auto Electricals Pvt. Ltd. for a lease rent of Rs. 10,02,000 per annum for a period of 11 months. In the returns submitted by the assessee, it has claimed that this amount should be treated as business income. The reason attributed by the assessee for claiming such income as business income was that it was their practice and in the earlier assessment years 1990-91 and 1992-93 the claim of the assessee was allowed. However, this explanation given by the assessee was not accepted by the Assessing Officer, who refused to treat the same as business income and, on the other hand, treated the lease rental as the income from other sources. The Tribunal as well as the appellate authority reversed the finding of the Assessing Officer by strongly relying upon the decision of the Supreme Court in Vikram Cotton Mills Ltd. (supra).

5. Learned counsel appearing for the Revenue submitted that the decision in Vikram Cotton Mills Ltd. (supra) is distinguishable to the facts of the present case and the latest decision of the Supreme Court in Universal Plast Ltd. v. CIT [1999] 237 ITR 454 / 103 Taxman 493 covers the entire issue and, following the latter decision, the present appeals are to be allowed.

6. In Vikram Cotton Mills Ltd.’s case (supra), the assessee-company was a limited company. It carried on the business of manufacture of textiles. From 1949, the assessee-company started running into losses. At the end of December, 1953, the position was that as against the capital of Rs. 11 lakhs the accumulated liabilities of the assessee-company amounted to Rs. 26 lakhs. Because of this, the assessee-company stopped its manufacturing activity from December, 1953. This state of affairs continued till May 21, 1956, when one of the creditors of the company filed a winding up petition in the High Court M/s. Industrial Finance Corporation, who was one of the major creditors of the company, had in exercise of its powers under an English mortgage of the fixed assets of the company taken actual physical possession of the immovable properties hypothecated to them. Under section 153 of the Indian Companies Act, 1913, the High Court with the approval of the assessee-company and the creditors evolved a scheme whereunder the business assets of the assessee-company were let out to M/s. General Fibres Dealers (Pvt) Ltd., Calcutta, on Rs. 2.5 lakhs per year. The lease was for ten years with an option of renewal for another ten years. The intention was that the various creditors would be paid out of the lease money. The management of the assessee-company was transferred to a board of trustees appointed by the High Court. The lease money realised by the assessee-company for the assessment years 1957-58 to 1959-60 was assessed by the Department under section 10 of the Indian Income-tax Act under the head “Profits and gains of business”. But in subsequent assessment years the Income-tax Officer held that the income from the lease rent was liable to be taxed under the head “Income from other sources” under section 12 of the Act. The assessee-company took the matter up in appeal. It was urged before the Commissioner that the assets of the company were exploited and there was no intention of the assessee to discontinue the business activities. The assets of the company were let to the lessee with the principal object of liquidating a colossal liability and extricating itself from financial crises. The Commissioner, however, upheld the finding of the Income-tax Officer. The assessee-company then took the matter to the Tribunal. The Tribunal allowed the appeal and directed to treat the income arising out of the letting out of the assets as business income. On further appeal, the High Court held that the assessee’s case was that the income received by it from the lease of the plant and machinery was business income and was liable to be adjusted against the unabsorbed loss of the preceding year. On the aforesaid factual scenario, the Supreme Court, while answering the question whether the rental income should be treated as business income, observed as follows (page 607) :

“In the context of these facts, it appears that it was a possible conclusion that the assessee intended that there should be a temporary suspension of the business for the purpose of reconstruction of the company and for that matter there must be stoppage of the user of the machinery by the assessee. It was a temporary lease though for 10 years or 19 years on renewal and after the expiry of the period, the property reverted back to the assessee.

It is predominantly a matter of intention. Intention is an inference to be drawn from the relevant facts. All the relevant facts, it appears, have been considered by the Tribunal from the correct standpoint, i.e., an ordinary prudent businessman or as in England, it used to be ‘man on the top of the platform omnibus’, or ‘director’s armchair’. If on that test a plausible conclusion has been drawn no objection can be taken.

On that basis applying the correct principle, the Tribunal found that the intention was not to part with the machinery but to lease it out for a temporary period as a part of exploitation. In such a circumstance, it cannot be said that no business was carried on and their income derived from the machine letting was only a rental income. There was a temporary suspension of business for a temporary period with the object to tide over the crisis condition. There was never any act indicating that the assessee never intended to carry on the business.

In the background of these principles and in the facts and circumstances of the case so found, we cannot say such a finding was either perverse or not sustainable.”

7. The aforesaid decision was subsequently clarified by a Full Bench of the Supreme Court in Universal Plast Ltd.’s case (supra). In the later case, the Supreme Court, while dealing with Vikram Cotton Mills Ltd.’s case (supra), observed as follows (page 460) :

“CIT v. Vikram Cotton Mills Ltd. [1988] 169 ITR 597 (SC), is again a case arising under the Indian 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 restart 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 a 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 of the business by the company was a temporary suspension 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.”

8. The Apex Court, after analysing the various other decisions, laid down the following propositions (pages 460 and 461 of 237 ITR) :

“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.”

9. The Apex Court, ultimately by applying the aforesaid propositions, dismissed the appeals preferred by the assessee.

10. From the propositions laid down by the Supreme Court in the Universal Plast Ltd.’s case (supra), it is clear that no precise test can be laid down to ascertain whether the income received by an assessee from leasing or letting out of assets would fall under the head “Profits and gains of business” and, moreover, it is a mixed question of law and fact to be determined from the point of view of businessman including true interpretation of the lease agreement and the period of lease. Furthermore it was laid down that exploitation of the assets by the assessee has to be looked into. Now, we have to see whether the propositions laid down by the Supreme Court, are fulfilled in the present case.

11. In the present case, the assessee had entered into a lease agreement on September 8, 1993, for a period of 11 months. Admittedly, after a period of 11 months, the lease agreement was not renewed or the period was extended. In this context, as per the propositions laid down by the Supreme Court, one has to see whether the intention of the assessee is to go out of the business altogether or to come back and restart the same. Except the lease agreement, no material has been produced by the assessee before the Assessing Officer or this court to come to a conclusion that the assessee is likely to come back and restart the business. In Vikram Cotton Mills Ltd.’s case (supra), a particular period of lease was stipulated and when the 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. But, in the case on hand, there is no material and not even a recital to the effect that the company is likely to restart its business. Moreover, it is also not the case of the assessee that its company had run to loss and, therefore, it has no other alternative than to lease out the company. In such circumstances, we are not in a position to accept the contention of the assessee that the income arrived at by letting out its factory is to be treated as business income, when there was nothing on record to show that the assessee had only let out the same temporarily and intended to resume its business. Since the third and fourth propositions laid down by the Supreme Court in the latter case have not been admittedly fulfilled, the substantial question of law formulated in this case has to be answered against the assessee. This Full Bench decision of the Supreme Court, which had distinguished the Vikram Cotton Mills Ltd.’s case (supra) heavily relied on by the appellate authority as well as the Tribunal, and the propositions laid down therein were not brought to the knowledge of either the appellate authority or the Tribunal. The impugned orders under appeals are contrary to the above proposition of law laid down by the hon’ble Supreme Court and, hence, they are liable to be quashed. Accordingly, they are quashed.

12. In the result, the appeals filed by the Revenue are allowed. No costs.

[Citation : 338 ITR 428]

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