High Court Of Patna (Full Bench)
CIT vs. H.D. Agarwala & Sons
CIT vs. S.K. Sahana & Sons
Sections 28(i), 56
Asst. Year 1967-68, 1968-69, 1969-70
S.S. Sandhawalia, C.J.; Uday Sinha & Ashwini Kumar Sinha, JJ.
Tax Cases Nos. 240, 241 & 249 to 251 of 1976
12th May, 1987
Jain, Shambhu Sharan, V.D. Narayan, S.K. Narayan, Rameshwar Prasad No. II and Amarendra Kumar,Sinha for the Assessee
S. SANDHAWALIA, C.J. :
In this set of connected and consolidated IT Ref. Nos. 240, 241, 249, 250 and 251 of 1976, the larger question that looms for adjudication may be formulated in the following terms:
” Whether the proprietor of a colliery abdicating all control of its business in favour of a managing contractor by a lease for a fixed term of ten years with an option to renew by the lessor on the terms of an annual minimum guaranteed amount of Rs. 18,000 and royalty at differential rates on the quantum of coal raised and its manufacture, can still be said to be carrying on the business of the said colliery within the meaning of s. 28(i) of the IT Act, 1961 ? ”
Pointedly at issue is the correctness of the earlier view of the Division Bench in CIT vs. S. K. Sahana & Sons Ltd. (1976) 102 ITR 437 (Pat) answering the identical question in the affirmative.
2.Virtually identical facts may be noticed from Tax Cases Nos. 249 to 251 of 1976. S. K. Sahana & Sons Ltd., the assessee, is a limited company which, inter alia, derives income from a mining establishment known as New Bansjora Colliery. By an agreement dated April 22, 1959, the assessee-company leased out the colliery to Khas Ganeshpur Coal Mines (P.) Ltd. by appointing the latter as a managing contractor for a period of ten years with an option of renewal for a further period of three years. The terms of the agreement, inter alia, were for the payment of the minimum guaranteed amount of Rs. 18,000 per year to the assessee and further to pay a guaranteed profit of Rs. 1.50 per ton of coal raised from the colliery and an additional payment of Rs. 2.25 per ton for every ton of soft coke manufactured and Rs. 3 per ton for hard coke manufactured by the managing contractor. For the asst. yrs. 1967-68 to 1969-70, it was contended on behalf of the assessee before the ITO that the minimum guaranteed amount of income and the royalty received on every ton of coal raised by the managing contractor should be assessed as an income from business. This contention was, however, rejected by the ITO (vide annexures A, A-1 and A-2), who referred to his orders for the previous assessment years and for the reason given therein held that the guaranteed commission and the royalty on coal was assessable under the head ” Income from other sources “. The ITO referred to the fact that though the Tribunal had taken a different view, the matter was still pending before the High Court in reference.
3.The matter was carried before the AAC in appeal, who, however, found that the colliery had been leased out as a running concern to the managing contractor which worked it under a power of attorney. He found that the running concern as such had been handed over for management in the name and on behalf of the assessee. For these reasons, he took the contrary view that the income under the contract of managing contractorship was income from business and not from other sources. The consolidated order of the AAC is annexure ” B ” to the statement of the case.
4.When the matter came up before the Tribunal, all the three years’ appeals were disposed of by a common order. The Tribunal found that the facts in these cases were the same, as had been found in the earlier asst. yrs. 1963-64 and 1964-65 in which it had earlier held that the income derived by the assessee was income from business and not income from other sources. Therefore, the Tribunal followed its earlier orders and held that the income derived by the assessee was income from business (vide annexure ” C “). Against the aforesaid orders, the CIT moved reference applications under s. 256(1) of the IT Act, 1961 “the Act”, for referring the question of law arising in the case to the High Court. Therein, on behalf of the assessee, firm reliance was placed on the fact that in respect of the asst. yrs. 1963-64 and 1964-65, the High Court had considered the same question and by its judgment dated September 20, 1974 [(1976) 102 ITR 437(supra)], it had been held that the income of this very assessee received from the managing contractor was income from business. It was contended that the facts relevant for the assessment years were the same as had been mentioned in the earlier statement of the case for the asst. yrs. 1963-64 and 1964-65. On these premises, the Tribunal referred the following question to the High Court for the three assessment years: ” Whether, on the facts and in the circumstances of the case, the income of the assessee received from the managing contractor was income from business ? “
5.These cases originally came up for consideration by a Division Bench presided over by my learned brother, Uday Sinha J. In his lucid order of reference to the larger Bench, it was noticed that there appeared a sharp cleavage of opinion within the Court itself between the cases in S. K. Sahana & Sons Ltd.(supra) and CIT vs. Pure Dhansar Coal Co.(1985) 46 CTR (Pat)153:(1985) 154 ITR 857 (Pat) on the one hand and Khas Benedih Colliery vs. CIT (1974) BBCJ 440 (Pat) and CIT vs. Kuya & Khas Kuya Colliery Co. (1986) 52CTR (Pat) 250:(1985) 156 ITR 206 (Pat) on the other. It was consequently found appropriate that the question of the interpretation of the lease granted by the assessee should be considered by a larger Bench for deciding whether the earlier case in S. K. Sahana & Sons Ltd.(supra) was correctly decided or not. To facilitate the resolution of the point, it was further directed that the agreements executed by the assessee, S. K. Sahana, in the present cases and the lease deed under consideration in Khas Benedih Colliery’s case (supra) should be incorporated in the supplementary paper-book for ease of reference, which has accordingly been done. That is how the matter is before us.
6.As has been authoritatively said by the final Court in cases of the present kind, apart from general principle, each case must be decided on its peculiar circumstances according to the ordinary common sense principle and, in particular, on the terms of the contract betwixt the parties. Consequently, before proceeding further, the terra firma of the contractual terms admittedly arrived at and duly executed and adhered to would necessarily first call for notice. Whilst reference to every clause will be obviously wasteful, a summation of the prominent terms thereof is inevitable to highlight the core of the contract betwixt the parties.
7.The deed is admittedly dated April 22, 1959, and it is itself described by the parties as a deed of managing contract betwixt S. K. Sahana & Sons Ltd. referred to as the ” proprietor ” and Khas Ganeshpur Coal Mines (P.) Ltd. referred to as the ” managing contractor “. Thereby, the managing contractor was appointed for the New Bansjora Colliery for a period of ten years with the option on the part of the proprietor for a renewal of the period on such terms and conditions as may be usually agreed upon. The other significant clauses of the deed warranting pointed notice provide as follows: ” 18. That the New Bansjora Colliery is now lying closed and reopening permission has to be obtained from the proper authorities. That the managing contractor shall take all necessary steps and make arrangements for obtaining the reopening permission. That the proprietor shall render all possible assistance to the managing contractor in aforesaid matter and shall do such formal acts and deeds as may be as and when requested by the managing contractor required to be done in the said connection. 19. That notwithstanding anything hereinbefore contained, so long as reopening permission is not obtained from the authorities concerned, the managing contractor shall not be liable to pay to the proprietor the guaranteed income or profit reserved in this agreement, that is to say during such period the managing contractor shall not have to pay the minimum guaranteed income or profit referred under cl. 15… 3. As there are no machineries existing at the said colliery, the managing contractor shall be entitled at its own cost to instal such machineries and to bring in such chattels and utensils at the said colliery, as it may in its discretion think fit and proper for the purpose of working the said colliery. The said machineries so to be installed and the said chattels and utensils so to be brought shall remain the absolute properties of the managing contractor and on determination of these presents, subject to the provisions of cl. 5 hereof, the managing contractor shall be entitled to remove such machinery, chattels and utensils as may be installed at or brought in by it to the said colliery without any objection on the part of the proprietor. 2. The managing contractor shall have full power and authority to search for, get, quarry, win and dig coal by all… (torn)… required modes of coal mining in the said colliery and manufacture coke and otherwise to work the said colliery according to the Indian Mines Act and the Rules and Regulations framed or to be framed thereunder and all other statutes, bye- laws, rules and regulations applicable to the said colliery and business and in connection therewith to use all existing structures and buildings and the railway siding and maintain the property during the said term without any lawful eviction, interruption, claim or demand by or on the part of the proprietor.
4. The managing contractor shall have the right at its own to build on any portion of the surface land appertaining to the said colliery and belonging to the proprietor such buildings, structures, dhowaraha, creches, pithead bathe, washery, coke ovens, as it may in its discretion think fit with the consent of the proprietor and on the termination of these presents, the proprietor shall be liable to pay the cost of the same, less depreciation allowed by the IT authorities, to the managing contractor. That during the terms hereby created, the business of the said colliery shall be carried on by the managing contractor in the existing name of ” New Bansjora Colliery ” and all costs, charges and expenses for working of the said colliery and for carrying on the said business shall be borne and paid by the managing contractor who shall indefinitely keep indemnified the proprietor and its estate and effects in respect thereof and all coal raised and coke manufactured as aforesaid at the said colliery during the said term shall be treated as the properties of the managing contractor who shall be entitled to sell or otherwise dispose of the same in accordance with the terms and conditions herein contained for its own absolute use and profit.
That during the term hereby created the managing contractor shall be entitled : (i) To realise and appropriate the price of all coal and coke sold and despatched from the said colliery by railway as aforesaid. (ii) To enter into all contracts for sale of all kinds of coal raised or coke manufactured from the said colliery. (iii) To carry out all correspondence in anyway relating to the working of the said colliery and to sign the name of the proprietor or its business name of New Bansjora Colliery in such correspondence. (iv) To make out bills for supply of coal and coke against any party or parties to whom the same might have been supplied and delivered and to sign such bills in the name of the proprietor or its business name. (v) To demand and realise all moneys payable to the proprietor of New Bansjora Colliery from such parties and to grant and sign effectual receipts and discharges for the same. (vi) To institute suits and other proceedings for recovery of price of coal and coke … (torn)… and delivered and for the purposes aforesaid to sign vakalatnama, plaints, petitions and other cause papers. (vii) To enforce (sic) or otherwise negotiate any cheques that may be drawn in favour of the proprietor of New Bansjora Colliery by any such party as aforesaid or otherwise to collect the proceeds of the cheques. (viii) To enter into siding agreements with the Railway Administration and do all other things in connection with obtaining new siding accommodation and/or having additional loading accommodation.
9. That notwithstanding anything contained herein authorising the managing contractor to sell coal or coke, the managing contractor shall not sell or dispose of any coal or coke otherwise than by despatching the same by Railways except with the express written consent of the proprietor and in the presence of the representatives of the proprietor. 10. The proprietor hereby undertakes to execute in favour of the managing contractor or its nominee or nominees a power of attorney authorising it to exercise all or any of the aforesaid powers and such other power as may be necessary and required for the purpose of working, managing and carrying on the business of the colliery in the manner herein : provided always that the managing contractor shall and hereby agree to indemnify and keep indemnified the proprietor from and against all losses, damages and expenses of suits, action, proceedings that may be occasioned or suffered by the proprietor on account of any default on the part of the managing contractor in respect of working and management of the said colliery or in the exercise of any of the powers conferred or to be conferred on it, its nominee or nominees by the proprietor by these presents and/or the power of attorney hereinbefore mentioned.
12. During the term hereby created, the managing contractor shall have full authority to appoint such managers, clerks, workmen and other employees for working the said colliery on such terms and for such period as it thinks fit but not exceeding the said term hereby created including the period of renewal, if any, granted and at its discretion to discharge and dismiss any such persons so to be employed as aforesaid and to appoint other or others in his or their place or stead. That the managing contractor shall keep and maintain proper books and registers showing raisings and despatches of coal and coke from the colliery. Such books and registers shall be open to the inspection of the proprietor or its authorised agent at any time during usual business hours after giving 7 days’ notice to the managing contractor. The managing contractor shall prepare monthly returns of the coal raised and coke manufactured and despatched from the said colliery and shall send a copy of the same to the proprietor by registered post within succeeding ……. That, in consideration of the premises, the managing contractor shall, during the subsistence of these presents, pay to the proprietor in the manner hereinafter provided as and by way of guaranteed income or profit from the said colliery, the following amounts: (a) Rupee one and annas eight per ton of coal raised except such coal as is used for manufacture of soft coke and hard coke. (b) Rupees two and annas four per ton of soft coke manufactured. (c) Rupees three per ton of hard coke manufactured. Provided always that the aforesaid payment of guaranteed income or profit at the rates mentioned above is subject to a minimum of Rs. 18,000 (rupees eighteen thousand) only per annum, that is to say, in case the guaranteed income or profit on the basis of raisings of coal and coke falls short of Rs. 18,000 (rupees eighteen thousand) only, in any particular year or years, the managing contractor shall be bound to pay to the proprietor the fixed sum of Rs. 18,000 only. That the said sum of Rs. 18,000 will be payable in three instalments of Rs. 5,000 (rupees five thousand) each in the months of April, July and October of the particular year and the balance by the month of January of the succeeding year.
In accordance with cl. 10, the proprietor also executed a general power of attorney in favour of the managing contractor authorising it to exercise all such powers as may be necessary and required for th purpose of working, managing and carrying on the business of the colliery.
8.Now, what admittedly emerges from the aforequoted terms of the deed and deserves to be saliently put in the forefront is, first, the fact that the colliery in question was not even a working one and was undisputedly lying closed since long. There was thus no existing or continuing business of the colliery as such and the burden of applying for the opening of the said colliery and securing the requisite permission to proceed with the business of raising coal therefrom was at the outset laid on the shoulders of the managing contractor. Equally undisputed is the fact that no machinery or equipment worth the name belonging to the proprietor was on the premises and this was also to be brought and installed by the managing contractor himself. Equally significant was the term that irrespective of the profit or loss accruing to the managing contractor, he was obliged to pay a minimum guaranteed amount of Rs. 18,000 per annum to the proprietor. Once the permission for reopening was obtained, this payment was unrelated to the fact whether the managing contractor raised a single ton of coal from the colliery or otherwise. The additional royalty on the raising of coal was then related to its tonnage and the quality of coal manufactured at the differential rates of Rs. 1.50 per ton of coal raised, Rs. 2.25 per ton of soft coal manufactured and Rs. 3 per ton of hard coal manufactured. The practical and the end result of the deed, therefore, was that there was neither any sharing of the profits nor of the loss betwixt the proprietor of the colliery and the managing contractor to which it had been leased for a fixed term of ten years. Whether the managing contractor ran into a loss of a crore of rupees for the period or made a profit of rupees five crores was irrelevant to the bare minimum guarantee of Rs. 18,000 payable in any event and above all it was related to the quantum of coal raised and manufactured and not to the profit or loss from the sale thereof. It may be highlighted that in the vagaries of business and in the fluctuating prices of a commodity like coal, the colliery may sometimes run into a bigger loss (the working expenses remaining constant or being enhanced) by raising a larger quantum of coal whilst the proprietor would be entitled in the inverse ratio to claim a higher quantum of royalty on the basis of raised tonnage irrespective of the actual financial loss to the managing contractor. To crown it all, cl. 7 in terms stated that the business of the said colliery shall be carried on by the managing contractor. The existing name of New Bansjora Colliery was preserved and all costs, charges and expenses in the working of the said colliery and for carrying on the said business shall be borne and paid by the managing contractor. Further, the managing contractor was to keep the proprietor indemnified in respect of the coal raised and manufactured in the colliery during the term of the lease and the managing contractor was at full liberty to sell or otherwise dispose of the coal raised or manufactured in the colliery without let or hindrance. The other terms of the contract would leave no manner of doubt that the actual carrying on of the business of the colliery after the same was got reopened was done by the managing contractor who was entitled to realise the price of the products raised, to enter into all contracts for their sale, to carry on correspondence, to make bills, to institute suits for recovery of amounts due, to enter into siding agreements with the Railway administration and to employ labour and personnel for its working without let or hindrance by the proprietor.
It is against the aforesaid backdrop of the salient terms of the contract betwixt the proprietor and the managing contractor that the crucial tests of statutory provisions and principles have to be applied to determine whether it was the proprietor who was carrying on the business of running the colliery or it was the managing contractor who was, in fact, doing so. The terms of the deed have thus to be put into the crucible of the statutory provisions of s. 28(i) of the Act employing the words “any business or profession which was carried on by the assessee ” and the legal principles applicable.
9.Inevitably, one must now turn first to the language of the statute and equally to the spirit of the phraseology employed therein. The relevant parts of ss. 14, 28 and 56 of the Act read as under : “14. Heads of incomeâSave as otherwise provided by this Act, all income shall, for the purposes of charge of income- tax and computation of total income, be classified under the following heads of income:-A. Salaries. B. Interest on securities. C. Income from house property. D. Profits and gains of business or profession. E. Capital gains. F. Income from other sources. ” 28. Profits and gains of business or profession.âThe following income shall be chargeable to income- tax under the head âProfits and gains of business or profession’,â (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year.” “56. Income from other sources.â(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head âIncome from other sources’, if it is not chargeable to income-tax under any of the heads specified in s. 14, items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-s. (1), the following incomes shall be chargeable to income-tax under the head âIncome from other sources ‘, namely: (i) dividends ; (ia) income referred to in sub-cl. (viii) of cl. (24) of s. 2; (ib) income referred to in sub-cl. (ix) of cl. (24) of s. 2 ; (ii) income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head â Profits and gains of business or profession ‘ ; (iii) where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head ‘Profits and gains of business or profession’.” (Emphasis italicised in Print,supplied) Perhaps at this very stage, it may be pointedly recalled (in order to appreciate the earlier binding precedent) that the earlier provisions of ss. 10 and 12 of the Indian IT Act, 1922 (” the 1922 Act”), though not in pari materia literally, were nevertheless the closely corresponding sections of the aforequoted provisions and the principles laid down under the said sections by the earlier precedents of the final Court and the High Court would be equally attracted in the present case.
10.Mr. B. P. Rajgarhia, learned senior standing counsel for the Revenue, forcefully pointed out the language of s. 28(i), namely, ” profits and gains of any business which was carried on by the assessee “. Herein, he rightly highlighted two basic aspects, namely, in order to carry on the business, one must have the control, even if not all- pervasive, yet the ultimate power to direct the working and conduct of such a business. Unless such control or authority to direct is manifest, a person cannot be said to be carrying on such a business. The other thing rightly highlighted is that both the statute and the concept of business in the commercial sense inevitably imply a participation or sharing of the profits and, if not otherwise provided for, the losses of such business as well. By way of analogy, our attention was drawn to s. 4 of the Indian Partnership Act, 1932, which defines partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Sec. 13 of the said Act provides that subject to contract between the partners, the partners are entitled to share equally in the profits earned and shall contribute equally to the losses sustained by the firm. Counsel contended that the core issue of carrying on a business is either an appropriation or sharing of the profits or gains of a business and unless expressly contracted otherwise to equally divide the losses in the same proportion if they are incurred. With plausibility, it was contended that where either of these two crucial tests, namely, the control and direction of running the business and the appropriation or sharing of the profits or losses thereof is absent, it may well be said that the persons are not carrying on a business. In any case, where both tests are lacking, namely, where there is neither control over the actual conduct of the day-to-day business nor any direct nexus with the profits or losses of a business, there can be no question of a business or profession carried on by the assessee in terms of s. 28 and the case, therefore, must fall within the ambit of s. 56 as income from other sources.
11.The submission of learned counsel appears to me both impeccable and acceptable. As their Lordships of the Supreme Court have repeatedly observed in this context, the issue has to be decided on ordinary common sense principles. The plain dictionary meaning of the word ” business ” relevant in this context is given in the Chambers 20th Century Dictionary as (at p. 175) : “trade, profession, or occupation; commercial activity ; a commercial or industrial concern”; and again in the New Oxford Illustrated Dictionary as: ” habitual occupation, profession, trade; commercial transactions ; commercial house, firm.” It is thus somewhat plain that the word ” business ” in this context implies commercial transactions with a view to making profit and gain therefrom. Therefore, a nexus with the profit of the commercial activity, to my mind, is an essential ingredient of a business. What has then to be borne in mind is that s. 28 does not use the word ” business ” in isolation but in express terms talks of profits and gains from such a business which has been carried on by the assessee. Therefore, carrying on a business connotes some substantial, essential, systematic and organised activity with the object of making gain or profit therefrom, with the inevitable control and direction of such activity or business. Consequently, the two faces of the coin of carrying on a business imply a control or direction of business activity with a direct or indirect nexus with the profits or losses therefrom, of course, subject to any express terms of the contract. In the converse, it necessarily follows that if there is neither control nor direction of the activity of a business nor a direct nexus with its gain or profit, then a person or an assessee cannot possibly be said to have carried on such a business.
12.Perhaps, it is somewhat unnecessary to overelaborate this aspect because it appears to me well borne out by binding and unbroken precedent of the final Court itself. Way back in Narain Swadeshi Wvg. Mills vs. CEPT (1954) 26 ITR 765 (SC), the Constitution Bench had observed: ” The word âbusiness’ connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. ” The aforesaid view was reiterated again by their Lordships in CIT vs. A. Dharma Reddy (1969) 73 ITR 751 (SC) in the following terms :
” The word â business ‘ has been defined in s. 2(4) of the Act as including any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. These words are of wide import, the underlying idea being of continuous exercise of an activity. As pointed out by S. R. Das J. (as he then was) in Narain Swadeshi Weaving Mills vs. CEPT (1954) 26 ITR 765 (SC), the word ‘business ‘ connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. The systematic or organised course of activity of the assessee, in the present case, consisted of dealings or taking of contracts in bidi leaves. ” The commercial object of gain or profit of business was then highlighted by their Lordships of the Supreme Court in the following words in CIT vs. Lahore Electric Supply Co. Ltd. (1966) 60 ITR 1,: “The question whether the company was carrying on business arises only because, if it was, it would be entitled under s. 10 to deductions from its business income in regard to certain expenses incurred by it for the purpose of that business. Business as contemplated by that section is an activity capable of producing a profit which can be taxed…” (Emphasis,italicised in print, supplied) It would be wasteful to multiply authorities since it is undisputed that the aforequoted binding views of their Lordships have not thereafter been deviated from and, in fact, have been reiterated times out of number.
13.Therefore, to my mind, the core of the matter on the binding Supreme Court judgments in this context is that the word ” business ” implies ” some real, substantial and systematic or organised course of activity or conduct with a set purpose “. However, where, in terms of s. 28, such business must be carried on by the assessee not in the abstract but at any time during the previous assessment year for profits and gains thereof, then what has been said by their Lordships above would become applicable even with greater rigour. The issue may perhaps be also examined from a different yet refreshing angle. Another test which would be relevant, if not crucial, in this context is the position (as in the present case) of the proprietor vis-a-vis the managing contractor which carries on the business of the colliery for the fixed term lease or its renewal thereafter. It would seem somewhat axiomatic that both the proprietor and the managing contractor cannot be said to be carrying on the identical business of the said colliery for the relevant assessing years. The terms of the agreement leave no manner of doubt, that it is the managing contractor who carries on the real, substantial, systematic and organised activity of working the colliery. Assuming, as would not be unusual, that herein both the proprietor and the managing contractor are income-tax assessees, the issue would naturally arise as to which one of them is carrying on the business of the colliery and making profits and gains therefrom during the previous assessment years. Obviously, both the proprietor and the managing contractor would not come within the ambit of s. 28 and plainly enough on the litmus test laid down by their Lordships of the Supreme Court, it is only the managing contractor who would come within the label of carrying on the business of the colliery and the proprietor having only a fixed term guaranteed rental per year and royalty on the quantum of coal raised and manufactured irrespective of the profits or gains of the colliery business cannot possibly be said to be carrying on the said business. Perhaps, the second thing which deserves repetition is that if the proprietor was not appropriating or sharing the profits of the business nor was concerned with the losses thereof, then it appears somewhat illogical for me to hold that such a proprietor was nevertheless actively carrying on the business of the colliery.
14.I would wish to refrain from overelaborating the matter on principle because I am firmly inclined to the view that now the issue is governed and squarely concluded on all fours by the watershed case of New Savan Sugar & Gur Refining Co. Ltd. vs. CIT (1969) 74 ITR 7 (SC). However, before one examines in depth the facts and the clear ratio of that judgment, it seems apt to clear the cobwebs created by a misreading or misapplication of the ratio of the earlier judgment of their Lordships in CEPT vs. Shri Lakshmi Silk. Mills Ltd. (1951) 20 ITR 451 (SC). It appears to me that a welter of confusion has been created by a somewhat misapplication of the ratio and the observations in the said case. Therein, during the period of the Second World War (January 1, 1943, to December 31, 1943), the assessee, Shri Lakshmi Silk Mills Ltd., found that a part of its mill, namely, its dyeing plant, had become redundant for its business of dyeing silk because of non-availability of silk yarn. Consequently, for a temporary and trifling period of five months, the assessee-mills let out the said plant for the dyeing of jute as it could not be advantageously used by itself and had become, for that limited period, redundant to the company’s business of dyeing and manufacture of silk. On these facts, their Lordships observed as under : ” We are, therefore, of the opinion that it was a part of the normal activities of the assessee’s business to earn money by making use of its machinery by either 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. ” (Emphasis italicised in print, supplied)
15.To my mind, the above observations cannot even remotely be a warrant for the proposition that leasing or renting out the whole business for a fixed period of ten years with renewal terms would still make the proprietor or the lessor a person carrying on the business for profit or gain for the previous assessment year. There is, however, no gainsaying the fact that the observations in Shri Lakshmi Silk Mills Ltd.’s case (1951) 20 ITR 451 (SC) were misconstrued in some jurisdictions till the matter was finally set at rest by the authoritative interpretation of its ratio in New Savan Sugar & Gur Refining Co. Ltd.’s case (1969) 74 ITR 7 (SC) later. However, it is worth recalling that even earlier in Narain Swadeshi Wvg. Mills’ case (supra) , the Constitution Bench had distinguished and explained the ratio of Shri Lakshmi Silk Mills Ltd.’s case (supra) , as under at: ” The case of CIT vs. Shri Lakshmi Silk Mills Ltd. (1951) 20 ITR 451, decided by this Court is clearly distinguishable.
There, the respondent company which was formed for the purpose of manufacturing silk cloth installed a plant for dyeing silk yarn as a part of its business. During the relevant chargeable accounting period, owing to difficulty in obtaining silk yarn on account of the war, it could not make any use of this plant and it remained idle for some time. In August, 1943, the plant was let out to another company on a monthly rent. The question arose whether the income received by the respondent company in the chargeable accounting period by way of rent was income from business and assessable to excess profits tax. It should be noted that in that case the respondent company was continuing its business of manufacturing silk cloth. Only a part of its business, namely, that of dyeing silk yarn, had to be temporarily stopped owing to the difficulty in obtaining silk yarn on account of the war. In such a situation, this Court held that that part of the assets did not cease to be commercial assets of that business since it was temporarily put to different use or let out to another and accordingly the income from the assets would be profits of the business irrespective of the manner in which that asset was exploited by the company. This Court clearly indicated that no general principle could be laid down which would be applicable to all cases and that each case must be decided on its own circumstances according to ordinary common sense principles. ” (Emphasis italicised in print,supplied)
16.Yet again, in New Savan Sugar & Gur Refining Co. Ltd.’s case (supra) , their Lordships distinguished the case of Shri Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC), in the following terms : “…The material facts of Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC) are that only a 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.
There was also no letting out of the premises of the factory by the assessee. The ratio of the decision in Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC) is, therefore, not applicable to the present case. ” (Emphasis italicised in print,supplied)
17.Now, once the ratio of Shri Lakshmi Silk Mills Ltd.’s case (supra) is correctly understood and, in fact, when it has been authoritatively interpreted later by the final Court itself to be so, there appears to me no manner of doubt that the issue herein is conclusively covered by the ratio in New Savan Sugar & Gur Refining Co. Ltd.’s case (1969) 74 ITR 7 (SC). Therein, the appellant company was carrying on the business of crushing sugarcane and gur refining. The managing agents, for a variety of reasons, advised the acceptance of an offer of the lease of the factory as a running concern. After approval at an extraordinary general meeting, a lease was executed for a period of five years with three options to renew for a similar period on the part of the lessee. The consideration for the lease was a royalty payable on the manufacture of sugar and gur at the rate specified therein subject to a minimum royalty of Rs. 65,000 per annum. The lessee was entitled to use the railway siding during the period of the lease and was responsible for all the running expenses of the factory and excise duty on sugar, etc. On these premises, the question was whether the income which arose to the appellant for the asst. yr. 1955-56 should be assessed under ss. 10 and 12 of the 1922 Act. On behalf of the assessee, the main plank was the contention resting on the observations in the case of Shri Lakshmi Silk Mills Ltd. (supra) . Repelling such a contention anddistinguishing the said case, their Lordships affirmed the High Court’s view that the case fell clearly within s. 12 of the old Act and holding in favour of the Revenue, observed as under : ” Mr. Choudhury referred to cl. 6 which entitled the lessee to use the railway siding during the period of the lease. But the right of use of railway siding by the lessee under this clause cannot in anyway be construed as the exercise of control over the business of the assessee. The provision for minimum royalty of Rs. 65,000 per annum indicates that the assessee had no direct interest in the production of the factory. The cumulative effect of cls. 11, 12, 13 and 14 is that the lessor will have no concern with the production of the factory which is the principal part of the business, previously carried on by the lessor. The provisions in cl. 17 are that the lessors shall keep the demised premises insured to the full value
and to repair and replace the machines which are of capital nature. On a scrutiny of all the clauses of the indenture of lease, our conclusion is that the intention of the assessee was to part with the entire machinery of the factory and the premises with the obvious purpose of earning rental income. It was not the intention of the assessee to treat the factory and machinery, etc., as a commercial concern during the subsistence of the lease. The primary condition for the application of s. 10 of the Act is that the tax is payable by an assessee under the head ‘Profits and gains of business’ in respect of business carried on by him. When an assessee does not carry on any business at all, s. 10 cannot be applicable and the income that he receives cannot bear the character of profits of business. As we have already shown, there is no direct nexus between the income of the assessee and the production of the factory.
The royalty payable to the assessee was not paid under cl.7 of the indenture of lease for the production in the factory. The production was only a measure of the royalty to be paid and, in any event, the measure of payment had nothing to do with the character of the payment as a receipt from business or from other sources. It follows that, in the circumstances of this case, the income of the assessee cannot be characterised as income from the activity of the assessee carrying on any business. The High Court was, therefore, right in holding that the income of the assessee was liable to be assessed under s. 12 and not under s. 10 of the Act. ” (Emphasis,italicised in print, supplied) To my mind, the aforesaid observations, therefore, cover and conclude identical and similar cases of fixed long term leases (with option to renew or otherwise) of a whole business which is to be carried on by the lessee during the said term and where there is no direct nexus between the income of the lessor and the production of the leased factory, colliery or any other business.
18.The aforesaid view has been taken and consistently adhered to within this jurisdiction barring the case of S. K. Sahana & Sons Ltd. (supra) . A Division Bench of this Court presided over by Untwalia C.J. in Khas Benedih Colliery’s case (supra) , first rightly observed that the use of the phraseology in the terms of the contract cannot in anyway be conclusive and what one has to look for is the substance and not the form thereof and, secondly, the mere use of the words ” principal ” and ” agent ” employed in an agreement would not necessarily mean that the principal was carrying on the business through his agent, if the basic elements of control and carrying on the business and sharing of the profits and losses were absent. The Division Bench further categorically held in an almost identical situation that the colliery having been let out on a fixed income (including rates of royalty on the raising and manufacture of coal), such income would become income from other sources and not from business.
Mr. Rajgarhia, learned counsel for the Revenue, rightly contended that the present case was on a much stronger footing than the foregoing one. Again in CIT vs. Selected Jharia Colliery Co. (P.) Ltd 1975 CTR (Pat)98:(1980) 125 ITR 670(Pat) 193, a Division Bench of this Court in the context of a colliery, relying on New Savan Sugar & Gur Refining Co. Ltd.’s case (supra) , and distinguishing the case of Shri Lakshmi Silk Mills Ltd. (supra) , held that as there was no direct nexus between the income of the assessee and the production of the colliery because of a fixed term royalty on coal raised from the colliery and manufactured and despatched therefrom, such income did not constitute business income and the assessee was not entitled to claim deduction on that basis. Yet again, in the similar context of a colliery, a Division Bench of this Court presided over by my learned brother, Uday Sinha J., in Kuya & Khas Kuya Colliery Co.’s case (supra), has taken an identical view.
19.In the light of the above, it appears to me that both on principle and even more so on the binding precedent of their Lordships in New Savan Sugar & Gur Refining Co. Ltd.’s case (supra) and the consistent view within this jurisdiction thereafter (barring some isolated discordant notes), the issue herein is concluded in favour of the petitioner-Revenue.
20.Mr. Rameshwar Prasad No. 11, learned counsel for the opposite party assessee, when faced with a stonewall of principles and precedents against him, first attempted a finical objection that since for a previous year, the Division Bench had held in S. K. Sahana & Sons Ltd.’s case (supra), that the income fell within s. 28(i) and the said judgment having not been appealed from, the matter had become final and was res judicata between the parties even for the subsequent years. It was contended that even a larger Bench considering the correctness of its ratio cannot go into the issue. To this submission, there is the conclusive answer provided by the Full Bench in CIT vs. Syed Saddique Imam 1978 CTR (Pat) 39 (FB)(1978) 111 ITR 475 (Pat)(FB), wherein, relying upon the long line of Supreme Court decisions, it has been held as under : “Thereafter, the matter went up to the Supreme Court at the instance of the CIT and the Supreme Court held as follows [See (1972) 84 ITR 273]: The fact that in the earlier proceedings the Tribunal took a different view of those deeds is not a conclusive circumstance. The decision of the Tribunal reached during those proceedings does not operate as res judicata. Therefore, the earlier decision in Tax Case No. 10 of 1968 will not operate as res judicata and estop this Court from considering the true import of the transaction, whether the transfer of the house by the husband to the wife in lieu of dower debt was a gift or a sale, every year’s assessment being based on a separate cause of action… “
21.In view of the above, within this jurisdiction, to my mind, the issue stands concluded in favour of the Revenue and it is wasteful to refer to earlier judgments by way of analogy on which learned counsel for the opposite partyassessee had attempted to rely. The submission in this context must necessarily fail.
22.Yet again, Mr. Prasad attempted to go off at a tangent by contending on the basis of Sudhansu Kanta vs. Manindra Nath, AIR 1965 Pat 144, that the very agreement between the parties was wholly void because, according to him, it amounted to a sub-lease or a transfer thereof and r. 37 of the Mineral Concession Rules rendered it void in the absence of consent by the Government. This submission has only to be noticed to be rejected. It is patent that Sudhansu Kanta’s case, (supra), has not the remotest analogy to an income-tax reference and the judgment was rendered in appeal from an original order. In the present context, we are narrowly confined to the question duly referred to us and the statement of facts in the said reference. There is hardly any hint in any of the proceedings in the courts below of any issue of the validity or otherwise of the contract of the managing contractorship.
At no stage whatsoever right from the ITO to the Tribunal was the execution or the validity of the contract assailed by either of the parties and it is not even remotely the function of this Court in this reference under s. 256(1) to deviate from the question on which the opinion of this Court has been sought and to act as if it was a civil appellate Court in a suit on the analogy of Sudhansu Kanta’s case,(supra).
23.Mr. Prasad, learned counsel for the assessee, had then attempted to submit somewhat innocuously that a business may be either carried on by a person himself or through an agent. There can possibly be no quarrel with such a generic proposition. However, the core issue herein is whether on the totality of the terms of the contract, the managing contractor is merely an agent of the proprietor or is it an independent contractor carrying on the business itself whilst the proprietor is merely securing a rental income as a minimum guaranteed payment irrespective of loss or profit in the business and an additional pro rata royalty on the quantum of the coal raised or manufactured. Once it is found that the fact situation is the latter one, no question of principal and agent arises and the mere use of such terminology is in no way conclusive and may, in fact, be misleading.
24.On precedent, the sheet-anchor of Mr. Prasad was yet again the observations in the case of Shri Lakshmi Silk Mills (supra). This has again to be noticed only to be rejected because in the earlier part of the judgment, I have pointed out that their Lordships of the Supreme Court themselves have explained and distinguished Shri Lakshmi Silk Mills Ltd.’s case (supra) in Narain Swadeshi Wvg. Mills’ case (supra) and more pointedly in New Savan Sugar & Gur Refining Co. Ltd.’s case (supra). Once that is so, it is inapt and incongruous on the part of the High Court to hold to the contrary and to read the ratio of Shri Lakshmi Silk Mills Ltd.’s case (supra), contrary to how it has been authoritatively interpreted and thus to override and skirt the considered view in New Savan Sugar & Gur Refining Co. Ltd.’s case (supra) which, to my mind, is directly applicable to and governs the present case and those akin thereto. Mr. Prasad had then attempted to rely on the passing observations of a Division Bench of the Delhi High Court in Addl. CIT vs. Rajindra Flour & Allied Industries (P.) Ltd. (1981) 128 ITR 402(Del). That case, in my view, does not in anyway advance the stand of the opposite party. Therein, the Division Bench, as an issue of fact, merely affirmed the finding of the Tribunal that as a temporary and compelling measure, in order to tide over business difficulty unforeseenly arising from the sudden death of its managing director, his widow had to take over as such in difficult circumstances and to overcome the same she was forced to let out the factory for a period of 5 years. On the expiry of the lease, the flour mill was restored to the assessee and the assessee started working the mill itself after receiving the necessary permission and licence for running the same. One fails to see how any such consideration arises in the context of the present kind in which there is an express fixed time lease with an option to renew and a complete abdication of the control of the business by the proprietor on its own volition irrespective of any compelling circumstances. Indeed, in the said case, the learned Chief Justice at p. 419 himself observed it to be a borderline issue in which the Bench declined to differ from the Tribunal in the following terms : ” Keeping all these circumstances in view, it cannot be said that the inference drawn by the Tribunal is not based on any material. When two views are possible, and this is a case which stands on the borderline, the Court should accept the Tribunal’s view. So, it would follow that we would have to concur with the Tribunal.” The aforementioned case does not in anyway aid or advance the case of the opposite partyassessee.
25.There is, however, no gainsaying the fact that there appears a streak of opinion prior to New Savan Sugar & Gur Refining Co. Ltd.’s case (supra) which now seems to run plainly contrary to its ratio. It is unnecessary to individually distinguish these cases and suffice it to mention that the earlier view of the Punjab & Haryana High Court in Dal Chand & Sons vs. CIT (1968) 69 ITR 247 (P&H) and of the Madras High Court in G. R. Narasimier & Co. vs. CIT (1969) 73 ITR 257(Mad), appears to be now in headlong conflict with the view of their Lordships in New Savan Sugar & Gur Refining Co. Ltd.’s case (supra).
26.However, it appears to me that even subsequent to New Savan Sugar & Gur Refining Co. Ltd.’s case (supra), there is a line of authority in the Calcutta High Court taking the view that if the asset is a commercial one, then, whether business therewith is carried on by the owner himself or it is merely let out or rented to another, it would make little difference and income therefrom would continue to be income from business under s. 28. This line of reasoning is typified by CIT vs. Prem Chand jute Mills Ltd. (1978) 114 ITR 769 (Cal) and CIT vs. Katihar Jute Mills (P.) Ltd. (1979) 116 ITR 781 (Cal). In these two cases, the case of New Savan Sugar & Gur Refining Co. Ltd. (supra) was referred to but with the deepest respect, its true import and ratio seems to have been missed. With deepest deference, I feel compelled to record a dissent from such a line of reasoning after the watershed case of New Savan Sugar & Gur Refining Co. Ltd. (supra). To my mind, the issue herein is not the character of the commercial asset. The salient question under s. 28 is as to who has derived the profit and gain by carrying on the business with that commercial asset during the previous assessment year. In the aforesaid section, carrying on the business or exploitation of the commercial asset, in my view, means such exploitation by the person who actually carries on such business by the employment of such a commercial asset. It cannot be construed as carrying on a business therewith if it is merely let out or rented to another on a rental or with a fixed minimum guaranteed amount or royalty therefrom irrespective of the losses or profits of that business. The view that even a long-term lease of 10 years renewable for the same period is a temporary phase is directly contrary to New Savan Sugar & Gur Refining Co. Ltd.’s case (supra) , where, in fact, the period was only 5 years. It is somewhat plain that with the same commercial asset, two persons cannot be said to be carrying on the business thereof within the meaning of s. 28. If the person to whom the commercial asset has been let out or rented and he, in form and substance, is carrying on the business thereof, then it is that person who must be deemed to be exploiting the commercial asset and carrying on business therewith within the language employed in s. 28. New Savan Sugar & Gur Refining Co. Ltd.’s case (supra) is a clear authority for that proposition. Therein, the leased sugar factory had not lost its character of a commercial asset and was rented out as a going concern which was not dismantled but was obviously so worked by the lessee for the lease term. The intention of the proprietor (lessor) was clearly to continue the sugar factory as a sugar factory, i.e., as a commercial asset. Nevertheless, their Lordships held in no uncertain terms in that case that the proprietors or the owners after letting it out were not carrying on the business of the said sugar factory despite the fact that it continued to be a commercial asset and was exploited as such and there was not the remotest intention of the proprietors to make any change in its nature. With profound respect, the view taken in Prem Chand Jute Mills Ltd.’s case (supra) and Katihar Jute Mills (P.) Ltd.’sâ case (supra) and other judgments following that tenor cannot be reconciled with the authoritative and undeviated ratio of New Savan Sugar & Gur Refining Co. Ltd.’s case (supra). So long as the pole-star rule and ratio of the said case remains intact and undiluted by the final Court, it cannot and should not be whittled down or bypassed by any abstract theory of a commercial asset continuing as such despite the fact that the business thereof is being carried on not by the proprietors or its owners but by an altogether different person, as the lessee thereof, for a long fixed term. Within this jurisdiction, the Calcutta High Court’s view plainly runs counter to the long line of Patna High Court cases which have been referred to above. Perhaps, the reasoning therein is well countered by the following observation in Kuya & Khas Kuya Colliery Co.’s case (supra): ” On the authority of the Supreme Court case in New Savan Sugar & Gur Refining Co. Ltd. (supra) and CEPT vs. Shri Lakshmi Silk Mills Ltd. (supra) , it must be held that letting out of business as a whole is distinct from letting out commercial assets of the firm. If the business as a whole is let out, the income (i.e., the rent) would not be liable to be assessed as income from business…”
27.What has been said above applies equally to the case of CIT vs. Vikram Cotton Mills Ltd. (1977) 106 ITR 829(All), a Division Bench judgment of the Allahabad High Court which again adumbrated the theory of a commercial asset and there being no intention to dismantle or discontinue the business, even though a long-term lease of 10 years with an option for renewal for another 10 years had been executed after letting it out to another concern on a rent of rupees two lakhs per year. It would appear that New Savan Sugar & Gur Refining Co. Ltd.’s case (supra) was not even brought to their Lordships’ notice and finds no reference in the judgment. With deference, it is not possible to subscribe to the view in the aforesaid Allahabad High Court case.
28.Yet again to my mind, the aforesaid judgments of the Calcutta and Allahabad High Courts seem to miss the salient feature of carrying on the business, namely, some nexus or connection with at least the profits or gains of the business or its losses. Where there is no direct nexus either with the profits and gains therefrom irrespective of the fact whether the lessee actually loses heavily in carrying on the same, it is not easy to plump for the proposition that in the absence of such nexus, a person unconcerned with the profits or gains of such a business.
[Citation : 169 ITR 617]