Civil Appeal No 689692 NT of 1975
From the Judgment and order dated 851973 of the Allahabad High Court in Income Tax Reference No 453 of 1971
391 Miss A Subhashini for the Appellant
DD Gupta for the Respondent
The Judgment of the Court was delivered by SABYASACHI MUKHARJI J
These appeals by special leave arise from the judgment and order of the Allahabad High Court at the instance of the revenue
The Income tax Appellate Tribunal Bombay Bench referred the following question of law for the opinion of the Allahabad High Court The question related to the assessment years 1960 6 1 1961 62 1962 63 and 1963 64
Whether on the facts and in the circumstances of the case the income derived by the assessee company by way of lease rent from the letting out of its assets during the years ended 311259 311260 311261 and 311262 is assessable to tax under the head Profits and gains of business  or under the head Income from other sources  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 Rs1100000 the accumulated liabilities of the assessee company amounted to Rs2600000
Because of this the assessee company stopped its manufacturing activity from December 1953
This state of affair continued till 21556 when one of the creditors of the company filed a winding up petition in the High Court
Ms 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 Ms General Fibres Dealers Pvt Ltd Calcutta on Rs250000 per year rent
The lease was for ten years with an option of renewal for another ten years
The intention it was contended 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 assessment years 1957 58 to 195960 was assessed by the Department under Section 10 of the Indian 392 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 found 1
There was nothing on record to indicate that the assessee company was formed to let out its plant and machinery on hire 2
On account of financial crisis the assessee company found it advantageous to let out the machinery for a temporary period of ten years to the lessee
The assessee company was able to liquidate its liabilities at the end of such period and regain the physical possession of it assets
The assessee company was able to persuade its creditors not to make any distress sale of the machinery taken over by the Industrial Finance Corporation with a view to salvage the company from its total extinguishment
At the end of the lease period the assessee company did not dismantle the assets and did not sell away or otherwise dispose of the assets
It appears that the maintenance of the assets by the company meant that the company had intention to restart manufacturing of textiles
The Tribunal inferred that the intention of the company in letting out its assets was to exploit the commercial assets for the purpose of its business
The Income Tax officer was directed to treat the income arising out of the letting out of the assets as business income
The High Court noted in the Judgment under appeal which inci 393 dentally is reported in ITR Vol 106 1977 at page 829 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
It is here that the question arises
If it was business income then the unabsorbed loss of the preceding year could be adjusted against such income
If on the other hand it was not then such income could not be adjusted against the loss of the previous year
The rub of the matter lies there
It is well known that Section 24 of the Indian Income Tax Act 1922 deals with set off and carry forward of losses
Under Sub section IJ where an assessee sustains a loss of profits or gains in any year under any of the head mentioned in Section 6 he shall be entitled to have the amount of the loss set off against his income profits or gains under any other head in that year
Sub section 2 provides that where an assessee suffers loss in any business and the loss cannot be wholly set off under sub section 1 the unabsorbed loss shall be carried forward to the succeeding year and shall be set off against the income from the same business
Before the loss could be carried forward it was necessary that the income against which the loss has to be set off should be income from any business emphasis supplied
It was submitted before the High Court on behalf of the assessee that the plant and machinery of the factory were commercial assets and any income from the letting out of such an asset would be the business income
In support reliance was placed upon several decisions of this Court
One among them is the decision in the case of Commissioner of Excess Profits Tax Bombay City vs Shri Lakshmi Silk Mills Ltd 1
This Court in Commissioner of Income tax West Bengal vs Calcutta National Bank Ltd dealing with excess profit tax case explained that
the concept of profit and business was little wider under Excess Profits Tax Act of 1940
The High Court relied on the several decisions namely the decision in the case of Commissioner of Excess Profits Tax Bombay City vs Shri Lakshmi Silk Mills Ltd supra and Narain Swadeshi Weaving Mills vs Commissioner of Excess Profits Tax In view of the above decisions the High Court held that the income derived by the assessee company by way of lease rent from the letting out of its assets during the years ended 31st December 1959 31st December 1960 31st December 1961 and 31st December 1962
is assessable to tax under the head profits and gains of business
Being aggrieved by the aforesaid decision revenue has come up 394 in appeal before this Court by Leave under Article 136 of the Constitution
Whether a particular income received by the assessee as a result of activities carried on by the assessee is business income or rental income depends upon the manner of the exploitation of the assets of the assessee
It only varies from facts and circumstances of each case
This question was discussed in detail by this Court in Commissioner of Excess Profits Tax Bombay City vs Shri lakshmi Silk Mills Ltd supra where this Court found that if a commercial asset was not capable of being used as such then its being let out to others did not result in an income which was the income of the business but it could not be said that an asset which was acquired and used for the purpose of the business ceased to be a commercial asset of that business as soon as it was temporarily put out of use or let out to another person for use in his business or trade
The yield of income by a commercial asset was the profit of the business irrespective of the manner in which that asset was exploited by the owner of the business
He was entitled to exploit it to the best advantage and he might do so either by using it himself personally or by letting it out to somebody else
The view that in order to constitute business income the commercial asset must at the time it was let out be in a condition to be used as commercial asset by the assessee himself was not correct
In that case the assessee company was a manufacturer of silk cloth and as a part of its business it installed a plant for dyeing silk yarn
During the chargeable accounting period Ist January 1943 to 31st December 1943 owing to difficulty in obtaining silk yarn on account of the war it could not make use of this plant and it remained idle for some time
In August 7 1943 it was let out to a person on a monthly rent
The question was whether such sum representing the rent for five months realised by the assessee was chargeable to excess profits tax as profits of business or was income from other sources and was therefore not chargeable to excess profits tax
It was held by this Court 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 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 that the dyeing plant had not ceased to be a commercial asset of the business and the sum representing the rent for five months received from the lessee by the assessee was therefore income from business and was chargeable to excess profits tax
As mentioned hereinbefore the question arose in the context of Excess Profit Tax Act the consequence will be the same in the case of Income Tax Act
This Court observed again that the yield of income by a commercial asset irrespective of the manner in which the assets VINEET 395 are exploited by the owner of the business would be income from business
It was emphasised that the assessee was entitled to exploit it to the best advantage and he might do so either by using it himself personally or by letting it out to somebody else
This Court gave an example
For instance in a manufacturing concern use of its plant and machinery could advantageously be made owing to the paucity of raw materials only for six hours in a working day and in order to get the best yield out of it another person who has got the requisite raw materials is allowed to use it as a licensee on payment of certain consideration for three hours
The question was posed could it be said in such a situation with any justification that the amount realised from the licensee was not a part of the business income of the licensor
The Court noted that in that case the company was incorporated purely as a manufacturing concern with the object of making profit
It had installed plant and machinery for the purpose of its business and it was part of it if at any time it found that any part of its plant for the time being could not be advantageously employed for earning profit by the company itself to earn profit by leasing it to somebody else
In such circumstances it would be improper to refuse it to treat it as such being the advantage of business income
This Court noted the observations of the Court of Appeal in Inland Revenue Commissioner vs Broadway Car Co Ltd In that case the company had carried on the business of motor car agents and repairers on land held on lease from 1935 to 1956 at an annual rent of 750
By 1940 the company s business had dwindled under war conditions to such an extent that no more than one third of the land was required
In those circumstances the remainder was sublet for fourteen years at an annual rent of 1150
The General Commissioner of Income Tax decided that the difference of 1400 between the outgoing of 1750 for the land retained and the incoming of 1150 for the land disposed of was income received from an investment and business not being one within the special categories mentioned in the Finance Act 1939 that 1400 was not taxable
Lord Scott J held that the word investment  must be construed in the ordinary popular sense of the word as used by business men and not as a term of art to say that the Commissioners had erred in law in coming to the conclusion that the transaction resulted in an investment
Lord Scott J emphasised on the point that after the business of the company had dwindled it partitioned part of the land from the rest and sublet it by installing a heating apparatus for the sublessee
It was found that war conditions had reduced the company s business to very small proportions and they cut their LOSS by going out of business in respect of the major part of their land and put it out of their power for fourteen years to resume business there
In such a 396 situation it could not be business any more
That was a peculiar circumstance when the assessee had a desire to part with that type of business
Therefore whether a particular income is from business or from investment must be decided according to the general commonsense view of those who deal with those matters in the particular circumstances and conduct of the parties concerned
Has the assessee evidenced any intention to switch over from exploitation of assets by itself and used the asset as a rented one This Court in the aforesaid decision found that it was a part of the normal activities of the assessee s business to earn money by making use of his machinery by either employing it in his 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
The High Court in that case was in error therefore in holding that the dyeing plant had ceased to be a commercial asset of the assessee and the income earned by it and received from Ms Parakh  Co was chargeable to excess profits tax
This Court had again occasion to examine this question in Narain Swadeshi Weaving Mills vs Commissioner of Excess Profits Tax That was a case under Excess Profits Tax Act 1940
It was observed by this Court that before the Excess Profits Tax officer could embark upon an enquiry as to whether a transaction was effected for the avoidance or reduction of liability to excess profits tax within the meaning of Section 10A of the Excess Profits Tax Act 1940 and to make such adjustments as he considered appropriate under that section there must be proof that the assessee was during the chargeable accounting period carrying on business of kind referred to in Section 5 of the Act
There the assessee firm was carrying on a manufacturing business consisting of three partners N and his two sons R and G In April 1940 a public limited company was incorporated with the object of taking over the business from the assessee firm
The Company was director controlled and the directors were N his three sons R and S and a brother in law of G the company purchased only the buildings and leasehold rights from the assessee firm but took over from it on lease at an annual rent the plant and machinery
The assessee firm did not thereafter manufacture anything and it had accordingly no further trading or commercial activity
In July 1940 the company executed a managing agency agreement in favour of U  Co consisting of R and as partners
In January 1941 the company appointed as its selling agent R  Co consisting of R and S as partners
In April 1941 the shares of the partners in the assessee firm were adjusted so as to 397 equalise as far as possible the share of N with the shares which his sons got in the several firms
All the three firms were registered under Section 26A of the Indian Income Tax Act 1922
The question was whether the Excess Profits Tax Authorities were justified in amalgamating the income of U  Co and R  Co with the income of the assessee firm under the provisions of Section 10A of the Excess Profits Tax Act 1940
It was held that in the facts and circumstances of the case the letting out of the plant and machinery by the assessee firm to the company could not be held to fall within the body of the definition of Business under section 25 and as the assessee firm had therefore no business during the relevant period to which the Act applied Section 10a could not be invoked by the Excess Profits Tax Authorities
It was further held that the application of Section 10a with a view to amalgamating the income of the firms of U  Co and R  Co with the income of the assessee firm was not valid in law
Dealing with this question this Court noted that business as defined under Section 25 of the Excess Profits Tax Act included amongst others any trade commerce or manufacture or any adventure in the nature of trade commerce or manufacture
The first part of this definition of a business in the Excess Profits Tax Act is the same as the definition of a business in Section 24 of the Indian Income Tax Act 1922
Whether a particular activity amounted to any trade commerce or manufacture or any adventure in the nature of trade commerce or manufacture is always a difficult question to answer
The Judicial Committee noted in the case of Commissioner of Income tax vs Shaw Wallace  Co Cal 1343 that the words used in the definition are no doubt wide but underlying each of them is the fundamental idea of the continuous exercise of an activity emphasis supplied
It was also emphasised by this Court that the word business indicated some real substantial and systematic or organised course of activity or conduct with a set purpose
In that case this Court pointed out the difference between Excess Profits Tax Act and the Indian Income Tax Act 1922
So far as the question before us is concerned this difference is not material
Shri Manchanda learned counsel for the revenue draw our attention to Commissioner of Income tax West Bengal vs Calcutta National Bank Ltd This Court reiterated that the term business is a word of very wide though by no means determinate scope
There the assessee which was a banking company in a large way of business owned a six storeyed building where its offices were located on the ground floor and a part of the sixth floor while the rest 398 of the building was let out to tenants
The question was whether the income realised by the assessee by way of rent for the portion of the building let out was liable to excess profits tax and could be included in the profits of the business under rule 44 of the First Schedule to the Excess Profits Tax Act 1940
It was held that the realisation of rental income by the assessee was in the course of its business in prosecution of one of its objects in the memorandum
It depends in the facts and circumstances of each case
In New Savan Sugar and Gur Refining Co Ltd vs Commissioner of Income Tax Calcutta  this Court was dealing with a case where the appellant company was carrying on the business of crushing sugarcane and gur refining
Its managing agents wrote a letter addressed to its shareholders referring to the alarming increase of Government interference in the affairs of this sugar industry in Bihar and the increase of wages of the workers the levy of a cess and deterioration in cane crops and advising the acceptance of an offer of the lease of the company as a running concern
Thereafter examination it was found that the cumulative effect of different clauses of the deed suggested that the assessee would have no concern with the production of the company
It was therefore held that the terms of the lease deed that the intention of the appellant was to part with the entire 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 a commercial asset during the subsistence of the lease
In each case the intention has to be gathered as to whether the commercial asset was intended to be exploited by the assessee or whether it was intended to be used by letting it out for a temporary period
It depends upon the facts and circumstances of each case
The circumstances of the instance case were as follows as appears from the statement of the case The assessee company incurred losses in its business of manufacture of textiles from the year 1949
On account of heavy losses its manufacturing activities were stopped from December 1953
By 1956 colossal loss had accumulated
Its liabilities had amounted to Rs26 lakhs as against the capital of Rs11 lakhs
A winding up petition was filed in the Allahabad High Court by the creditors
Ms Jawala Prasad Radha Krishan in February 1954
The Industrial Finance Corporation was one of the creditors of the company and the company had a liability of Rs125 lakhs to 399 that undertaking secured by the fixed assets in terms of a mortgage deed dated 19121950
The Punjab National Bank had advanced a loan of Rs65 lakhs to the company by movable assets of the company such as cotton cloth and yarn
The Industrial Finance Corporation had taken physical possession of the immovable properties of the company on 12th July 1954 on the company s failure to pay off its debts to the IFC
The High Court thereafter approved a scheme by an order dated 2151956 whereby the assets and the entire business of the assessee company were let out to Ms General Fibres Dealers Pvt Ltd Calcutta at a least rent of Rs250000 per year
The management of the assessee company was transferred to a Board of Trustees appointed by the High Court pursuant to the scheme referred to above
According to the terms of the lease dated 771956 with the lessee the General Fibres Dealers Pvt Ltd the assets of the company were let out for an initial period of ten years with a right given to the lessee to exercise the option for a further period of ten years
The assesse company had maintained a skeleton staff thereafter
 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 temporary lease though for 10 or 19 years on renewal years and after the expiry of the period the property reverted back to the assessee
It is pre dominantly 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 ie Ordinary prudent businessman or as in England it used to be man on the top of the platform omnibus or director s arm chair
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 machine 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 rent income
There 400 was a temporary suspension of business for a temporary period for an 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
In the aforesaid view of the matter the High Court was right in the view it took and the appeals must accordingly fail and are dismissed with costs
In the view we have taken in the first matter the special leave petitions Nos
5324 and 5325 of 1978 are also dismissed
But there will be no order as to costs
S L Appeals  Petitions dismissed


Summary:
 A suit filed by the respondent for the specific performance of a C contract entered into between him and the father of the appellant was decreed by the trial court
A Single Judge of the High Court affirmed the decree
During the hearing of the Letters Patent Appeal filed by the appellant a settlement was arrived at between the parties and statements were made by them to that effect before the court
The case was adjourned to the date on which payment in terms of the compromise was to be made
Though the statements formed part of the proceedings the compromise was not reduced in writing and signed by parties
Taking advantage of this the respondent tried to resile from the compromise
When the case came up on the adjourned date the Division Bench directed that since the respondent was not prepared to abide by the proposed compromise the appeal would be decided on merits and that the case should be placed before another Bench
ln the appeal by special leave against the aforesaid decision it was contended on behalf of the appellant that the requirements of order XXIII Rule 3 Civil Procedure Code were mandatory that the claim in the suit for specific performance having been settled by a lawful compromise within the meaning of Rule 3 the High Court was not justified in directing that the appeal be placed before another Bench for decision on merits that the word in writing and signed by the parties qualified the words any lawful agreement or compromise appearing in the first part and therefore where the parties made a statement before the Court that the dispute between them had been settled on certain terms and the settlement so made formed part of the proceedings of the Court there was no legal requirement to have an agreement in writing embodying the terms of the compromise
402 Dismissing the appeal  HELD The whole object of the amendment of Rule 3 of the Civil Procedure Code 1908 by adding the words in writing and signed by the parties is to prevent false and frivolous pleas that a suit has been adjusted wholly or in part by any lawful agreement or compromise with a view to protract or delay the proceedings in the suit408C D Under Rule 3 as it now stands when a claim in suit has been adjusted wholly or in part by any lawful agreement or compromise the compromise must be in writing and signed by the parties and there must be a completed agreement between them
To constitute an adjustment the agreement or compromise must itself be capable of being embodied in a decree
When the parties enter into a compromise during the hearing of a suit or appeal there is no reason why the requirement that the compromise should be reduced in writing in the from of the an instrument signed by the parties to reduce the terms into writing
408D F The present case clearly does not come within the ambit of the second part of Order XXIII Rule 3 of the Code
Under the terms of the proposed compromise the appellant was required to pay Rs225000 by a bank draft on March 17 1987 but before the due date the respondent resiled form the promised compromise saying that it was detrimental to his interest
That being so that appellant could only fall back on the first part
But in the absence of an agreement in writing the High Court had no other alternative but to direct that the appeal be listed for hearing on merits
409C D Manohar Lal  Anr
vs Surjan Singh  Anr 1983 Punj
Lj 402 overruled