Case: Commissioner Of Excess Profits Tax,Bombay City Vs. Sri Lakshmi Silk Mills Ltd

not. The suggestion was that freehold land is in the same position, and if you carry on business on part of it whatever you do with the rest by way of licensing or letting cannot be regarded as producing income from investment. That, however, is dead in the teeth of the judgment in the Inland Revenue Commrs. v. Broadway Car Co. Ltd.,(1946) 2 All E. R. 609. The same argument was tried there, but Tucker L. J. said he thought the Desoutters case,(1946) 1 All E. R. 58, had very little to do with it, as there was a great difference between land and a patent, and he did not think the Desoutters case,(1946) 1 All E. R. 58, threw any light on the matter......A patent is quite different from freehold land."13. These observations appositely apply to the case of a company incorporated for the purpose of doing business and earning profit by the process of manufacture. Letting out a part of its machinery in a certain situation in order to make the business advantageous as a whole does not alter the nature of the income. The case of an owner of land letting out his land and carrying on exploitation of part of that land by selling gravel out of it, as at present advised in our opinion, would fall under S. 9, Indian Income-tax Act, as income earned, no matter by whatever method from land, and specifically dealt with by that section. The observations, therefore, made in Iless case, (1947)1 ALL E. R. 798 can have no apposite application to the case of a manufacturing concern letting out a part of its machinery temporarily which it cannot advantageously use itself.14. Mr. Chatterjee also laid stress an the decision of the Court of Appeal inInland Revenue Commrs. v. Broadway Car Co. Ltd.,(1948)2 ALL E. R. 609. In this case the company 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 companys business had dwindled under war conditions to such on 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 ?1,150. The general commissioners at income tax decided that the difference of ?400 between the outgoing of ?750 for the land retained and the incoming of ?1,150 for the land disposed of was "income received from an investment, and the business not being one within the special categories mentioned in the Finance Act, 1939, that ?400 was not taxable. It was held that the word "investment" must be construed in the ordinary, popular sense of the ward as used by business men and not as a term of art having a defined or technical meaning and that it was impossible to say that the commissioners had erred in law in coming to the conclusion that the transaction resulted in an investment. Scott L. J. in delivering his judgment laid emphasis 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 sub lessee. It was found that war conditions had reduced the companys 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 14 years to resume business there. In this situation it was observed that in that case they were dealing with part of the property of the company which had become redundant and was sublet purely to produce income, - a transaction quite apart from the ordinary business activities of the company. It was pointed out that the question whether a particular source of income was income or not must be decided, as it could be according to ordinary commonsense principles.15. The short question to decide in this case is whether on the facts found, it could be said reasonably that the dyeing plant had become redundant for its business as a silk manufacturing concern, simply by the circumstance that for the time being it could not be used by it personally for the purpose of dyeing silk yarn owing to the non availability of yarn. It is difficult to conceive that the company would not have immediately started dyeing yarn as soon as it became available. Instead of dyeing yarn, another person was allowed to dye jute (we are told), the assessee company making income out of its use as a commercial asset. In this situation it is not possible to hold that the income thus earned was not a part of the income of the business and was not earned for the business by its commercial asset or that this commercial asset had become redundant to the companys business of manufacture of silk. The analogy of Broadway Car Co. Ltd.,(1946) 2 ALL E. R. 609, therefore, does not hold good for the decision of the present matter.16. We are, therefore, of the opinion that it was a part of the normal activities of the assessees 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. The High Court, therefore, was in error 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 the lessee Messrs Parakh and Co. was not chargeable to excess profits tax. The result, therefore, is that we hold that the answer returned by the High Court to the question referred to it by the Tribunal was wrong and that the correct answer to the question would be in the affirmative and not in the negative.17.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]8. In our opinion, the contention raised by the learned Attorney General is sound. The High Court was in error in engrafting a proviso on the rule deduced by it from the authorities considered by it, to the effect that a commercial asset of a business concern which yields income must at the time it was let out be in a condition to be used as commercial asset by the assessee himself. We respectfully concur in the opinion of the learned Chief Justice that if the commercial asset is not capable of being used as such, then its being let out to others does not result in an income which is the income of the business, but we cannot accept the view 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 is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business. He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else. Suppose, for instance, in a manufacturing concern the use of its plant and machinery can advantageously be made owing to 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 there requisite raw materials is allowed to use it as a licensee on payment of certain consideration for three hours; can it be said in such a situation with any justification that the amount realized from the licensee is not a part of the business income of the licensor. In this case the company was incorporated purely as a manufacturing concern with the objects of making profit. It installed plant and machinery for the purpose of its business, and it was open to it if at any time it found that any part of its play "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. It is difficult to hold that the income thus earned by the commercial asset is not income from the business of the company that has been solely incorporated for the purpose of doing business and earning profits. There is no material whatever for taking the view that the assessee company was incorporated with any other object than of carrying on business or trade. Owning properties and letting them was not a purpose for which it was formed and that being so, the disputed income cannot be said to fall under any section of the Indian Income-tax Act other thanhowever, are in respectful agreement with the observations of Lord President Strathclyde in Sutherlandv. The Commissioners of Inland Revenue,(1928) 12 Tax. Cas63, that a commercial asset susceptible of being put to a variety of different uses in which gain might be acquired, and whichever of these uses it was put to by the appellant, the profit earned was a user of the asset of the same business. A mere substituted use of the commercial asset does not change or alter the nature of that asset. What ever the commercial asset produces is income of the business of which it is an asset, the process by which the asset makes the income beingargument, in our opinion, though attractive, is fallacious. The analogy between the case of land and of a dyeing plant for the purpose of taxing statutes is inappropriate. The distinction becomes apparent from the following passage which occurs in Tucker L. J. S judgment inIless case,(1947) 1 ALL E. R. 798it was suggested by counsel for the Crown that the case was like the InlandRevenue Commrs. v. Desoutter Bros. Ltd.,(1946) 1 All E. R.58, where it was held that if you make use of a patent in your business and also receive royalties from the use of the patent by others licensed to use it, those royalties cannot be regarded as receipts from an investment. In other words, the door has to be either open or shut. A patent is either an investment or it is not. The suggestion was that freehold land is in the same position, and if you carry on business on part of it whatever you do with the rest by way of licensing or letting cannot be regarded as producing income from investment. That, however, is dead in the teeth of the judgment in the InlandRevenue Commrs. v. Broadway Car Co. Ltd.,(1946) 2 All E. R.We are, therefore, of the opinion that it was a part of the normal activities of the assessees 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. The High Court, therefore, was in error 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 the lessee Messrs Parakh and Co. was not chargeable to excess profits tax. The result, therefore, is that we hold that the answer returned by the High Court to the question referred to it by the Tribunal was wrong and that the correct answer to the question would be in the affirmative and not in the negative.