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

2. The respondent (Sri Lakshmi Silk Mills Ltd. is 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 (1-1-1943 to 31-12-1943) owing to difficulty in obtaining silk yarn on account of the war it could make no use of this plant and it remained idle for some time. On 20-8-1943 it was let out to Messrs E. Parakh and Co. on a rent of Rs. 4,001 per month. The Excess Profits Tax Officer by his assessment order dated 11-6-1945 included the sum of Rs. 20,005 realized as rent for five months, in the profits of the business of the respondent and held that excess profits tax was payable on this amount. This order was confirmed on appeal by the Appellate Assistant Commissioner and on further appeal by the Income-tax Tribunal. The Tribunal, however, on being asked referred the following question of law to the High Court for its opinionin the circumstances of the case, the assessees income of Rs. 20,005 is profits from business within the meaning of S. 2 (5), Excess Profits Tax Act and therefore or otherwise liable to pay excess profitsThe High Court answered the question in the negative. This is an appeal by special leave from this decision.4. It was contended on behalf of the Commissioner before the High Court that the dyeing plant was a commercial asset of the assessess business for the purpose of earning profit and if this commercial asset yielded income to him in any particular manner, it was income from the assessees business for the purpose of the Excess Profits Tax Act. It was said that it was immaterial whether a commercial asset yields income by use of the assessee himself or its being used by someone else. This contention was disposed of by the learned Chief Justice in these wordsJoshi seems to be right but with this qualification that the commercial asset Trust be at the time it was let out in a condition to be used as a commercial asset by the assessee. If it has ceased to be a commercial asset, if its use as a commercial asset has been discontinued, then if the assessee lets it out, he is not putting to use something which is a commercial asset at the time.Now, on the facts found by the Tribunal it is clear that when the assessee let out this dyeing plant, it had remained idle for some time. He could not obtain silk yarn on account of the war and therefore it was not possible to make use of it as a commercial asset as far as the assessee himself was concerned and it was only for that reason that he let it out to Messrs E. Parakh and Co. I can understand the principle for which Mr. Joshi is contending that it makes no difference what an assessee does with a commercial asset belonging to him. He may use it as he likes. So long as it yields income it is the income of his business. Various cases have been cited at the Bar and I think that those cases though apparently conflicting are reconcilable if we accept this principle to be the correct principle and apply this ratio as the ratio emerging from these cases and I will state the principle and the ratio again that if an assessee derives income from a commercial asset which is capable at the time of being used as a commercial Asset, then it is income from him business, whether he uses that commercial asset himself or lets it out to somebody else to be used. But if the commercial asset is not capable of being used as such, then its being let out does not result in an income which is the income of the business.Mr. Justice Tendolkar concurred in this view and observed as followsratio of all these cases to my mind is that if there is a commercial asset which is capable of being worked by the assessee himself for the purpose of earning profits and the assessee instead of doing so, either voluntarily allowed someone else to use it on payment of a certain sum or is compelled by law to allow it to be used in such manner, then what he receives is income from business. But if the commercial asset has ceased to be a commercial asset in the hands of the assessee and thereafter he gets what he can out of it by letting it out to be used by other, then the rent he receives is not income from any business that he carries

Reasoning: 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.