Case: New Savan Sugar &amp; Gur Refining Co. Ltd Vs. Commissioner Of Income-Tax, Calcutta

2. The appellant (hereinafter referred to as the assessee) was carrying on the business of crushing sugar cane and gur refining. M/s. Andrew Yule and Co. were acting as the managing agents of the assessee. In a letter dated 5th February, 1946 addressed to theshareholders of the assesseethe managing agents referred to the alarming increase of Government interference in the affairs of the sugar industry in Bihar and the increase of wages of the workers, as well as the levy of a cess of Government and deterioration in the cane crops. In view of this state of affairs, the managing agents apprehended a loss and suggested that the companys affairs should be put on a "less discouraging basis" by accepting the offer of a lease of the company as a running concern from the Standard Refinery and Distillery Ltd. At an extraordinary general meeting of theshareholders of the assesseecompany held on 5th March, 1946 it was decided to authorise the directors to enter into a lease with the said Standard Refinery and Distillery Ltd. By an indenture of 15th March, 1948 the lease was executed to come into effect retrospectively from lst June, 1945. The term of the lease was originally for 5 years commencing from lst June, 1945 with an option to the lessee to continue for further five years and thereafter two further options to the lessee, each for five years, on the same terms and conditions, but subject to the payment of higher rates of royalties and so subject to the option on the part of the assessee company to terminate the lease by a resolution of the shareholders of the company to be held before 30th November in any year after the first two years. This option of termination of the lease was not exercised by the assessee company. The consideration of the lease as described in Clause 7 of the indenture was royalty payable on the manufacture of sugar and molasses. The royalty on sugar was to be at the rate of Rs. 75 per hundred maunds of sugar manufactured for the first and second term of five years, at the rate of Rs. 82.50 per hundred maunds of sugar manufactured for the third five year period and at Rs. 90 for the fourth five year period. The royalty on molasses was to be calculated at 3 pies per maund on all molasses sold during each year of the original period or the renewed period of the lease. The computation of the royalty was subject to a minimum payment of Rs. 65,000 per annum.3. For the assessment yearthe relevant accounting year of the assessee ended on 31st May, 1954. In the assessment proceedings forthe assessees main contention was that the lease granted under the indenture of l5th March, 1948 was a lease of a commercial asset and therefore the income arising from the lease should be assessed under Section 10 of theAct and the assessee should be allowed depreciation and development rebate in accordance with Clauseon (2) of Section 10 of thetax Officer assessed the income under Section 12 of the Act as being income under the head "other sources" and held that no additional depreciation or development rebate could be allowed as claimed by the assessee. According to the assessee, the income derived from the lease of the sugar factory was income from business because the factory was leased as a going concern and the rent of the building, machinery, plant and spare parts was fixed at a certain rate per maund of sugar produced, and at a certain rate per maund of molasses sold. On appeal, the Appellate Assistant Commissioner found that it was a simple lease of the building and machinery in a sugar factory, and as such the method of payment based on production could not affect the character and nature of the income derived under the said lease. In further appeal the Appellate Tribunal came to the conclusion that on the facts stated the case fell under Section 12 and not under Section 10 and that since(3) of Section 12 did not include clausesb) of Section 10 (2) the claim of additional depreciation and development rebate could not be allowed. At the instance of the assessee the Appellate Tribunal stated a case to the High Court on the following questions of law under Section 66 (1) of theAct, 1922 (hereinafter referred to as theWhether on the facts and in the circumstances of the case, the income of the assessee company was liable to be assessed under Section 12 of the IndianAct and not under Section 10 of the said Act?(2) Whether on the facts and in the circumstances of the case, additional depreciation and development rebate can be allowed as aHigh Court answered both the questions against the assessee holding that the income was liable to be assessed under Section 12 and that no additional depreciation and development rebate could be allowed.

Court's reasoning:
In order to examine the validity of this argument it is necessary to set out the relevant clauses of the indenture of lease.Clause (1) of the lease provided that the lease was for a term of five years commencing from 1st June, 1945, with an option to continue for a further term of five years and thereafter two further options of five years in each case on the same terms and conditions subject to higher payment of rates of royalties.Clauselessee shall be entitled to run the said sugar factory and all other machinery annexed to the same and use all the tools and implements, buildings and premises, offices, and erections and utensils and all other things which are now in or upon the said premises and which may be added from time to time thereto provided always that the lessees shall not at any time remove the plant and/or machinery, etc., hereby demised or any part thereof from the said premises elsewhere for the purpose of or in connection with the lessees othere lessees shall at the time of taking over possession of the factory from the lessors be entitled free of payment to the goods already manufactured during the current crushing season, i.e., 1945-46 or in the process of manufacture and/or to be hereafter manufactured by the lessees and the lessees shall have absolute discretion to sell and deal with the same in such manner as they think fit ande lessees shall also be entitled to erect, construct and maintain any other machinery as the lessees may think fit and proper. All machinery brought in and erected by the lessees would remain the lessees property and after the termination of the lease the lessees shall be entitled to remove the same provided always that the lessees shall forthwith repair and make good all damage caused to the demised premises by such removal of the lesseese 7 provides for the payment of royalty. The royalty on sugar was to be computed at the rate of Rupees Seventyfive per 100 maunds of sugar manufactured for the first five years as well as next five years then at the rate of Rupees eighty-two and annas eight per l00 maunds of sugar manufactured for the third five years and Rs. 90 for the fourth five years. The royalty on molasses was computed at three pies per maund on all molasses sold during each year of the original lease period and any renewals thereof subject to the payment of a minimum royalty of Rs. 6,500 pers clause provides that the lessee shall in addition to the royalty reserved be responsible for all the running expenses of the factory including salaries and wages and all factory staff and labour and shall pay all sugar excise duty, etc. excepting the ground rents payable to the landlords and taxes on income chargeable to the lessors and shall fully reimburse the lessors in respect of such expenses which have already been incurred by the lessors since the first day of one thousand nine hundred and forty five and property) The lessors will keep the demised premises insured to the full value thereof and shall pay all expenses which will be incurred for insuring the demised premises.(b) The lesson shall pay all expenses of running the lessors company e.g., Directors fees, Audit fees, Ground rents, etc., but not the running expenses of the factory and premises hereby demised and shall also pay for all the expenditure for additions, alterations, breakdown and/or renewals and replacement of capital nature (i.e., debitable to block account) to buildings and machineries, etc. and other similar expenses of a capital nature on the demised premises.It appears from clauses 2 and 5 that the existing machinery which was owned by the lessor could not be removed and that the lessee would be entitled to set up additional machinery without interference from the lessor and that on the termination of the lease the lessee would be entitled to remove the same without causing any damage to the property demised. Clause 3 contemplates that if during the period 1945-46 the lessors sell the commodity manufactured the price thereof should go back to theorder to examine the validity of this argument it is necessary to set out the relevant clauses of the indenture of lease.Clause (1) of the lease provided that the lease was for a term of five years commencing from 1st June, 1945, with an option to continue for a further term of five years and thereafter two further options of five years in each case on the same terms and conditions subject to higher payment of rates of royalties.Clauselessee shall be entitled to run the said sugar factory and all other machinery annexed to the same and use all the tools and implements, buildings and premises, offices, and erections and utensils and all other things which are now in or upon the said premises and which may be added from time to time thereto provided always that the lessees shall not at any time remove the plant and/or machinery, etc., hereby demised or any part thereof from the said premises elsewhere for the purpose of or in connection with the lessees othere lessees shall at the time of taking over possession of the factory from the lessors be entitled free of payment to the goods already manufactured during the current crushing season, i.e., 1945-46 or in the process of manufacture and/or to be hereafter manufactured by the lessees and the lessees shall have absolute discretion to sell and deal with the same in such manner as they think fit ande lessees shall also be entitled to erect, construct and maintain any other machinery as the lessees may think fit and proper. All machinery brought in and erected by the lessees would remain the lessees property and after the termination of the lease the lessees shall be entitled to remove the same provided always that the lessees shall forthwith repair and make good all damage caused to the demised premises by such removal of the lesseese 7 provides for the payment of royalty. The royalty on sugar was to be computed at the rate of Rupees Seventyfive per 100 maunds of sugar manufactured for the first five years as well as next five years then at the rate of Rupees eighty-two and annas eight per l00 maunds of sugar manufactured for the third five years and Rs. 90 for the fourth five years. The royalty on molasses was computed at three pies per maund on all molasses sold during each year of the original lease period and any renewals thereof subject to the payment of a minimum royalty of Rs. 6,500 pers clause provides that the lessee shall in addition to the royalty reserved be responsible for all the running expenses of the factory including salaries and wages and all factory staff and labour and shall pay all sugar excise duty, etc. excepting the ground rents payable to the landlords and taxes on income chargeable to the lessors and shall fully reimburse the lessors in respect of such expenses which have already been incurred by the lessors since the first day of one thousand nine hundred and forty five and property) The lessors will keep the demised premises insured to the full value thereof and shall pay all expenses which will be incurred for insuring the demised premises.(b) The lesson shall pay all expenses of running the lessors company e.g., Directors fees, Audit fees, Ground rents, etc., but not the running expenses of the factory and premises hereby demised and shall also pay for all the expenditure for additions, alterations, breakdown and/or renewals and replacement of capital nature (i.e., debitable to block account) to buildings and machineries, etc. and other similar expenses of a capital nature on the demised premises.It appears from clauses 2 and 5 that the existing machinery which was owned by the lessor could not be removed and that the lessee would be entitled to set up additional machinery without interference from the lessor and that on the termination of the lease the lessee would be entitled to remove the same without causing any damage to the property demised. Clause 3 contemplates that if during the period 1945-46 the lessors sell the commodity manufactured the price thereof should go back to thematerial facts of Lakshmi Silk Mills Ltd., 1951-20 ITR 451   = (AIR 1951 SC 454  ) (supra) 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   = (AIR 1951 SC 454  ) (supra) is therefore not applicable to the presentFor the reasons already expressed our conclusion is that the intention of the assessee was not to treat the factory, etc., as a commercial asset during the subsistence of the lease. In other words, the intention of the assessee was to go out of the business altogether so far as the factory and the machinery was concerned with effect from 1st June, 1945 and the intention was to use the income arising from the royalty in its capacity as the owner of the factory.It follows therefore that the first question was rightly answered by the High Court in favour of the Commissioner ofappears that clause (vi-a) was inserted by Section it of the Taxation Laws (Extension to Merged States and Amendment Act, 1949). Clause (vi-b) was inserted by Section 8 of the Finance Act, 1955 with effect from 1st April, 1955. At the time of making the amendment under the said Acts, no amendment was made to Section 12 (3) of thesaid Lord Brougham, inGwynne v. Burnell, (1840) 7 CL F 572, 696"we depart from the plain and obvious meaning on account of such views (as those pressed in argument on 43 Geo. 3, c. 99) we do not in truth construe the Act, but alter it. We add words to it, or vary the words in which its provisions are couched. We supply a defect which the legislature could easily have supplied, and are making the law, not interpreting it". (Cf. Kamalaranjan Roy v. Secretary of State, 66 Ind App 1 at p. 10 = (AIR 1938 PC 281   at p. 283).Accordingly, we are of opinion that the assessee is not entitled to additional depreciation and development rebate and the second question was rightly answered by the High Court in the negative.