Case: Commissioner of Income Tax Vs. Vikram Cotton Mills Limited

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 Rs.11, 00, 000 the accumulated liabilities of the assessee company amounted to Rs.26, 00, 000. Because of this the assessee company stopped its manufacturing activity from December, 1953. This state of affair continued till 21.5.56 when one of the creditors of the company file d a winding up petition in the High Court. M/s 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 M/s General Fibres Dealers (Pvt.) Ltd., Calcutta on Rs.2, 50,000 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 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. There was nothing on record to indicate that the assessee company was formed to let out its plant and machinery on hire2. 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 lessee3. The assessee company was able to liquidate its liabilities at the end of such period and regain the physical possession of it assets4. 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 extinguishment5. 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 assetsIt 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 incomeThe High Court noted in the Judgment under appeal which incidentally is reported in ITR Vol. 106 (1977) at page 829 that the assessees 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 y ear. 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 pro fits 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 v. Shri Lakshmi Silk Mills Ltd., 20 I.T.R. 45 1. This Court in Commissioner of Income-tax West Bengal v. Calcutta National Bank Ltd., 37 I.T.R. 171 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 v. Shri Lakshmi Silk Mills Ltd., (supra) and Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax, 26 ITR 765 . 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 o f 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 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.

Court's reasoning:
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 assesseeIt 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, i.e. Ordinary prudent businessman or as in England it used to be "man on the top of the platform omnibus.", or "directors arm chair".If on that test a plausible conclusion has been drawn-no objection can be takenOn 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 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 businessIn 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 sustainableIn 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 costsIt 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.