Case: Universal Plast Ltd Vs. Commissioner Of Income Tax,Calcutta

2. Civil Appeals No. _________________ of 1999 @ Special Leave Petition (C) Nos. 10912-14 and 10984 of 1986, in which leave is granted, are preferred by the assessee - The Guntur Merchants Cotton Press Company Limited, Guntur - aggrieved by the judgment and order of a Division Bench of the Andhra Pradesh High Court in Case Referred No. 22 of 1979, under Section 256(1) of the Act dated August 9, 1984 (hereinafter referred to as `Guntur Merchants case).3. The points for consideration in these appeals are similar.4. In UPL case, the question of law referred to the Calcutta High Court, at the instance of the revenue, reads :on the facts and in the circumstances of the case, the Tribunal was correct in law that the income received by the assessee by leasing out the factory was business income ?"The following is one of the questions of law referred to the Andhra Pradesh High Court, at the instance of the assessee in Guntur Merchants case :on the facts and in the circumstances of the case, the appellate Tribunal was justified in holding that the letting of godowns at Guntur and Narsaraopet and the letting of the factory with machinery at Narsaraopet and at Guntur did not constitute business of the assessee ?"the Calcutta High Court as well as the Andhra Pradesh High Court answered the said questions in the negative, in favour of the Revenue and against the assessee. The assesses are thus in appeal before us.6. To resolve the controversy in these cases, we refer to the facts in the UPL case.The appellant-assessee set up a factory styled as "UPL Factory" for carrying on the business of manufacturing PVC sheets and allied products. It appears that from the venture the assessee suffered losses for two years. It then entered into an agreement styled as `leave and licence agreement with M/s Leatherite Industries Limited (hereinafter referred to as `the licensee) for a period of 7 years on March 13, 1977. The agreement contains renewal clause giving option to the licensee to renew it for a further period of three years. The licensee was to pay licence fee of Rupees twenty four lakhs and twenty per cent of the net profit of the factory in question with effect from April 1, 1977. For the first three months which fell in the accounting year relevant to the assessment year 1977-78, the assessee received only licence fee of Rupees six lakhs as no profit was earned by the licensee during the said period. That amount was shown by the assessee as part of the business income. The Income Tax Officer did not accept that it was business income and assessed the same as income from other sources. However, the Commissioner of Income Tax (Appeal) accepted the plea of the appellant-assessee that it was its business income and allowed the appeal on April 27, 1985. The Revenue unsuccessfully appealed against the order of the Appellate Authority before the Income Tax appellate Tribunal. On an application filed by the Revenue under Section 256(2) of the Act, the High Court directed the Tribunal to draw up statement of case and refer the aforementioned question to it. On February 6, 1992 the High Court answered the question in the negative, in favour of the Revenue and against the assessee, as noted above.

Court's reasoning:
14. In the light of the above discussion, the propositions may be summarised as followsno precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, lease amount, rents licence fee) received by an assessee from leasing or letting out of assets would fall under the head `Profits and Gains of business or profession;(2) it is mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case including true interpretation of the agreement under which the assets are let out;(3) where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back and restart the same.(4) if only or a few of the business assets are let out temporarily while the assessee is carrying out his other business activities then it is a case of exploiting the business assets otherwise than employing them for his own use for making profit for that business; but if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets.If the Licensee pass a resolution for winding up or are ordered to be wound up (except for the purpose of amalgamation or reconstruction) or if the Licensee shall do or cause to be done or permit or suffer any act or thing whereby the Licensors right in the UPL factory and in the building, plant, machinery and equipment therein may be prejudiced or put in jeopardy, the Licensor may without any notice determine this Agreement and the licence and it shall thereupon be lawful for the Licensor to enter upon and retake possession of the UPL factory.17. From a plain reading of the clauses noted above, what is clear is that they deal with a situation arising out of the breach of the terms of the Agreement entitling the Licensor to terminate the Agreement on the expiry of the period of one month from the service of the notice to the Licensee. Clause 16 deals with a situation of the Licensee being wound up in which situation the Licensor reserved his right to determine the Agreement and retake the possession of the factory. These clauses do not whittle down the conclusion arrived at by the High Court with reference to the rights of thecoming to an end on the exercise of option by the lessee under clause 19 of the Agreement. Applying thetests, we are clear in our mind that the High Court has reached the correct conclusion which does not warrant interference.18. So far as Guntur Merchants case is concerned, the Agreement of Lease is not placed on record and there is no challenge that in recording its findings the Tribunal and in answering the question the High Court has ignored any vital clause of theconsidering these findings, the High Court answered the question referred to it in favour of the Revenue. On the face of these findings, it cannot but be concluded that the assessee had dismantled its business never to return back to it. Applying the aforesaid principles, it has to be held that the answer recorded by the High Court to the question referred to it is correct in law.