dedol-hf/india-case-legal-rag huggingface dataset:
Excess  Profits Tax Act (XV of 1940), s. 2  (5)--"Income
from  business "--Manufacturing company--Rent of  plant  and
machinery let out to others--Whether income from business.
HEADNOTE:
    The  respondent,  a company formed for  the  purpose  of
manufacturing silk cloth, installed a plant for dyeing  silk
yarn  as  a  part of its Business.   During  the  chargeable
accounting  period  (last January, 1943, to  31st  December,
1943) owing to difficulty in obtaining silk yarn on  account
of  the war, it could make no use of this plant and  it  re-
mained  idle for some time. In August, 1943, the  plant  was
let  out to another company on a monthly rent. The  question
being whether the income received by the respondent  company
in  the  year 1948 by way of rent of this plant  was  income
from business and assessable to excess profits tax, the High
Court  of Bombay held that, as the assessee was not able  to
use  the plant as a commercial asset, it had ceased to be  a
commercial  asset in the assessee's hands and the  rent  re-
ceived was not income from business. On appeal:
    Held, that an asset which was acquired and used for  the
purpose of the business by a company formed for carrying  on
business and earning profits, does not cease to be a commer-
cial asset of that business as soon as it is temporarily put
out  of  use  or let out to another person for  use  in  his
business or trade; the income from the asset would be profit
of  the  business irrespective of the manner in  which  that
asset  is exploited by the owner, and the rent  in  question
was therefore income from business and assessable to  excess
profits tax. No general principle, however, can be laid down
which is applicable to all cases. Each ease has to be decid-
ed on its own circumstances.
    Sutherland v. Commissioners of Inland Revenue [1918]  12
Tax Cas. 63 relied on.
    Inland  Revenue  Commissioners v. lies [1947]  1  A.E.R.
798,  Croft  v. Sywell Aerodrome Co., Ltd. [1942]  1  A.E.R.
110, Inland Revenue Commissioners v. Broadway Car Co.,  Ltd.
[1946] 2A.E.R. 609 distinguished.
Judgment of the Bombay High Court reversed.
2
JUDGMENT:
CIVIL APPELLATE  JURISDICTION:  Civil Appeal
No. 46 of 1950.
  Appeal by special leave from a judgment of the High  Court
of Judicature at Bombay dated 23rd March, 1948, (Chagla C.J.
and Tendolkar J.) in Income Tax Reference No. 16 of 1947.
M.C. Setalvad, Attorney-General for India (Gopal  Singh,
with him) for the appellant.
    N.C. Chatterjee (B. Sen, with him)for the respondent.
    1951. September 18. The Judgment of the Court was deliv-
ered by
    MAHAJAN J.--The sole controversy in this appeal  centres
round  the point as to whether or not excess profits tax  is
payable on the sum of  Rs. 20,005 received by the respondent
from Messrs Parakh & Co. by way of rent for the dyeing plant
let out to them during the chargeable accounting period.
    The respondent (Sri Lakshmi Silk Mills Ltd.) is a  manu-
facturer  of  silk cloth, and as a part of its  business  it
installed a plant for dyeing silk yarn.  During the  charge-
able accounting period (1st January, 1943, to 31st December,
1943) owing to difficulty in obtaining silk yarn on  account
of  the  war it could make no use of this plant and  it  re-
mained  idle for some time.  On the 20th August,  1943,   it
was let out to Messrs E. Parakh & Co. on a rent of Rs. 4,001
per month. The Excess Profits Tax Officer by his  assessment
order dated 11th June, 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  fur-
ther  appeal  by  the Income-tax  Tribunal.   The  Tribunal,
however,  on being asked referred the following question  of
law to the High Court for its opinion:
    "Whether  in the circumstances of the case,  the  asses-
see's income of Rs. 20,005 is profits from business
3
within  the meaning of section 2 (5) of the  Excess  Profits
Tax  Act  and therefore or otherwise liable  to  pay  excess
profits tax ?"
    The  High Court answered the question in  the  negative.
This is an appeal by special leave from this decision.
It  was contended on behalf of the  Commissioner  before
the High Court that the dyeing plant was a commercial  asset
of the assessee's 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 assessee's  busi-
ness 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 words :-
    "Mr. Joshi seems to be right but with this qualification
that the commercial asset must 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 & 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.  Var-
ious 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
4
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 his 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  ob-
served as follows :--
     "The  ratio  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
allows 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 others, then the  rent
he receives is not income from any business that he  carries
on."
     The  learned  Attorney-General  pointed  out  that  the
nature  of a commercial asset is not changed because a  par-
ticular  person is unable to use it.  The inability  of  the
assessee to make use of it in certain circumstances does not
in  any  way' affect the nature of the asset  and  cause  an
infirmity  in the asset itself.  It was contended that  when
the  dyeing  plant became idle for a short time  during  the
chargeable  accounting period it did not cease to be a  com-
mercial  asset of the respondent for it had no  other  busi-
ness;  that all the assets of the respondent  including  the
dyeing plant were the assets of the business, that  whatever
income was derived by the use of these assets including  the
income  that an asset fetched by its being let out  was  the
business  income  of  the assessee, and that  there  was  no
warrant
5
in  law  for the proposition that a commercial  asset  which
yields  income  must be used as an asset by  the  respondent
himself before its income becomes chargeable to tax.
    The  learned  counsel for the respondent urged  that  as
soon as the assessee found difficulty in obtaining yarn  the
dyeing plant became redundant for its business and ceased to
be an asset of its business and any income derived from  the
rent  by letting out this asset was income received  by  the
assessee  from  other sources and therefore was not  charge-
able to excess profits tax.
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  commer-
cial asset of a business concern which yields income must at
the  time it was let out be in a condition to be used  as  a
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  manufac-
turing concern the use of its plant and machinery can advan-
tageously 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  the  requisite
raw materials is allowed to use it as a licensee on  payment
of certain
6
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 object 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 plant "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 commer-
cial  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  incorpo-
rated 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 than section  10.   Cases  of
undertakings  of this nature stand on an entirely  different
footing and are distinguishable from cases of individuals or
companies acquiring lands or buildings and making income  by
letting  them on hire.  These latter cases may  legitimately
fall  under the specific provisions of section 9 or  section
12,  though the High Courts in this country are by no  means
unanimous on this subject; but for the purpose of this  case
it is unnecessary to resolve that conflict.
    It may be observed that no general principle can be laid
down which is applicable to all cases, and each case has  to
be  decided on its own circumstances. Decisions of the  Eng-
lish  courts  given under the Finance Acts,  the  scheme  of
which is different from the Indian Income-tax statutes,  are
not  always  very helpful in dealing  with  matters  arising
under the Indian law and analogies and inferences drawn from
those decisions are at times misleading. We, however, are in
respectful agreement with the observations of Lord
7
President Strathclyde in Sutherland v. The Commissioners  of
Inland Revenue(1) that if a commercial asset is  susceptible
of  being put to a variety of different uses in  which  gain
might be acquired, 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.
Whatever  the  commercial asset produces is  income  of  the
business  of which it is an asset, the process by which  the
asset makes the income being immaterial.
    Mr.  Chatterjee  for the respondent stressed  the  point
that  as the dyeing plant in the present case could  not  be
made  use of by the assessee in its  manufacturing  business
owing  to  the non-availability of yarn, it ceased to  be  a
commercial asset of the business of the assessee and  became
redundant  to  that business and that being so,  any  income
earned  by  this asset which had ceased to be  a  commercial
asset was not an income of the business but must be held  to
have been derived from a source other than business and fell
within the ambit of section 12 of the Indian Income tax Act,
and  on this income excess profits tax was not payable.   He
contended that the facts of this case were analogous to  the
case  of  Inland  Revenue Commissioners v.  lies(2)  and  it
should  be  similarly  decided. In that  case  the  taxpayer
carried  on  the  business of sand and  gravel  merchant  on
certain  land  and at the same time he granted  licences  to
three firms to enter his land and win gravel for  themselves
in  return  for which he received from them a  royalty   for
each cubic yard of gravel taken away.  It was held that  the
royalties  were  not  part of the profits  of  the  business
because, in granting the licences, the taxpayer was exploit-
ing his rights of ownership in the land and was not carrying
on  his business of a sand and gravel merchant.  The  income
was held taxable as an income from an investment and did not
fall  under Schedule D which concerns profits earned from  a
trade. Mr. Chatterjee also laid emphasis on the observations
of Lord
(1)  (1918) 12 Tax Cas. 63.             (2) [1947] 1  A.E.R.
798.
8
    Greene  M.R.  in  Croft v. Sywell  Aerodrome  Ltd.  (1),
wherein  the learned Master of the Rolls observed  as   fol-
lows:
"I cannot myself see that a person who leases the   land
to  others, or grants licences to others to come   upon  it,
is doing anything more than exploiting his    own rights  of
property,  even  if the tenant or licensee      is,  by  the
terms  of the lease or licence, entitled himself   to  carry
on a trade on the land."
  It  was urged that what the assessee was doing in  this
case  was exploiting his rights of property by  letting  the
dyeing  plant to other persons precisely in the same  manner
as the owner of land in the case cited above was  exploiting
his own rights to property by granting a licence to  another
to  come on his land. The argument, in our  opinion,  though
attractive, is fallacious.  The analogy between the case  of
land  and of a dyeing plant for the purpose of taxing  stat-
utes is inappropriate. The distinction becomes apparent from
the following passage which occurs in Atkinson J.'s judgment
in I les's case(2) :--
     "Then  it was suggested by counsel for the  Crown  that
the  case was like the Desoutter case(3), 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
Broadway Car Co. case(4). The same argument was tried there,
but  Tucker L.J. said he thought the Desoutter  case(3)  had
very  little to do with it, as there was a great  difference
between land
  (1)  [1942]  1  A.E.R. 110.                 (3)  [1946]  1
A.E.R. 58.
  (2)  [1947]  1  A.E.R. 798                  (4)  [1946]  2
A.E.R. 609.
9
and  a  patent, and he did not think the  Desoutter  case(1)
threw any light on the matter  ......  A patent is     quite
different from freehold land."
    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 section 9 of the  Indian  In-
come-tax Act, as income earned, no matter by whatever  meth-
od, from land, and specifically dealt with by that  section.
The observations therefore made in I les's case(2) 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.
    Mr.  Chatterjee also laid stress on the decision of  the
Court of Appeal in Inland Revenue Commissioners v.  Broadway
Car  Co. Ltd.(3).  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 pound 750.   By
1940  the company's business had dwindled under  war  condi-
tions  to such an 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 pound  1,150.
The  general  commissioners of income-tax decided  that  the
difference  of pound 400 between the outgoing of  pound  750
for  the land retained and the incoming of pound  1,150  for
the  land disposed of was "income received from  an  invest-
ment,"  and, the business not being one within  the  special
categories  mentioned in the Finance Act, 1939,  that  pound
400 was not taxable. It was held that the word  "investment"
must be construed in the ordinary, popular sense of the word
as used by businessmen and not as a
 (1) [1946] 1 A.E.R.58.                 (3) [1946] 2  A.E.R.
609.
 (2) [1947] 1 A.E.R. 798.
       2
10
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 result-
ed 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  company's 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 come 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.
  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  manu-
facturing  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  company's
business of manufacture of silk. The analogy of Broadway Car
Co.  Ltd. (1) therefore does not hold good for the  decision
of the present matter,
(1) [1946] 2 A.E.R. 609.
11
    We  are therefore of the opinion that it was a  part  of
the  normal  activities of the assessee's 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 & 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  Tribu-
nal  was wrong and that the correct answer to  the  question
would be in the affirmative and not in the negative.
    The  appeal is allowed, but in the circumstances of  the
case  we make no order as to costs. We have not  thought  it
necessary  to  refer to all the cases cited at  the  Bar  as
none  of them really is in point on the short question  that
we were called upon to decide and analogies drawn from  them
would not be helpful in arriving at our decision.
                    Appeal allowed.
       Agent for the appellant. P.A. Mehta.
       Agent for the respondent: P.K. Chatterjee.
PETITIONER:
MANOHAR LAL
        Vs.
RESPONDENT:
THE STATE
DATE OF JUDGMENT:
23/05/1951
BENCH:
BOSE, VIVIAN
BENCH:
BOSE, VIVIAN
KANIA, HIRALAL J. (CJ)
FAZAL ALI, SAIYID
MAHAJAN, MEHR CHAND
AIYAR, N. CHANDRASEKHARA
CITATION:
 1951 AIR  315            1951 SCR  671
 CITATOR INFO :
 R          1961 SC 418  (6)
ACT:
Punjab  Trade  Employees Act, 1940, ss. 2-A (i) and  (j),  7
(1), 16 --Shopkeeper without employees--Sate by son on close
day-- Liability of shopkeeper--Scope of s. 2-A (i) and (j).
HEADNOTE:
Section  7  sub-s. (1) of the Punjab  Trade  Employees  Act,
1940,  as amended in 1943, provided that "save as  otherwise
provided  by this Act, every shop shall remain closed  on  a
close day." Sub- section (2) (i) stated that "The choice  of
a  close  day shall rest   with the owner or occupier  of  a
shop  ......  and shall be intimated
  87
672
  to  the prescribed authority." Clauses (i) and (j)  of  s.
2-A provided that nothing in the Act shall apply to  persons
employed  in a   managerial capacity and the members of  the
family of the   employer. The appellant owned a shop and  on
a  close day the   appellant's son sold an article from  the
shop,  and the appellant   was convicted under s. 16 of  the
Act.  It was contended on his   behalf that s. 7 of the  Act
was ultra vires as it did not fall under   any of the  items
in  either  the Provincial or the  Concurrent    Legislative