The Commissioner of Income Tax, Chennai v. Venkateswara Agro Chemicals &Minerals Pvt. Ltd.,Chennai 98

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED :29.04.2011CORAMTHE HONOURABLE MR JUSTICE ELIPE DHARMA RAO andTHE HONOURABLE MR JUSTICE M. VENUGOPALTax Case Appeal Nos.201 to 203 of 2008The Commissioner of Income Tax, Chennai. ... Appellant in all TCAsVsVenkateswara Agro Chemicals &Minerals Pvt. Ltd.,Chennai 98.... Respondent in all TCAsPrayer:- Appeal under Section 260A of the Income Tax Act, 1961against the common order of the Income Tax Appellate TribunalMadras 'C' Bench, dated 08.03.2007 in ITA.Nos.1538 to 1540/Mds/2005for the assessment years 1997-98 to 1999-2000. against the order ofthe Commissioner of Income Tax (Appeals) III, dated 7.3.2005 inITA.Nos.98, 99, 100/2004-05/A111, Chennai 34 for the assessmentyears 1997-98, 1998-99, 1999-2000 against the order of theAssistant Commissioner of Income Tax i/c Company Circle III (4)Chennai 34 in GIR.No.PAN2686/AAACV2532R for the assessment years97-98, 98-99, 99-2000 respectively. For Appellant : Mr.K. Subramanian Senior Standing CounselFor Respondent : No Appearance- - -COMMON JUDGMENT(Judgment of the Court was delivered by ELIPE DHARMA RAO, J)These appeals are preferred by the Revenue against the commonorder passed by the Income Tax Appellate Tribunal (in short "theTribunal") Madras 'C' Bench, dated 08.03.2007 in ITA.Nos.1538 to1540/Mds/2005 for the assessment years 1997-98 to 1999-2000. Sincethe issue involved in these appeals are one and the same and theyare inter-connected, they were heard together and disposed of bythis common judgment.2. The facts in brief are as follows :-In the present appeals, we are concerned with the returns https://hcservices.ecourts.gov.in/hcservices/ filed by the assessee in respect of assessment years 1997-98 to1999-2000. Assessee is a Private Limited company. It hassubmitted its returns in the previous years showing nil income.However, the case was re-opened by issue of notice under Section148 of the Income Tax Act, 1961 (in short "the Act"). Onscrutiny, it was found that the assessee had let out its factorywith all machinery with effect from 8.9.1993. Although theassessee had credited the same as "other income" in its Profit andLoss Account, for income tax purposes, it claimed the same asbusiness income and adjusted it against business losses. Theassessing officer by order dated 27.02.2004, assessed the incomeas income from other sources. Aggrieved by the order of theAssessing Officer, the assessee preferred appeals before theCommissioner of Income Tax (Appeals), who, by common order dated07.03.2005 in ITA Nos.98, 99 & 100/2004-05, allowed the appealspartly by holding that the lease rental income should be treated asbusiness income and not under "other sources". Against theaforesaid order, the Revenue preferred appeals before the IncomeTax Appellate Tribunal, which, by common order dated 08.03.2007,confirmed the decision of the appellate authority by relying uponthe decision of the Supreme Court in CIT (Appeals) v. Vikram CottonMills Ltd., ([1988] 169 ITR 597). Challenging the order of theTribunal, the present appeals are preferred by the Revenue.3. While admitting these appeals, the following substantialquestion of law has been formulated for consideration :-"Whether, in the facts and circumstances of thecase, the Tribunal was right in applying the decision ofthe Supreme Court in the case of Vikram Cotton MillsLtd., (169 ITR 597) and holding that the assessee'sincome from letting out its factory is to be treated asbusiness income, when there was nothing on record to showthat the assessee had only let out the same temporarilyand intended to resume its business?4. It is seen that the assessee with effect from 8.9.1993 hadleased out its entire factory building to M/s. Premier AutoElectricals Pvt. Ltd., for a lease rent of Rs.10,02,000/- per annumfor a period of 11 months. In the returns submitted by theassessee, it has claimed that this amount should be treated asbusiness income. The reason attributed by the assessee for claimingsuch income as business income was that it was their practice andin the earlier assessment years 1990-91 and 1992-93 the claim ofthe assessee was allowed. However, this explanation given by theassessee was not accepted by the Assessing Officer, who refused totreat the same as business income and, on the other hand, treatedthe lease rental as the income from other sources. The Tribunalas well as the appellate authority reversed the finding of theassessing officer by strongly relying upon the decision of theSupreme Court in CIT (Appeals) v. Vikram Cotton Mills Ltd., ([1988]169 ITR 597).5. Learned counsel appearing for the Revenue submitted that https://hcservices.ecourts.gov.in/hcservices/ the decision in Vikram Cotton Mills Ltd., is distinguishable tothe facts of the present case and the latest decision of theSupreme Court in Universal Plast Ltd. Etc., v. CIT ([1999] 237 ITR454 [SC] = 1988 (Supp) SCC 442) covers the entire issue and,following the latter decision, the present appeals are to beallowed.6. In Vikram Cotton Mills case, the assessee company was alimited company. It carried on the business of manufacture oftextiles. From 1949, the assessee company started running intolosses. At the end of December 1953, the position was that asagainst the capital of Rs 11,00,000 the accumulated liabilities ofthe assessee company amounted to Rs 26,00,000. Because of this, theassessee company stopped its manufacturing activity from December1953. This state of affairs continued till May 21, 1956, when oneof the creditors of the company filed a winding up petition in theHigh Court M/s Industrial Finance Corporation, who was one of themajor creditors of the company, had in exercise of its powers underan English mortgage of the fixed assets of the company taken actualphysical possession of the immovable properties hypothecated tothem. Under Section 153 of the Indian Companies Act, 1913, the HighCourt with the approval of the assessee company and the creditorsevolved a scheme whereunder the business assets of the assesseecompany were let out to M/s General Fibres Dealers (Pvt) Ltd ,Calcutta on Rs 2,50,000 per year lent. The lease was for ten yearswith an option of renewal for another ten years. The intention wasthat the various creditors would be paid out of the lease money.The management of the assessee company was transferred to a Boardof Trustees appointed by the High Court. The lease money realisedby the assessee company for assessment years 1957-58 to 1959-60 wasassessed by the department under Section 10 of the Indian IncomeTax Act under the head “Profits and gains of business”. But insubsequent assessment years the Income Tax Officer held that theincome from the lease rent was liable to be taxed under the head“income from other sources” under Section 12 of the Act. Theassessee company took the matter up in appeal. It was urged beforethe Commissioner that the assets of the company were exploited andthere was no intention of the assessee to discontinue the businessactivities. The assets of the company, were let to the lessee withthe principal object of liquidating a colossal liability andextricating itself from financial crises. The Commissioner,however, upheld the finding of the Income Tax Officer. The assesseecompany then took the matter to the tribunal. The Tribunal allowedthe appeal and directed to treat the income arising out of theletting out of the assets as business income. On further appeal,the High Court held that the assessee’s case was that the incomereceived by it from the lease of the plant and machinery wasbusiness income and was liable to be adjusted against theunabsorbed loss of the preceding year. On the aforesaid factualscenario, the Supreme Court, while answering the question whetherthe rental income should be treated as business income, observed asfollows :- https://hcservices.ecourts.gov.in/hcservices/ "15. In the context of these facts, it appears thatit was a possible conclusion that the assessee intendedthat there should be a temporary suspension of thebusiness for the purpose of reconstruction of the companyand for that matter there must be stoppage of the user ofthe machinery by the assessee. It was a temporary leasethough for 10 years or 19 years on renewal years andafter the expiry of the period the property reverted backto the assessee. 16. It is predominantly a matter of intention.Intention is an inference to be drawn from the relevantfacts. All the relevant facts, it appears have beenconsidered by the Tribunal from the correct standpointi.e. ordinary prudent businessman or as in England itused to be “man on the top of the platform omnibus”, or“director’s armchair”. If on that test a plausibleconclusion has been drawn — no objection can be taken.17. On that basis applying the correct principle theTribunal found that the intention was not to part withthe machine but to lease it out for a temporary period asa part of exploitation. In such a circumstance, it cannotbe said that no business was carried on and their incomederived from the machine letting was only a rent income.There was a temporary suspension of business for atemporary period for an object to tide over the crisiscondition. There was never any act indicating that theassessee never intended to carry on the business.18. In the background of these principles and in thefacts and circumstances of the case so found, we cannotsay such a finding was either perverse or notsustainable."7. The aforesaid decision was subsequently clarified by a FullBench of the Supreme Court in Universal Plast Ltd. Case. In thelater case, the Supreme Court, while dealing with Vikram CottonMills Ltd., case, observed as follows:-"11. CIT vs. Vikram Cotton Mills Ltd. (988) 67 CTR(SC) 259 : (1988) 169 ITR 597 (SC) : TC 13R.760, is againa case arising under the IT Act, 1922. One of thecreditors filed a petition in the High Court for windingup. The Industrial Financial Corporation took possessionof fixed assets under an English mortgage of thoseassets. The assessee-company had gone into losses andhad stopped its manufacturing activity. Under the schemeevolved by the High Court under the Companies Act, thebusiness assets were let out for ten years with an optionfor renewal for another ten years. The management of thecompany was transferred to a Board of Trustees approvedby the High Court. The question which fell fordetermination was whether the rental income was https://hcservices.ecourts.gov.in/hcservices/ assessable in the relevant assessment years as businessincome? The findings of the Tribunal were that onaccount of financial crisis, the company found itadvantageous to let out the machinery on hire for atemporary period and the company was able to liquidateits liability at the end of the lease period and regainedpossession of its assets; the company did not sell orotherwise dispose of its assets; there was nothing onrecord to show that the company was formed to let outplan and machinery on hire. The Tribunal came to theconclusion that the maintenance of the assets meant thatthe company had an intention to re-start the business andthat the intention of the company in letting out itsassets was to exploit the commercial assets for thepurpose of its business and, therefore, the rental incomewas assessable as business income. On reference, thatconclusion was upheld by the High Court. On appeal tothis Court, while affirming the decision of the HighCourt, it was noted that all relevant facts were correctconsidered from the standpoint of an ordinary prudentbusinessman by the Tribunal and it was also pointed outthat the stoppage of the business by the company was atemporary suspension business for a temporary period withthe object of tiding over the crisis condition and therewas never any act indicating that the company intended tocarry on the business in future."8. The Apex Court, after analysing various other decisions,laid down the following propositions :-"12. In the light of the above discussion, thepropositions may be summarised as follows:(1) no precise test can be laid down to ascertainwhether income (referred to by whatever nomenclature,lease amount, rents, licence fee) received by an assesseefrom leasing or letting out of assets would fall underthe head “profits and gains of business or profession”;(2) it is a mixed question of law and fact and hasto be determined from the point of view of a businessmanin that business on the facts and in the circumstances ofeach case including true interpretation of the agreementunder which the assets are let out;(3) where all the assets of the business are letout, the period for which the assets are let out is arelevant factor to find out whether the intention of theassessee is to go out of business altogether or to comeback and restart the same. https://hcservices.ecourts.gov.in/hcservices/ (4) if only or a few of the business assets are letout temporarily while the assessee is carrying out hisother business activities then it is a case of exploitingthe business assets otherwise than employing them for hisown use for making profit for that business; but if thebusiness never started or has started but ceased with nointention to be resumed, the assets also will cease to bebusiness assets and the transaction will only beexploitation of property by an owner thereof, but notexploitation of business assets.9. The Apex Court, ultimately by applying the aforesaidpropositions, the dismissed the appeals preferred by the assessee.10. From the propositions laid down by the Supreme Court inthe Universal Plast Ltd case, it is clear that no precise test canbe laid down to ascertain whether the income received by anassessee from leasing or letting out of assets would fall under thehead "Profits and Gains of business" and, moreover, it is a mixedquestion of law and fact to be determined from the point of view ofbusinessman including true interpretation of the lease agreementand the period of lease. Further more it was laid down thatexploitation of the assets by the assessee has to be looked into.Now, we have to see whether the propositions laid down by theSupreme Court, are fulfilled in the present case. 11. In the present case, the assessee had entered into a leaseagreement on 8.9.1993 for a period of 11 months. Admittedly, aftera period of 11 months, the lease agreement was not renewed or theperiod was extended. In this context, as per the propositions laiddown by the Supreme Court, one has to see whether the intention ofthe assessee is to go out of the business altogether or to comeback and restart the same. Except the lease agreement, nomaterial has been produced by the assessee before the AssessingOfficer or this Court to come to a conclusion that the assessee islikely to come back and restart the business. In Vikram CottonMills Ltd.'s case, a particular period of lease was stipulated andwhen the company had gone into losses and had stopped itsmanufacturing activity, under the scheme evolved by the High Courtunder the Companies Act, the business assets were let out for tenyears with an option for renewal for another ten years. But, inthe case on hand, there is no material and not even a recital tothe effect that the company is likely to restart its business.Moreover, it is also not the case of the assessee that its companyhad run to loss and, therefore, it has no other alternative than tolease out the company. In such circumstances, we are not in aposition to accept the contention of the assessee that the incomearrived at by letting out its factory is to be treated as businessincome, when there was nothing on record to show that the assesseehad only let out the same temporarily and intended to resume itsbusiness. Since the third and fourth propositions laid down by the https://hcservices.ecourts.gov.in/hcservices/ Supreme Court in the later case have not been admittedly fulfilled,the substantial question of law formulated in this case has to beanswered against the assessee. This Full Bench decision of theSupreme Court, which had distinguished the Vikram Cotton MillsLtd., case heavily relied on by the appellate authority as well asthe Tribunal, and the propositions laid down therein were notbrought to the knowledge of either the appellate authority or theTribunal. The impugned orders under appeals are contrary to theabove proposition of law laid down by the Hon'ble Supreme Courtand, hence, they are liable to be quashed. Accordingly, they arequashed.12. In the result, the Appeals filed by the Revenue areallowed. No costs.dpkSd/-Asst. Registrar//True Copy//Sub Asst. RegistrarTo1. The Income Tax Appellate Tribunal, Madras 'C' Bench, Chennai.2. The Commissioner of Income Tax (Appeals) III, Chennai 34.3. The Assistant Commissioner of Income Tax i/c Company Circle III (4) Chennai 34.+ 1 cc to Mr. K. Subramaniam, Advocate SR No30543SP(CO)SR/21.6.2011T.C.A.Nos 201 to 203 of 2008