Calcutta High Court
Commissioner Of Income-Tax vs Premchand Jute Mills Ltd. on 5 March, 1986
Equivalent citations: [1987]164ITR288(CAL)
JUDGMENT Dipak Kumar Sen, J.
1. Premchand Jute Mills Ltd., the assessee, owned And ran a jute mill known as "Premchand Jute Mills" situate at Ghengail, Howrah, Under a deed of lease executed by the assessee, the said jute mill was let out for a period of five years with effect from November 12, 1958, with option to the lessee to have the lease renewed for another five years at a rent of Rs. 32,000 per month.
2. After the expiry of the initial period of five years, the lessee exercised its option in 1963 and the lease continued up to November 11, 1968.
3. After the expiry of the said lease, the assessee did not resume its business in the mill but entered into an agreement to sell the mill. Delivery of possession of the mill was given to the intending purchaser under a written agreement. The shareholders of the assessee, however, did not approve of the proposed sale whereupon the assessee recovered possession of the said mill from the intending purchaser.
4. Thereafter, the assessee executed another deed on July 14, 1971, under which the said jute mill was again let out to another lessee for a period of 30 years with effect from May 1, 1969, with option to the lessee to have the said lease renewed for another period of 20 years at a stipulated rent of Rs; 28,000 per month for the first and the second year, Rs. 30,000 per month for the third and the fourth year and, thereafter, Rs. 32,000 per month for the rest of the succeeding term.
5. The assessee was assessed to income-tax for the assessment years 1968-69 to 1971-72, the corresponding accounting years ending on 30th April of the calendar years 1968, 1969, 1970 and 1971.
6. In the assessment years 1968-69 and 1969-70, the first lease executed by the assessee was in force. The Income-tax Officer noted in the order of assessment that subsequent to the expiry of the said lease, the assessee had again let out the jute mill to a lessee for a long period and that prior to the execution of the new lease, during an interval of above five months, no business had been also carried on by the assessee in the mill. The Income-tax Officer came to the conclusion that the assessee had no intention to resume its business of milling jute and assessed the rent received under the first lease under the head "Income from other sources".
7. For the assessment years 1970-71 and 1971-72, the Income-tax Officer treated the income from the second lease executed by the assessee also, as income from other sources, inter alia, on the ground that the assessee did not resume the business after the expiry of the first lease, let out the jute mill for a long period under the second lease and during the interregnum did not carry on business in the jute mill. The Income-tax Officer disallowed deduction of business loss brought forward from the earlier years from the income assessed.
8. Being aggrieved, the assessee went up in appeal before the Appellate Assistant Commissioner.
9. The Appellate Assistant Commissioner disposed of the four appeals by a consolidated order. The assessments as made by the Income-tax Officer were all upheld. The Appellate Assistant Commissioner noted the conduct of the assessee which tried to sell the jute mill after the expiry of the first lease. Thereafter, the assessee again let out the mill for a long period under the second lease. It was held that such conduct indicated that the assessee had no intention of resuming its business. Following the decision of the Supreme Court in New Savan Sugar and Gur Refining Co. Ltd. v. CIT [1969] 74 ITR 7, the Appellate Assistant Commissioner held that the income from letting out the jute mill should be treated as income from other sources.
10. It was also held that as no business had been carried on by the appellant during the relevant years, the Income-tax Officer was justified in not allowing deduction of the earlier years' loss and unabsorbed depreciation.
11. From the order of the Appellate Assistant Commissioner, the assessee went up in further appeal before the Tribunal.
12. Before the Tribunal, the representative of the assessee relied on and cited a decision of this court in the case of the assessee for the assessment year 1962-63 in CIT v. Prem Chand Jute Mitts Ltd. [1978] 114 ITR 769, where this court considered the first lease executed by the assessee and held that the assessee had let out the jute mill under the first lease because it had incurred heavy losses on account of various factors including quarrels amongst its directors. The case of the assessee that it was difficult to work the mill and attempts at settlement were not successful was accepted. On the facts it was held by this court that the attempts for settlement and the clauses incorporated in the first deed of lease indicated an intention on the part of the assessee to ensure that its assets comprised of the said mill should retain their commercial character and that the same would be exploited as such. The lease was found to have been executed with the object of facilitating resumption of the commercial use of the assets by the assessee itself later. The income of the lease was held to be business income assessable under Section 28 of the Income-tax Act, 1961 ("the Act"). It was held further that unabsorbed depreciation losses could be carried forward and set off against the income derived from letting out the commercial assets.
13. On the authority of the aforesaid decision, it was contended on behalf of the assessee that the income received by the assessee under the renewed period of the first lease and also the income received from the second lease should also be, therefore, treated as business income and particularly so as the shareholders of the assessee did not intend to sell away the jute mill.
14. It was contended on behalf of the Revenue, on the other hand, that the subsequent facts and the later circumstances found by the Income-tax Officer and the Appellate Assistant Commissioner were sufficient to distinguish the instant case from the earlier case of the assessee decided by this court in the assessment year 1962-63. The subsequent conduct of the assessee, it was contended, made it quite clear that the assessee had given up its intention of resumption of the business in the jute mill and even before the expiry of the renewed period of lease, the assessee proposed to let the jute mill to another lessee. This was recommended by the directors of the assessee in their report dated April 13, 1968. The attempted sale of the mill by the assessee and the subsequent letting out of the same for a long period of thirty years with option of renewal for a further period of twenty years, it was contended, further established the intention of the assessee not to resume the business.
15. In support of his contentions, the learned advocate for the Revenue relied on the decision of the Supreme Court in New Savan Sugar and Gur Refining Co. Ltd.'s case [1969] 74 ITR 7 and also a decision of the Patna High Court in CIT v. Kuya and Khas Kuya Colliery Co. [1985] 156 ITR 206: In this case, it was held by the Patna High Court that where the assessee let out not only its commercial assets but its entire business, the income from the lease would be assessable as income from other sources and not as income from business. The High Court in coming to the said conclusion applied the ratio of the decision of the Supreme Court in New Sawn Sugar and Gur Refining Co. Ltd.'s case [1969] 74 ITR 7.
16. The Tribunal held that so far as the assessment years 1968-69 and 1969-70 were concerned, it was not possible to come to a conclusion different from that arrived at by this court for the assessment year 1962-63, because the same lease, namely, the first lease, was in force in the said assessment years. The Tribunal noted that only towards the end of the renewed period of the first lease the management of the assessee had decided to let out the mill for a further term but the Tribunal held that from the same it could not be inferred that during the currency of the first lease, the assessee ceased to exploit the mill as a commercial asset and had gone out of business for ever. Following the decision of this court in Prem Chand Jute Mills Ltd.'s case [1978] 114 ITR 769, the Tribunal held that for the assessment years 1968-69 and 1969-70, the income of the assessee from letting out the jute mill should be assessed to tax as business income. For the said years, the assessee was also entitled to set off from such income the earlier years' business losses and unabsorbed depreciation,
17. For the assessment years 1970-71 and 1971-72, the Tribunal found, however, that the matter stood on a different footing in view of the execution of the second lease by the assessee. In the second lease, there was no clause binding the lessee to become and continue to be a member of the IJMA for the period of the lease. There was also no clause directing the lessee to continue in a particular grouping, namely, group B in hessian. In the absence of such clauses which were present in the deed of the first lease and on the basis of which this court delivered its judgment for the assessment year 1962-63, it was held that from the second lease executed by the assessee it could be inferred that it was the intention of the assessee to part with the entire assets in the jute mill for the purpose of realising only the rental income and it was not the intention of the assessee to treat the said mill as a commercial asset during the subsistence of the second lease There was no direct nexus between the rent received by the assessee and the production of the factory during the subsistence of the second lease and, therefore, the decision of the Supreme Court in New Savan Sugar and Gur Refining Co. Ltd.'s case [1969] 74 ITR 7 squarely applied to the facts in the said assessment years 1970-71 and 1971-72. Following the said decision, it was held that the rent realised by the assessee in respect of its jute mill for the said assessment years was rightly assessed as income from other sources.
18. It was, however, contended on behalf of the assessee that even for the said assessment years 1970-71 and 1971-72, though the rental income was assessed under the head "Income from other sources", the assessee was still entitled to set off the unabsorbed depreciation of the earlier years allowed in respect of the said assets by virtue of the provisions contained in Sections 56(2)(ii), 57(ii) and 32(2) of the Act. The Tribunal accepted the contention of the assessee and held that such contention was supported by the decision of the Supreme Court in CIT v. Jaipuria China Clay Mines (P.) Ltd. [1966] 59 ITR 555. The Tribunal found in favour of the assessee and directed the Income-tax Officer to allow the assessee the benefit of the unabsorbed depreciation of the earlier years to be set off against the rental income for the said assessment years 1970-71 and 1971-72.
19. On the application of the Revenue under Section 256(1) of the Act, the Tribunal has referred the following questions of law arising out of its order for the opinion of this court:
20. In respect of the assessment years 1968-69 and 1969-70 :
"1. Whether, on the facts and in the circumstances of the case and on a proper construction of the relevant deed of lease, the Tribunal was right in holding that the income of the assessee was assessable under Section 28 of the Income-tax Act, 1961, and not under Section 56 thereof?
2. Whether, on the facts and in the circumstanced of the case, the Tribunal was right in holding that the assessee was entitled to carry forward and set off the unabsorbed depreciation and losses of earlier years against the income of the present years ?"
21. In respect of the assessment years 1970-71 and 1971-72 : "Whether, on the facts and in the circumstances of the case and on a correct interpretation of Section 56(2)(ii), Section 57(ii) and Section 32(2) of the Income-tax Act, 1961, the Tribunal was correct in holding that the assessee was entitled to carry forward and set of the unabsorbed depreciation pertaining to its business carried on in earlier years against its income of the present years although no business had been carried on during the present years ?"
22. At the hearing, the learned advocate for the Revenue submitted that in view of the subsequent facts found by the Income-tax Officer and accepted by the Appellate Assistant Commissioner, namely, that the assessed, towards the end of the first lease, had intended to let out the said jute mill under a further lease and also that the assessee attempted to sell off the entire jute mill, sufficiently distinguished the instant case from the assessee's case prevailing in the assessment year 1962-63 decided by this court. In the decision for the said assessment year, it was submitted, it was found as a fact that it was the intention of the assessee to retain the commercial character of its assets and to exploit the same as such. With that view, the first lease was entered into on terms and conditions introduced to ensure the continuance of the jute mill as a commercial unit. In view of the subsequent facts, the same conclusion cannot be reached in the instant case for the assessment years 1968-69 and 1969-70.
23. The learned advocate submitted further that the Tribunal having found in the assessment years 1970-71 and 1971-72 that the assessee had ceased to exploit its jute mill as a commercial asset and that its income from letting out the jute mill should be assessed as income from other sources, the Tribunal was in patent error in allowing the set off of urtabsorbed depreciation of the earlier years against such rental income. Such depreciation could be carried over and set off only against further business income. It was submitted that the income of the assessee in the relevant assessment years having lost its character of business income was not available to be set off against the amount of depreciation carried over; The decision of the Supreme Court in Jaipuria China Clay Mines (P.) Ltd.'s case [1966] 59 ITR 555 clearly supported this contention.
24. The learned advocate for the assessee submitted, on the other hand, that as long as the first lease continued, the decision of this court in the case of the assessee in respect of the assessment year 1962-63 would remain binding. The fact that during the relevant assessment years, the first lease had been renewed would not make any difference to the position. All other factors in the first lease and its terms and conditions including those relating to the maintenance of the jute mill as a commercial asset and preventing the lessee from altering or affecting the commercial character of the assets continued in the relevant assessment years. The decision of the Supreme Court in New Savan Sugar and Gur Refining Co. Ltd's case [1969] 74 ITR 7, was considered and distinguished by this court in the case of the assessee. The subsequent conduct of the assessee would have effect not in the assessment years involved but in the subsequent assessment years when the second lease came into force. The same submission was reiterated on the further fact that the assessee had made an attempt to sell the mill on the determination of the first lease. The learned advocate submitted that the steps which were intended to be taken by the assessee after the first lease came to an end were exploratory in nature and did not materialise in the relevant assessment years and, therefore, the same would not have any effect in the assessment years 1968-69 and 1969-70 when the first lease was in force.
25. On the question of setting off of unabsorbed depreciation of the earlier years against the rental income of the assessee for the assessment years 1970-71 and 1971-72, the learned advocate for the assessee drew our attention to the following sections of the Act.
"32. (2) Where, in the assessment of the assessee (or, if the assessee is a registered firm or an unregistered firm assessed as a registered firm, in the assessment of its partners), full effect cannot be given to any allowance under Clause (i) or Clause (ii) or Clause (iia) or Clause (iv) or Clause (v) or Clause (vi) of Sub-section (1) or under Clause (i) of Sub-section (1A) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of Sub-section (2) of Section 72 and Sub-section (3) of Section 73, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years."
"43. In sections 28 to 41 and in this section, unless the context otherwise requires -
(1) 'actual cost' means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority :......
(6) 'Written down value ' means-
(a) in the case of assets acquired in the previous year, the actual cost to the assessee ;
(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force."
"56. (2) In particular, and without prejudice to the generality of the provisions of Sub-section (1), the following incomes shall be chargeable to income-tax under the head 'Income from other sources', namely:--......
(ii) income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head ' Profits and gains of business or profession ';
(iii) where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head ' Profits and gains of business or profession '."
"57. (ii) in the case of income of the nature referred to in Clauses (ii) and (iii) of Sub-section (2) of Section 56, deductions, so far as may be, in accordance with the provisions of Sub-clause (ii) of Clause (a) and Clause (c) of Section 30, Section 31, and Sub-sections (1), (1A) and (2) of Section 32, and subject to the provisions of sections 34 and 38. "
26. The learned advocate for the assessee submitted with reference to the said sections that there was a significant difference between the different Clauses of Sub-section (2) of Section 56. In Clauses (ii) and (iii) which dealt with income from machinery, plant or furniture let out on hire, a specific mention was made of such income as not being chargeable to income-tax under the head "Profits and gains of business or profession". In the other clauses of Sub-section (2) of Section 56, no such reference was made.
27. The learned advocate submitted that only when letting out of plant, machinery or furniture failed to fulfil all tests of business, income from such letting out would become chargeable under the head "Income from other sources".
28. Under Clause (ii) of Section 57, it was provided that only in cases falling under Clauses (ii) and (iii) of Sub-section (2) of Section 56 deductions under Sections 30, 31 and 32 of the Act would be allowed.
29. It was submitted that the said sections 30, 31 and 32 fell under Part B of the Act which dealt with the computation of income under the head "Profits and gains of business or profession". It was contended that under Clauses (ii) and (iii) of Section 57 in cases of income arising out of hiring of machinery, plant and furniture, the Legislature intended to confer the same benefit on the same terms as was available in respect of income under the head "Profits and gains of business or profession" on account of certain specified items of expenditure or deduction.
30. The scheme appeared to be not to allow all deductions available for computing the income under the head "Profits and gains of business or profession" in respect of income arising out of letting out of plant, machinery and furniture but to allow deductions under certain specified heads which had a direct relationship with plant, machinery, etc. The deductions allowed were in the nature of expenditure on account of repairs, insurance and also deduction in respect of depreciation on the plant and machinery. Whether the income from such plant and machinery arose under the head "Profits and gains of business or profession" or "Income from other sources", the intention of the Legislature was to confer the same benefits on account of expenditure directly connected with the plant and machinery. Under Section 57, the applicability of Section 32 was not restricted to Sub-section (1) of the said latter section. Sub-section (2) of Section 32 was also specifically included. By reason of the express provision of Section 57, the contention of the Revenue that unabsorbed depreciation relating to plant and -machinery for the earlier years cannot be allowed would be contrary to the express provisions of Section 57 and would render the inclusion of Section 32(2) in Section 57 redundant. This interpretation should not be followed.
31. It was submitted further that the prescribed percentage of depreciation under Section 32(1) in any event had to be allowed so far as current depreciation was concerned irrespective of the fact whether the assets were yielding income under the head "Profits and gains of business or profession" or "Income from other sources". The depreciation should be calculated at the prescribed percentage of the written down value of the assets. The prescribed percentage was the same whether the income arose under the head "Profits and gains of business or profession" or "Income from other sources".
32. The expression "written down value" was defined in Section 43(6) of the Act and in the case of assets acquired before the previous years meant the actual cost to the assessee of the said assets less all depreciation actually allowed to him under this Act or the earlier Act or any Act repealed by that Act or under any executive orders. While denning the written down value, the Act provided for deductions actually allowed under any Act, current or repealed, and the definition of written down value was also applicable where the income of the assets was computed under the head "Income from other sources".
33. It was contended that' if the unabsorbed depreciation of the earlier years when the income of the assets was being considered as income from business was not allowed to be adjusted in a subsequent year when the income from the assets were being treated as income from other sources, ah anomaly would arise because there would be two separate determinations of the written down value, one with reference to the situation where income of the assets was assessed under the head "Profits and gains of business or profession" and the other when the income from the assets was assessed under the head "Income from other sources". The same asset would have different written down values for the purpose of determining the income therefrom whether to be assessed under the head "Profits and gains of business or profession" or "Income from other sources". It was submitted that the intention of the Legislature was clear and all expenditure or Reductions directly relatable to the assets concerned, were meant to be allowed irrespective of whether the income of such assets is assessed under the head "Profits and gains of business or profession" or "Income from other sources".
34. The learned advocate for the assessee also submitted that the decision of the Supreme Court in Jaipuria China Clay Mines (P.) Ltd.'s case [1966] 59 ITR 555 and the decision of the Allahabad High Court in CIT v. Rampur Timber & Turnery Co. Ltd. [1973] 89 ITR 150, were not directly relevant and did not deal with this aspect of the matter. In the said cases, the assessee had or was deemed to have income unabsorbed under the head "Profits and gains of business or profession" against which the carried over depreciation was allowed to be adjusted.
35. The learned advocate contended further that the assessee was entitled to raise such contention in the present reference as the question was referred in a wide form and the basic dispute had been raised before the Tribunal. The contentions before the Tribunal covered only one aspect of the question. In support of his contentions, the learned advocate for the assessee relied on the well known decision in CIT v. Scindia Steam Navigation Co. Ltd, [1961] 42 ITR 589. , It was submitted that it was laid down by the Supreme Court in this case that it was permissible to argue other aspects of the question referred though specific arguments had not been made before the Tribunal on such aspects.
36. On a consideration of the facts and circumstances of the case, the decisions cited and the respective submissions made on behalf of the parties, it appears to us that so far as the questions referred for the assessment years 1968-69 and 1969-70 are concerned, the controversy sought to be raised remains covered by the decision of this court in the case of Prem Chand Jute Mills Ltd. [1978] 114 ITR 769. No doubt, during the said assessment years, tentative attempts were made by the assessee to take steps for future exploitation of the said jute mills but nothing was finalised. The assets remain covered under the first lease in the assessment year 1968-69. For a part of the assessment year 1969-70, nothing was done by the assessee with the jute mill but for the major part of the year, the assets were exploited under the first lease on the basis that the assets were commercial. It remained open for the assessee at any time to resume its business with commercial assets.
37. For the above reasons, we answer the questions referred for the said assessment years 1968-69 and 1969-70 both in the affirmative and in favour of the assessee.
38. The common question referred in respect of the assessment years 1970-71 and 1971-72 may now be considered. Section 57 permits deductions in accordance with the provisions of sections 30, 31 and 32 including Sub-section (2) of Section 32.
39. It is not disputed that in the earlier years, depreciation was suffered by the assets involved, namely, the jute mill, and that such depreciation remained unabsorbed. The assessee was entitled to carry forward the said unabsorbed depreciation under Section 32(2) without any reference to Section 57. In the assessment years involved, the assessee earned income from letting out machinery and plant which was not chargeable to income-tax under the head "Profits and gains of business or profession" but was chargeable under the head "Income from other sources". From such income, the assessee is entitled to deduction in respect of expenditure and depreciation in accordance with Section 32(2). The specific mention of Section 32(2) in Section 57, in our view, permits deduction of the unabsorbed carried forward depreciation of earlier years from the income received from plant, machinery or furniture let out. There is no bar or limitation in Section 57(ii).
40. We have noted the definitions of "actualcost" and "written down value" in Section 43. We accept the submissions made on behalf of the assessee that if the unabsorbed depreciation is not allowed to be deducted, the assets which remain the same whether used in business and yielding income from the business or whether they are let out and earn income from other sources, there will be an anomaly as the same assets would have different written down values and different rates of depreciation for the purpose of deductions under Section 57 than that which would be computed if the assets earn business income. Reading the relevant sections, it appears that the scheme of the Act is that the written down value and actual cost for the purpose of sections 32 and 57 are meant to be one and the same.
41. For the reasons cited above, we answer the common question for the assessment years 1970-71 and 1971-72 also in the affirmative and in favour of the assessee.
42. In the facts and circumstances of the case, there will be no order as to costs.
Shyamal Kumar Sen, J.
43. I agree.