Income Tax Appellate Tribunal - Ahmedabad
Income-Tax Officer vs Wood Paper Ltd. on 15 March, 1991
Equivalent citations: [1991]38ITD47(AHD)
ORDER
R.L. Sangani, Judicial Member
1. These three appeals relating to assessment years 1982-83 and 1983-84 were heard together and ate being decided by this common order.
ITA No. 1000IAhdll987 - Assessment year 1982-83
1. The assessee is a public limited company incorporated in the year 1942 under the name and style of M/s. Arvind Boards and Paper Products Ltd. The name of the assessee company was changed to M/s. Wood Paper Ltd. in the year 1980. The assessee had a paper mill situated at Billimora in the State of Gujarat which produced in 1980, 9,000 to 10,000 tons of paper and boards. The mill was situated in an area of 59 acres of land and a construction of over 40,000 sq. metres. The management of assessee company was changed in 1978. Thereafter, a project for expansion and modernisation on a large scale was taken up. However, due to financial difficulties the said project could not be fully implemented. For the year ending 31-3-1981 the total carried forward loss came to about Rs. 1 crore and after adjustment of reserves the said loss was of Rs. 78,01,690. It became difficult for the assessee company to raise finances required for expansion and modernisation of the plant. In the above circumstances, the assessee entered into an agreement dated 7-12-1981 with Laxmi Starch Ltd. Under the said agreement the assessee permitted Laxmi Starch Ltd. As operator to use and operate the total factory assets of the assessee company on payments to be made in accordance with Clause 3 of the agreement. These payments ranged from Rs. 50,000 per month to Rs. 3 lakhs. Under the agreement the assessee company permitted Laxmi Starch Ltd. to use the paper mills for a temporary period of three years commencing from 1st April, 1981 and ending on 31st March, 1984 with an option to Laxmi Starch to seek extension for a further period not exceeding two years on the expiry of initial period of three years. Laxmi Starch Ltd. had a right at any time to surrender the benefit of the user of the assets of the assessee company after giving three months' prior notice of its intention to do so. Under Clause 6 it was provided that all workmen, clerical staff, supervisory, administrative and technical staff and all other employees of the assessee would continue to remain the workmen, staff and employees of the assessee and they would not be regarded as servants of M/s. Laxmi Starch Ltd. Laxmi Starch would be liable to reimburse the assessee for conducting and running the said business of the wages, salaries and dearness allowance, overtime, bonus and other emoluments and outgoings including gratuity, super-annuation and all other retirement benefits payable to such workmen, staff and employees during the duration of the agreement and in accordance with the terms and conditions of employment governing them as on the date of agreement. Laxmi Starch Ltd. were permitted under Clause 7 with the consent of the assessee on such terms and conditions as mutually agreed upon to erect and install new buildings and structures on the said premises and/or removed or renovate the same or any part thereof. The cost was to be borne by Laxmi Starch Ltd. and at the time of termination of agreement the assessee would be liable to pay to Laxmi Starch Ltd. the said cost without any interest and that at the time of termination of agreement those new structures would be the property of the assessee. Laxmi Starch Ltd. was entitled under the agreement to bring in and erect any new plant and machinery for the better and efficient operation of the agreement and upon expiry of the agreement or renewal thereof Laxmi Starch Ltd. was entitled to remove the new plant and machinery but if the assessee so desired the assessee would have the option to take on lease or otherwise acquire from Laxmi Starch such additions and replacements made by said company. It was further provided in Clause 9 of the agreement that if Laxmi Starch raised funds for operational expenses the assessee would mortgage and charge the fixed and/or current assets which were subject matter of agreement. There was a provision in Clause 13 for borrowing from financial institutions, bankers, or other lenders in the name of the assessee and in that event it was the liability of the assessee to repay those loans.
2. The assessee pleaded that amount received under said agreement from M/s. Laxmi Starch Ltd. was income from business or profession and was assessable under said head and that all deductions in respect of expenses, interest, depreciation, investment allowance, etc., were allowable. The Income-tax Officer did not discuss the agreement in detail in the assessment order. He observed that Laxmi Starch Ltd. was a company under common control and management and that income derived by assessee under the aforementioned operating agreement was assessable as "income from other sources" under Section 56(1) of the Act. He further observed that provisions of Section 56(2) were not attracted and as such deduction claimed by the assessee were not allowable. According to him, only deductions admissible under Section 57(iii) were expenditure laid out wholly and exclusively for the purpose of earning the operating consideration and that no such expenditure could be said to have been incurred by the assessee. He accordingly, assessed the entire operating consideration of Rs. 4,50,000 under the head "income from other sources" under Section 56(1) of the Act.
3. The assessee filed appeal before the CIT(A). The CIT(A) observed that the tenor of the agreement indicated that the assessee did not intend to stop carrying on business or to give up the commercial assets. According to him, this was not a case where the assessee had attempted to earn income by merely letting out the property and that this was a case where assessee company could not exploit the commercial assets on its own to its own advantage because of certain reasons beyond its control and hence decided to exploit them through Laxmi Starch Ltd. According to him, the amounts received under the operating agreement would be income from business. He directed the IAC(Asst.) to consider the claim of expenses allowable under law from business income. The Department is now in appeal before the Tribunal.
4. The learned Departmental Representative submitted that it was necessary for the assessee to show that its intention was to treat the assets in question as commercial assets during the subsistence of the agreement and that this was not shown in the present case and as such the income was not assessable as income from business. Reliance was placed on the decisions of Supreme Court in New Savan Sugar & Gur Refining Co. Ltd. v. CIT [1969] 74 ITR 7. According to him, where business as a whole was leased out income would be assessable as "income from other sources". He placed reliance on several decisions of Patna High Court reported in CIT v. Kuya & Khas Kuya Colliery Co. [1985] 156 ITR 206, CIT v. Bishwanath Roy [1985] 156 ITR 217, CIT v. Chandra Litho Press [1986] 159 ITR 670 (Mad.) and CIT v. R.N. Bagchi & Bros. [1988] 170 ITR 174 (Pat.). He further submitted that it is only when the intention is to exploit the assets as commercial assets that the income could be regarded as income from business. In support of this proposition he relied on certain decisions of Calcutta High Court. The submission on behalf of the assessee, on the other hand, was that when entire circumstances are considered, the only finding that could be recorded is that the commercial assets have been exploited as commercial assets under the operating agreement for temporary period and that there was no intention to give up permanently the manufacturing activity. Reliance was placed on certain decisions which would be referred subsequently in this order.
5. We have considered the rival submissions and facts on record. Perusal of the agreement with Laxmi Starch Ltd. indicates that the intention of the assessee was not to part with the assets on permanent basis and to be satisfied with earning of income as owner of those assets. The circumstances, in which the agreement took place, are relevant. As already stated the assessee had accumulated losses to the extent of Rs. 78 lakhs as on 31 -3-1981. Finances were needed for modernisation of plant and machinery for which the assessee had prepared a project. It was not possible for the assessee to obtain the finances. Consequently, the assessee had no option but to engage the services of other company to keep the manufacturing activity going on for some temporary period. It was in this background that the assessee entered into the abovementioned agreement. Various clauses in the agreement indicate that the assessee intended to resume manufacturing activity on expiry of the period of agreement. It is for this reason that there was a clause in the agreement to the effect that the structures constructed by M/s. Laxmi Starch Ltd. would be taken over by the assessee at the time of termination of the agreement. Besides, the assessee had kept to itself the option to obtain new plant and machinery which were to be installed by M/s. Laxmi Starch Ltd. during the operation of the agreement. We were told at the Bar that after 1-4-1986 the assessee has continued the said business on termination of the agreement. The original agreement was only for a short period of three years with option for renewal of maximum period of two years. Consequently, maximum period for which the agreement could remain in force was only five years. From 1-4-1986 the agreement came to an end and commercial assets reverted back to the assessee. In these circumstances, the leasing out of the assets by the assessee amounted to exploitation of commercial assets as commercial assets. There was no intention to treat these assets as non-commercial assets and to be content with obtaining rent as owner. The intention was to treat the assets as commercial assets.
6. On the facts of the present case, the principle laid down by the Supreme Court in CIT v. Vikram Cotton Mills Ltd. would be applicable. In that case, the assessee had incurred losses in the business of manufacture of textiles and on account of heavy losses its manufacturing activities were stopped and it was in these circumstances that the assets were given on lease and the assessee earned rental income. The Supreme Court held that the rental income was income from business. In that case, the lease was for 10 years and renewal was permissible for another 10 years. Even then it was held that rental income was income from business. In our case, lease is for three years and maximum renewal allowable is only two years. Our case stands on a stronger footing. In that case, it was held that intention of the assessee at the time of giving the assets on lease was decisive and that intention was required to be gathered from surrounding circumstances. In the present case, all the surrounding circumstances indicate that the intention was to exploit the commercial assets as commercial assets by allowing manufacturing activity to be done by another company for temporary period. Intention was not to treat the assets as noncommercial assets and earn only rental income.
7. The decision of Supreme Court in the case of New Savan Sugar & Gur Refining Co. Ltd. (supra) on which the learned D.R. has strongly relied had been duly considered in the case of Vikram Cotton Mills Ltd. (supra) and the Supreme Court has observed that facts of each case would have to be scrutinized and no hard and fast rules could be laid down as to in what circumstances rental income would be regarded as income from business. The crucial factor was intention of the assessee at the relevant time and that intention was required to be gathered from surrounding circumstances. In the decision on which the learned Departmental Representative has relied it is no doubt observed that where entire assets are leased out the income would be regarded as income from other sources. However, facts of that case were not similar to the facts of our case. The facts of our case are akin to the facts in the case of Vikram Cotton Mills Ltd. (supra) and that decision supports the conclusion that we have reached.
8. Several decisions of Patna High Court on which the learned D.R. has relied are cases of leasing of colliery which stands totally on different footing and principle laid down in these decisions would not be applicable on the facts of the present case. In this connection, useful reference can be made to decision of Calcutta High Court in CIT v. Premchand Jute Mills Ltd. [1978] 114 ITR769. In that case, the assessee who was carrying on business of manufacture of jute goods incurred heavy losses and as such leased out its jute mills for a period of five years with an option of renewal for another five years. It was held that the rental income was income from business. It was laid down therein that in order to be a business income there must be evidence of exploitation of commercial assets and that exploitation of commercial assets does not necessarily mean exploitation by the assessee himself at all relevant times and that for temporary period the assessee may cause it to be exploited by another person against payment of consideration. It was further emphasized in said decision that crucial factor was the assessee's intention during the period of lease of the assets and that the assets leased out should remain and be treated as commercial assets and be exploited as such. In the present case, we have considered the entire circumstances and we find that the test laid down in the above decision as well as in the decision of the Supreme Court in Vikram Cotton Mills Ltd.'s case (supra) are fulfilled in the present case. The same principle was applied by Guwahati High Court in CIT v. Ganesh Das Shriram "[1990] 183ITR 397 (SC) in which case the assessee had given on lease a cinema theatre because of the fact that he could not obtain licence and that when the assessee obtained licence he started running the theatre and it was held that the rent obtained during the temporary period was business income. The other decisions cited on behalf of the assessee applied the above mentioned principle and as such it is not necessary to refer to those decisions.
9. It is to be noted that during the period when the operating agreement was in force the manufacturing activity was the same as was being carried on by the assessee prior to the said agreement. After the agreement came to an end the assessee resumed the same activity. Consequently, during the operation of the agreement it must be held that the assessee had carried on the same business through Laxmi Starch Ltd. and as such all such deductions were liable to be allowed as are allowable in ex-cases where the same business is being carried on. Where income is derived by the exploitation of the asset and there is only a difference in the manner of exploitation, that is to say, instead of user of the assets by the assessee itself there is a leasing out of the assets, the income derived must be considered to be of the same nature i.e., business income and also income of the same business. We are supported in this view of the matter by the decision of Calcutta High Court in Premchand Jute Mills Ltd.' s case (supra). It has been held in said decision that in such cases unabsorbed depreciation and loss incurred when the asset was exploited by the assessee himself can be carried forward and set off against the income derived from leasing out of the commercial asset. The CIT(A) was justified in giving directions of that nature to the Assessing Officer. The grounds raised by the Department are rejected.
10 to 14. [These paras are not reproduced here as they involve minor issues].