Patna High Court
Commissioner Of Income-Tax vs S.K. Sahana And Sons Ltd. on 20 September, 1974
Equivalent citations: [1976]102ITR437(PATNA)
Author: N.L. Untwalia
Bench: N.L. Untwalia
JUDGMENT S.K. Jha, J.
1. These references under Section 256(1) of the Income-tax Act, 1961, relate to two assessment years, namely, 1963-64 and 1964-65 of the assessee, Messrs. S. K, Sahana and Sons Ltd. The common question of law referred for our opinion is :
"Whether, on the facts and in the circumstances of the case, income of the assessee received from the managing contractor was income from business ?."
2. The assessee is a public limited company deriving income from mining business known as New Bansjora Colliery. The assessee and Messrs. Khas Ganeshpur Coal Mines (P.) Ltd. entered into an agreement dated the 22nd of April, 1959 (annexure "C/2"), to some of the terms of which I shall refer at a proper and appropriate place. By this agreement, Messrs. Khas Ganeshpur Coal Mines (P.) Ltd. (hereinafter referred to as "the managing contractor") was allowed to carr)' on the coal business of the assessee and to pay to it profit at a certain rate on the amount of coal raised and soft and hard coke manufactured subject to a minimum guaranteed amount. This income which the assessee received from the managing contractor aforesaid was assessed by the Income-tax Officer as income from other sources and not from business. The assessee having preferred appeals before the Appellate Assistant Commissioner and having failed there too, pursued further appeals before the Tribunal. The contention put forward on behalf of the assessee before the Tribunal, as has also been advanced in this court, was that the income received by the assessee from its managing contractor in respect of the two assessment years in question was an income from business since it arose out of a contract between a principal and an agent, the principal still carrying on the business through its agent--
the managing contractor. The question lor determination before the Tribunal was as to whether, on a true construction of the deed of agreement between the parties, it was a transfer of the business, or a letting out of the commercial assets, or was there merely a contract of agency so that the assessee could still be held to be carrying on the business through its agent. The Tribunal, by its appellate order, found as follows. The relationship created between the assessee and the managing contractor was clearly one of principal and agent, The power of attorney executed by the assessee in favour of the managing contractor strengthened the conclusion that the legal relationship between the parties was that as between a principal and an agent and the cumulative effect of all the various Clauses of the agreement established that the managing contractor aforementioned was only working as an agent of the assessee and the transaction was not at all that of letting out. In other words, there was not even a lease executed in favour of the managing contractor. The Tribunal further held that the managing contractor aforesaid was carrying on the colliery business under the effective control and guidance of the assessee, which (control and guidance) militated against any contention that the relationship between them was one of lessor and lessee. On these findings, the Tribunal accepted the contention of the assessee that there was absolutely no question of any transfer either out and out or even by way of lease of the business of the assessee ; on the contrary, the assessee was very much carrying on its business through its agent, the managing contractor. The income, thus, according to the Tribunal, clearly fell within the purview of "income from business" and could not be assessed as "income from other sources."
3. Learned standing counsel for the department drew our attention to some of the Clauses in the aforesaid deed of agreement dated the 22nd of April, 1959 (anuexure "C/2"), in order to persuade us to hold that the transaction should not be treated as anything else than one of stopping of the business of the coal mining with regard to the particular colliery of the assessee and transferring the business to the so-called managing contractor. Learned standing counsel also invited our attention to the decision of the Supreme Court in the case of New Savan Sugar and Gnr Refining Co. Ltd. v. Commissioner of Income-tax, [1969] 74 ITR 7(SC). Before adverting to any case law on the point, I must at the outset state that authorities arc settled that each case must be decided on the facts and on a proper construction of the documents iivquestion while judging whether a transaction in a particular case is that of a transfer of commercial assets or a transfer of business out and out. No hard and fast Rule or guideline can be culled out from any of the decisions so as to apply them to the facts of any particular case. I shall therefore, refer to some of the Clauses of the deed of agreement to show that the transaction in question has rightly been held by the Tribunal to be of the nature of a contract between a principal and an agent--the assessee as the principal still carrying on the business through the agent. Strictly speaking, it was needless for me to go into this question since no such question has been sought to be referred by the Commissioner of Income-tax nor has any such question been referred for our determination. It is only on account of the strenuous submissions made by learned standing counsel for the department challenging such a finding of the Tribunal, although in law it was not open to him to so challenge it, I chose to refer to merely some of the salient features of the deed. Not only the deed describes the assessee as being the proprietor of the colliery in question but also the operative portions of the document, some of which I shall presently refer to, do go to support such a description in the preamble of the deed. Clause 9 of the deed expressly stipulates that, notwithstanding anything to the contrary contained elsewhere in the deed authorising the managing contractor to sell coal or coke, the managing contractor shall not sell or dispose of any coal or coke otherwise than by despatching the same by railway except with the express written consent of the proprietor (the assessee) in the presence of the representative of the latter. Clause 10 stipulates that the assessee had undertaken to execute in favour of the managing contractor or any of its nominee or nominees a power of attorney authorising it to exercise all or any of the powers as may be necessary and required for the purpose of working, managing and carrying on the business of colliery in the manner provided under the deed, for the breach of any of which the assessee shall be entitled to be reimbursed to the extent of any damage caused by such breach. It is worthwhile to recite one of the stipulations in Clause 7 here, which authorises the managing contractor to carry on the business of the colliery of the assessee in the existing name and style of the New Bansjora Colliery. Clause 14 of the deed fastened a liability upon the managing contractor to keep and maintain proper books and registers showing raisings and despatches of coal and coke from the colliery and to keep such books and registers open for inspection of the assessee (proprietor) or its authorised agents, at any time during the usual business hours after giving 7 days' notice to the managing contractor. Clause 15 further stipulates that the managing contractor must prepare monthly returns of the coal raised and coke manufactured and despatched from the colliery and must send a copy of the same to the assessee (proprietor) by registered post within the month succeeding. Clause 16 laid down the rate at which payments were to be made to the assessee, such rates being as follows :
(i) rupee one and annas eight per ton of coal raised,
(ii) rupees two and annas four per ton of soft coke manufactured,
(iii) rupees three per ton of hard coke manufactured, etc.,
4. with a further stipulation that the assessee shall be entitled to get from the managing contractor a minimum guaranteed amount of Rs. 18,000 per annum only. Stipulations in the different Clauses of the long deed can very well be multiplied but only a few of the Clauses to which I have referred are sufficient to compel me to hold that this document along with the general power of attorney executed by the assessee in favour of the managing contractor (annexure."C/3.") authorising the latter to carry on transactions for and on behalf of, and to prosecute and defend litigations for and on behalf of, the assessee shows nothing but the creation of the relationship substantially akin to that of principal and agent between the assessee and its managing contractor. It was not even a case of letting out the commercial assets. The assessee was holding sufficient control in the day to day management of the business--the raising, the despatch of coal, soft and hard coke, etc. The assessee, on these facts, cannot but be said to be carrying on the business itself. The position of the managing contractor was not appreciably different from that of an agent. The case, therefore, stands on a much stronger footing than those of cases wherein fell for consideration the question as to whether a particular case was one of the letting out of business or, on the contrary, letting out of the commercial assets. The decision of the Supreme Court in the case of Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd., [1951] 20 ITR 451 (SC) dealt with a case of letting out of commercial assets. Even in such circumstances, their Lordships of the Supreme Court did hold that the lessor in that case was still carrying on business and that income from such letting out could not be said to be anything else than income from business. In the case of Ray Talkies v. Commissioner of Income-tax, [1974] 96 ITR 499 (Pat) (Tax Cases Nos. 11, 12, 13 and 14 of 1968), this very Bench, by a judgment dated the 2nd of August, 1973, reviewed a large number of case-law on the point and upheld the contention of the assessee in that case that, where it had let out the commercial assets only for the purpose of earing income, such income was income from business and not from other sources. In one of the cases decided by the Supreme Court, which has been referred to in the aforesaid judgment of this Bench, namely, Commissioner of Income-tax v. Calcutta National Bank Ltd., [1959] 37 ITR 171 (SC), observations of that court, relied upon, were to the effect that, though, ordinarily, "business" implies a continuous activity in carrying on a particular trade or avocation, it may also include a quiescent activity. The instant case, as I have already stated above, stands on a much stronger footing since the assessee was not engaged in any quiescent activity but in active prosecution of its business. The principles laid down by the Supreme Court in the case of Shri Lakshmi Silk Mills and by this court in the case of Ray Talkies do go to support the contention put forward on behalf of the assessee that the income in the present case was income from business and not from other sources.
5. Turning now to the decision of the Supreme Court in New Savan Sugar's case, it will be noticed that their Lordships of the Supreme Court found on a scrutiny of all Clauses of the so-called indenture of lease that the intention of the assessee in that case was to part with the entire machinery of the factory and the premises with the obvious purposes of earning a rental income. To quote the finding of the Supreme Court at page 14:
"It was not the intention of the assessee to treat the factory and machinery, etc., as a commercial concern during the subsistence of the lease."
6. Such a conclusion had been arrived at by the Supreme Court on a consideration of Clauses 11, 12, 13 and 14 of the deed which fell for consideration of their Lordships, The case of Shri Lakshmi Silk Mills was referred to in New Savan Sugar's case and accepted as laying down the correct proposition of law but on facts it was distinguished by the Supreme Court in so far as their Lordships in New Savan Sugar's case pointed out that the ratio of the decision was not applicable to that case since in the New Savan Sugar's case, the assessee had intention to part with, and did actually part with, the entire factory and premises for the purpose of earning rental income only and during the subsistance of the lease in question the assessee had never the intention to treat the factory and machinery as a commercial concern. In that context, it was also laid down at page 15:
"But this court clearly indicated that no general principle could be laid down which would be applicable to all cases and that each case must be decided on its own circumstances according to ordinary commonsense principles,"
7. Borrowing the language of the Supreme Court, the instant case decided on its own circumstances, according to ordinary commonsense principles, induces me to hold that the facts of the present case put it in a much stronger position than the case of the assessee either in Shri Lakshmi Silk Mills case or in the case of Ray Talkies .
8. For the reasons stated above, I must answer the question referred in favour of the assessee and against the revenue and hold that, on the facts, and, in the circumstances of the case, the income of the assessee received from the managing contractor was income from business. The question is thus answered in the affirmative. The assessee must be entitled to have its costs--consolidated hearing fee assessed at Rs. 100 only.
Untwalia, C.J.
9. I agree.
Question answered in the affirmative.