Income Tax Appellate Tribunal - Kolkata
Assistant Commissioner Of Income-Tax vs Kanodia Bros. on 4 February, 1994
Equivalent citations: [1994]50ITD125(CAL)
ORDER
R.V. Easwar, Judicial Member
1. These two appeals filed by the revenue pertain to the assessment years 1982-83 and 1986-87.
2. The first ground in the appeal for the assessment year 1982-83 which is also the only ground in the assessment year 1986-87 is that the CIT(A) was in error in directing the ITO to assess the licence fees received by the assessee under the head 'business'. The dispute arises this way. The assessee is a partnership firm which was deriving income under the Leave and Licence arrangement entered into with Shri Kashi Nath Kanodia representing M/s. Goverdhandas Bishwanath, a firm. The assessee firm was carrying on the business of trading and speculation in various commodities, commission agencies, flour and atta, etc. It also owned a flour mill known as Dhanbad Flour Mills. The flour mill was being worked by the assessee itself prior to 1-8-1975. On 21-4-1976 a document described as Indenture of Leave and Licence was entered into under which the assessee granted Leave and Licence to Kashi Nath Kanodia who represented the partnership of M/s. Goverdhandas Bishwanath to work Dhanbad Flour Mills. Under the agreement, the assessee granted Leave and Licence of the factory premises, machinery, plant and other equipments and accessories to the licensee on certain terms and conditions appearing in the agreement. Under Clause (1) of the agreement, the Leave and Licence covered all the rights and benefits of quotas, licences, grants, privileges, agreements, contracts, orders, permits, etc., relating to the operation of the flour mill. The agreement was for a period of three years commencing from 1-8-1975 and expiring on 31-7-1978. There was a right of renewal of the agreement. In consideration of the Leave and Licence the licensee was to pay a sum of Rs. 1,50,000 per year which was described as "licence fee". The amount was payable in quarterly instalments. It was further provided that the licence fee was payable irrespective of whether the flour mill ran profitably or not. Clause (2) of the agreement provided for the duties of the licensee. Under Sub-clause (vii), the licensee should permit the assessee at any time to enter and inspect the flour mill including the premises, plant and machinery, etc., with the engineers or other personnel for which all facilities had to be provided. More importantly, the sub-clause stipulated that the assessee firm would be entitled to keep a Miller and Electrician and Chowkidar in the flour mill premises. The Miller and the man incharge of the power house of the flour mill shall be persons appointed or whose appointment was approved by the assessee firm. They will not be dismissed or transferred without the written permission of the assessee-firm. The salary of the Miller, Electrician and Chowkidar would however be paid by the licensee. Under Sub-clause (ii), the licensee was to look after and maintain the flour mill in working condition and in a proper state of repair. Sub-clause (x) provided that the name of the licensee shall be added in the licences for the flour mill, food dealers' licence and all other professional licences and municipal licences. Clause (3) provided for the duties of the assessee-firm. In particular Sub-clause (iii) provided that the assessee should furnish all facilities, help and information which may be necessary in connection with past affairs of the flour mill and in connection with the operation of the flour mill to enable the licensee to successfully operate the mill. The assessee firm was also bound to disclose all trade secrets to the licensee. The assessee firm was liable under Clause (4)(3) to make a full and complete disclosure to the licensee with regard to the quotas, permits, orders, etc. but it will have no right to share the profits or will not be liable to share the loss arising out of all outstanding contracts or orders. It was provided in Clause (4)(8) that on the expiration of the licence period the licensee shall hand over peaceful and vacant possession of the flour mill to the assessee. In Clause (4)(10) it was provided that during the period of the Leave and Licence the assessee firm may continue to carry on the business which was carried on by it earlier including the running of any other flour mill. Under Clause (4)(14) it was provided that the assets of the flour mill shall be insured in the joint names of the assessee and the licensee. It was further provided in the same clause that the licensee shall pay premia and produce the policies for inspection of the assessee and all monies to be received under the policies shall be received by the assessee. If the licensee did not take out insurance policies, the assessee had the right to take out the insurance policies and the premia, in such event, it had to be reimbursed by the licensee. The said sub-clause further provided that if due to break-down for want of replacement of machinery etc. the operations in the flour mill remained suspended for over a month the licence fee for such period over one month shall not be payable by the licensee till the operations are restarted.
3. The aforesaid clauses are some of the important clauses of the Leave and Licence Agreement entered into between the assessee and the licensee.
4. In the assessments up to and including the assessment year 1979-80 the amount received by the assessee under the Leave and Licence Agreement was brought to tax as business income. From the assessment year 1980-81, the ITO took the view that the amount should be taxed under the head 'other sources' and not under the head 'business'. The appeals for the assessment years 1980-81 and 1981-82 are stated to be pending.
5. In line with the decision taken in the assessment years 1980-81 and 1981-82, the ITO brought the amount received by the assessee under the Leave and Licence Agreement to tax under the head 'other sources' for the assessment years 1982-83 as also 1986-87. On appeal, the CIT(A) found that the licence period was only for a short period of three years and thereafter though the same was not renewed in writing the licensee was allowed to carry on the operations on oral arrangement. He, therefore, took the view that the entire arrangement was only a temporary one. He noticed that there were labour troubles which forced the assessee to discontinue the working of the mill and enter into the Leave and Licence Agreement so that the assessee would get a fixed income without the risk. He further noticed that the residential bungalow inside the mill premises was retained by the assessee so that the manager of the assessee-firm could stay there and supervise the mill. He also noticed that under the agreement the assessee had the right to inspect the flour mill and even appoint Miller and Electrician etc. which according to him showed that the assessee had control over the mill and its activities. Having regard to the aforesaid facts he took the view that the income under the Leave and Licence Agreement arose out of the exploitation of a commercial asset, namely, Dhanbad Flour Mills and should be brought to tax as business income.
6. The decision of the CIT(A) is questioned in the first ground for the assessment year 1982-83 and in the only ground for the assessment year 1986-87. The Ld. D.R. mainly argued that the Leave and Licence was not a temporary arrangement as can be seen from the very fact that after 31-7-1978 it was still being continued though under an oral arrangement. It is, therefore, submitted that it was never the intention of the assessee to resume the flour mill operation. Therefore the exploitation of the asset is not a business man but was only as a owner. The income therefore was rightly brought to tax under the head 'other sources', it was argued.
7. The learned Counsel for the assessee on the other hand contended that the recitals in the Leave and Licence Agreement disclosed an intention on the part of the assessee to resume the flour mill operation after the expiry of the term of the agreement. He also drew our attention to the fact that after the expiry of the agreement on 31-7-1978, there was no agreement in writing but the licence was being extended under oral arrangement with the licensee which itself indicated the temporary nature of the licence. He drew our attention to the fact that the agreement was not even "lease" but was only an agreement granting Leave and Licence to the licensee to work the flour mill. According to him, there were two reasons which forced the assessee to let out the flour mill under the licence agreement. One was the continuous losses incurred by the assessee from the assessment year 1974-75. The other was the continuous labour troubles faced by the assessee. According to him, Sub-clauses (vii) and (ix) of Clause (2) of the agreement established that the assessee retained control over the operations of the mill and that it had no intention of going out of business. In this connection he also relied on Clauses 4(8) and 4(10) in support of his contention that the income should be assessed only under the head 'business'. He cited the judgment of the Supreme Court in CIT v. Vikram Cotton Mills Ltd. [1988] 169 ITR 597.
8. We have heard the rival submissions. We have perused the Leave and Licence Agreement and also the orders of the deptl. authorities. The fact that the assessee itself was running a mill earlier to 1-8-1975 is not disputed. The fact that there were heavy losses in the assessment years 1974-75 to 1976-77 is established by the assessments made for these years. They had resulted in losses amounting to Rs. 53,141, Rs. 1.92 lacs and Rs. 1.66 lacs respectively. It is recorded in the assessment orders that the turnover of the assessee had gone down heavily during these years on account of reduced wheat supply by the Government. The Dhanbad Flour Mills itself has incurred losses of Rs. 1.29 lacs, Rs. 3.14 lacs and Rs. 2 lacs in the assessment years 1974-75 to 1976-77 as can be seen from the assessment orders. The fact that there were labour troubles in addition to the losses has been found by the CIT(A) and this finding has not been challenged. It is, therefore, clear that the assessee was forced to exploit the flour mill in such a manner that it could resume the same at any time when conditions improve. The best way to exploit the flour mill which was a commercial asset on account of its being used by the assessee for its business was to enter into some kind of arrangement by it. The assessee was assured of income without the attendant risk. The various clauses of the Leave and Licence Agreement show that the intention of the assessee is not to disown or discontinue once for all the flour mill business. They also indicate an intention to retain control of the flour mill and to regain the same as soon as the conditions improve. For instance the Leave and Licence Agreement was only for a period of three years. Secondly the assessee had the right to enter and inspect the flour mill with its technical personnel and engineers. The assessee also had the right to appoint a Miller, Chowkidar and Electrician. It had the right to enter and remain in the residential bungalow to house the manager of the mill inside the flour mill premises. Its name was not deleted from the licence granted under the professional and municipal laws. The name of the licensee was merely added to the assessee's name. The assessee had to disclose all the details regarding the operations of the mill including the trade secrets to the licensee so as to enable the licensee to continue the operations of the mill. The insurance policies in respect of the assets in the flour mill had to be in the joint names of the assessee and the licensee. In fact it was the assessee who was entitled to receive the monies payable under the insurance policies. The assessee was free during the period of the Leave and Licence Agreement to engage itself in any business activity relating to flour, atta, etc. including the running of any other flour mill. The crucial stipulation in the agreement was that the licence fee was to be proportionately reduced if on account of break-down of machinery the mill does not function for more than a month. This stipulation, in our opinion, is more or less decisive, since it indicates that the licence fee was related to the actual working of the mill. Had it been the intention of the assessee to exploit the flour mill as an owner thereof, such a provision would not have been made and the licence fee would have been made payable in full irrespective of the fact whether the flour mill worked or not. The fact that the licence fee was made dependent upon the actual functioning of the mill subject to the initial period of one month itself indicates an intention on the part of the assessee to exploit the commercial asset, namely, the flour mill in the manner of a businessman.
9. We may refer briefly to a few decisions. In Sultan Bros. (P.) Ltd. v. CIT (1964) 51 ITR 353 it was observed by the Supreme Court that nothing can by its very nature be a commercial asset and an asset becomes a commercial asset only because it is used in a business and riot because of any inherent quality. In the present case it is an undisputed fact that the flour mill was used by the assessee as a business asset and that it operated the same itself till 1-8-1975. On that day it was a business or commercial asset in its hand. It was further held in that decision that whether a particular letting is business or not would depend on the circumstances of each case and each case should be looked at from the business point of view. From the businessman's point of view the present case is a clear case of exploitation of a commercial asset as part of the business activity of the assessee. It is clear from the background of the case as well as the various clauses of the Leave and Licence Agreement that the assessee had not exploited the asset as an owner thereof. In Everest Hotels Ltd. v. CIT [1978] 114 ITR 779 (App.) the Calcutta High Court laid down the following principles in order to determine whether the income in such cases was a business income or not :
(1) In order to be a business income within the meaning of Section 10 there must be evidence of exploitation of a commercial asset.
(2) Exploitation of a commercial asset does not necessarily mean exploitation by the assessee himself at all material times. The assessee may temporarily cause it to be exploited by another person against payment of consideration and for this purpose may also execute a lease for a fixed period even with clauses of option to renew.
(3) But in order that the income derived from the lease may be taxable under Section 10 it must be shown that the lessor's intention was that during the period of the lease the asset leased out must remain and he treated as a commercial asset and exploited as such.
(4) This intention of the lessor referred to above has to be ascertained from the cumulative effect of all the terms of the lease and other material circumstances.
Applying the above principles to the present case we find that the Leave and Licence Agreement gives rise only to business income. The fact that a fixed annual licence fee of Rs. 1,50,000 was stipulated does not militate against the contention that the income arose out of the exploitation of a commercial asset. A similar contention by the revenue before the Madras High Court in G.R. Narasimier & Co. v. CIT [1969] 73 ITR 257 was negatived by his Lordship Justice Veeraswami speaking for the Court. It was contended that the fixed payment shows that the assessee had no interest in the outcome of the business. The Madras High Court held that the fixation of an invariable monthly or yearly payment does not negative the idea of carrying on a business. It was observed that there may be people who may take risk and make a profit or incur loss and there may be others who may not be willing to take risk but still willing to run a business by themselves or through other means and proceed cautiously and make a moderate profit and logically speaking, there can be no reason why the latter category of activity is anytheless a business carried on by such persons. The Court was inclined to think that if there is a commercial asset which can be exploited in many ways which in the process may be of a wasting character or subject to wear and tear then irrespective of the particular method or mode of working, the activity will be of a commercial character and would fall within the wide ambit of the word "business". In the judgment of the Supreme Court cited by the learned Counsel for the assessee the test was held to be predominantly a matter of intention. We have to hold on the terms of the Leave and Licence Agreement that the intention of the assessee was to resume the business and that the exploitation of the commercial asset, namely, the flour mill was a business activity giving rise to income from the business.
10. For the aforesaid reasons we uphold the order of the CIT(A) on this point and dismiss the first ground for the assessment year 1982-83 and the only ground for the assessment year 1986-87.
11. In the second ground the revenue challenges the order of the CIT(A) directing the ITO to exempt the gains or profit derived by the assessee on sale of gold bonds. This issue is covered in favour of the assessee. The Tribunal, Calcutta Bench, has held by orders dated 12-4-1991 in the case of the partners of the assessee firm that there would be no capital gains on the sale of gold bonds. Respectfully following the aforesaid order we uphold the conclusion of the CIT(A) that the gains on the sale of gold bonds are not taxable under the Act. This ground is dismissed.
12. A similar conclusion regarding the taxability of the sale proceeds in respect of gold bonds was considered by the Third Member of the Madras Bench of the Tribunal in the order in Kartikeya Nagri Trust v. Fifth ITO [1986] 18 ITD 200. It was held there that the gold bonds are not capital assets within the meaning of Section 2(14)(iv) of the Act, and, therefore, the surplus arising from the sale is not taxable at all under the Income-tax Act.
13. The last ground in the appeal for the assessment year 1982-83 is that the CIT(A) erred in allowing the expenses of Rs. 3,255 incurred by the assessee for valuing the assets of the flour mill at Dhanbad owned by the assessee firm. The ITO disallowed the expenses on the ground that they were not incurred wholly and exclusively for earning the licence fee from the licensee.
14. On appeal, the CIT(A) took the view that since the flour mill has been held by him to be a commercial asset or business asset in the hands of the assessee and the income has been directed to be assessed under the head "business" the expenditure laid out for valuing the assets of the flour mill should be allowed as business expenditure as per the judgment of the Calcutta High Court in CIT v. Asiatic Oxygen & Acetylene Co. Ltd. [1981] 132 ITR 506. This conclusion of the CIT(A) is assailed on behalf of the department before us. It is contended that the expenditure does not constitute business expenditure. It was stated by the learned Counsel for the assessee that since the assessee was unable to get vacant possession of the flour mill from the licensee who refused to hand over the mill, the assessee negotiated for the sale of the flour mill in favour of the licensee and it was in this connection that the assets were valued. Apparently the sale consideration was to be fixed after taking into account the market value of the assets. We fail to see how the expenditure can be allowed as business expenditure. The expenditure was not in connection with carrying on of the business but it was in connection with the sale of the flour mill. The valuation itself was made only for fixing the sale proceeds of the flour mill as there were negotiations between the assessee and the licensee for the sale of the flour mill. Having regard to the statement of the learned Counsel for the assessee before us, the ratio of the Calcutta High Court judgment relied on by the CIT(A) is not applicable. In that case, the valuation was made for the purpose of improving the creditworthiness of the company in order to obtain loans for the purpose of its business without difficulty. Under those circumstances it was held that the expenditure on re-valuation of the fixed assets should be allowed as revenue expenditure. The question whether the expenditure on revaluation of the assets for the purpose of fixing the sale price of the assets was allowable as business expenditure or not was not decided by the Calcutta High Court. As held by the Supreme Court in CIT v. Gemini Cashew Sales Corpn. [1967] 65 ITR 643 any expenditure in connection with closure of the business cannot be allowed as business expenditure. The expenditure in the present case falls under that category. It is not incurred in connection with the carrying on of the business but was incurred in connection with the sale of the flour mill. The Calcutta High Court has held in Binani Printers (P.) Ltd. v. CIT [1983] 143 ITR 338 applying the Supreme Court judgment cited above that notice pay and compensation paid by the assessee on the closure of the business of printing establishment was not an allowable expenditure since the same was not necessary for carrying on the business. In the present case the expenditure on valuing the assets was not necessary for carrying on the business. It was necessary only to fix the sale price of the flour mill. We, are therefore of the opinion that the expenditure cannot be allowed as business expenditure. We reverse the order of the CIT(A) on this point and allow the third ground.
15. In the result, the appeal for the assessment year 1982-83 is partly allowed and that for the assessment year 1986-87 is dismissed.