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PETITIONER: COMMISSIONER OF EXCESS PROFITS TAX,BOMBAY CITY

       Vs.

RESPONDENT: SRI LAKSHMI SILK MILLS LTD.

DATE OF JUDGMENT: 18/09/1951

BENCH: MAHAJAN, MEHR CHAND BENCH: MAHAJAN, MEHR CHAND FAZAL ALI, SAIYID MUKHERJEA, B.K.

CITATION:  1951 AIR  454            1952 SCR    1  CITATOR INFO :  D          1955 SC 176  (14)  D          1965 SC1974  (5)  D          1969 SC1062  (7)  RF         1988 SC 460  (5,7)

ACT:     Excess  Profits Tax Act (XV of 1940), s. 2  (5)--"Income from  business "--Manufacturing company--Rent of  plant  and machinery let out to others--Whether income from business.

HEADNOTE:     The  respondent,  a company formed for  the  purpose  of manufacturing silk cloth, installed a plant for dyeing  silk yarn  as  a  part of its Business.   During  the  chargeable accounting  period  (last January, 1943, to  31st  December, 1943) owing to difficulty in obtaining silk yarn on  account of  the war, it could make no use of this plant and  it  re- mained  idle for some time. In August, 1943, the  plant  was let  out to another company on a monthly rent. The  question being whether the income received by the respondent  company in  the  year 1948 by way of rent of this plant  was  income from business and assessable to excess profits tax, the High Court  of Bombay held that, as the assessee was not able  to use  the plant as a commercial asset, it had ceased to be  a commercial  asset in the assessee’s hands and the  rent  re- ceived was not income from business. On appeal:     Held, that an asset which was acquired and used for  the purpose of the business by a company formed for carrying  on business and earning profits, does not cease to be a commer- cial asset of that business as soon as it is temporarily put out  of  use  or let out to another person for  use  in  his business or trade; the income from the asset would be profit of  the  business irrespective of the manner in  which  that asset  is exploited by the owner, and the rent  in  question was therefore income from business and assessable to  excess profits tax. No general principle, however, can be laid down which is applicable to all cases. Each ease has to be decid- ed on its own circumstances.     Sutherland v. Commissioners of Inland Revenue [1918]  12 Tax Cas. 63 relied on.     Inland  Revenue  Commissioners v. lies [1947]  1  A.E.R.

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798,  Croft  v. Sywell Aerodrome Co., Ltd. [1942]  1  A.E.R. 110, Inland Revenue Commissioners v. Broadway Car Co.,  Ltd. [1946] 2A.E.R. 609 distinguished. Judgment of the Bombay High Court reversed. 2

JUDGMENT: CIVIL APPELLATE  JURISDICTION:  Civil Appeal No. 46 of 1950.   Appeal by special leave from a judgment of the High  Court of Judicature at Bombay dated 23rd March, 1948, (Chagla C.J. and Tendolkar J.) in Income Tax Reference No. 16 of 1947.   M.C. Setalvad, Attorney-General for India (Gopal  Singh, with him) for the appellant.     N.C. Chatterjee (B. Sen, with him)for the respondent.     1951. September 18. The Judgment of the Court was deliv- ered by     MAHAJAN J.--The sole controversy in this appeal  centres round  the point as to whether or not excess profits tax  is payable on the sum of  Rs. 20,005 received by the respondent from Messrs Parakh & Co. by way of rent for the dyeing plant let out to them during the chargeable accounting period.     The respondent (Sri Lakshmi Silk Mills Ltd.) is a  manu- facturer  of  silk cloth, and as a part of its  business  it installed a plant for dyeing silk yarn.  During the  charge- able accounting period (1st January, 1943, to 31st December, 1943) owing to difficulty in obtaining silk yarn on  account of  the  war it could make no use of this plant and  it  re- mained  idle for some time.  On the 20th August,  1943,   it was let out to Messrs E. Parakh & Co. on a rent of Rs. 4,001 per month. The Excess Profits Tax Officer by his  assessment order dated 11th June, 1945, included the sum of Rs.  20,005 realized  as  rent for five months, in the  profits  of  the business of the respondent and held that excess profits  tax was  payable  on this amount.  This order was  confirmed  on appeal  by the Appellate Assistant Commissioner and on  fur- ther  appeal  by  the Income-tax  Tribunal.   The  Tribunal, however,  on being asked referred the following question  of law to the High Court for its opinion:     "Whether  in the circumstances of the case,  the  asses- see’s income of Rs. 20,005 is profits from business 3 within  the meaning of section 2 (5) of the  Excess  Profits Tax  Act  and therefore or otherwise liable  to  pay  excess profits tax ?"     The  High Court answered the question in  the  negative. This is an appeal by special leave from this decision.     It  was contended on behalf of the  Commissioner  before the High Court that the dyeing plant was a commercial  asset of the assessee’s business for the purpose of earning profit and  if this commercial asset yielded income to him  in  any particular  manner, it was income from the assessee’s  busi- ness for the purpose of the Excess Profits Tax Act.  It  was said  that  it  was immaterial whether  a  commercial  asset yields  income by use of the assessee himself or  its  being used  by someone else.  This contention was disposed  of  by the learned Chief Justice in these words :-     "Mr. Joshi seems to be right but with this qualification that the commercial asset must be at the time it was let out in  a  condition  to be used as a commercial  asset  by  the assessee.  If it has ceased to be a commercial asset, if its use as a commercial asset has been discontinued, then if the assessee  lets  it out, he is not putting to  use  something

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which is a commercial asset at the time.     "Now,  on the facts found by the Tribunal, it  is  clear that  when  the assessee let out this dyeing plant,  it  had remained idle for some time.  He could not obtain silk  yarn on  account of the war and therefore it was not possible  to make use of it as a commercial asset as far as the  assessee himself  was concerned and it was only for that reason  that he  let it out to Messrs E. Parakh & Co.  I  can  understand the  principle  for which Mr. Joshi is  contending  that  it makes no difference what an assessee does with a  commercial asset  belonging to him. He may use it as he likes. So  long as  it yields income it is the income of his business.  Var- ious cases have been cited at the Bar and I think that those cases  though apparently conflicting are reconcilable if  we accept this principle to be the correct principle 4 and apply this ratio as the ratio emerging from these  cases and  I will state the principle and the ratio again that  if an assessee derives income from a commercial asset which  is capable  at  the time of being used as a  commercial  asset, then  it is income from his business, whether he  uses  that commercial asset himself or lets  it out to somebody else to be  used.   But if the commercial asset is  not  capable  of being used as such,  then its being let out does not  result in an income which is the income of the business."      Mr.  Justice Tendolkar concurred in this view  and  ob- served as follows :--      "The  ratio  of all these cases to my mind is  that  if there is a commercial asset which is capable of being worked by  the assessee himself for the purpose of earning  profits and  the  assessee instead of doing so,  either  voluntarily allows someone else to use it on payment of a certain sum or is  compelled by law to allow it to be used in such  manner, then  what he receives is income from business.  But if  the commercial asset has ceased to be a commercial asset in  the hands of the assessee and thereafter he gets what he can out of it by letting it out to be used by others, then the  rent he receives is not income from any business that he  carries on."      The  learned  Attorney-General  pointed  out  that  the nature  of a commercial asset is not changed because a  par- ticular  person is unable to use it.  The inability  of  the assessee to make use of it in certain circumstances does not in  any  way’ affect the nature of the asset  and  cause  an infirmity  in the asset itself.  It was contended that  when the  dyeing  plant became idle for a short time  during  the chargeable  accounting period it did not cease to be a  com- mercial  asset of the respondent for it had no  other  busi- ness;  that all the assets of the respondent  including  the dyeing plant were the assets of the business, that  whatever income was derived by the use of these assets including  the income  that an asset fetched by its being let out  was  the business  income  of  the assessee, and that  there  was  no warrant 5 in  law  for the proposition that a commercial  asset  which yields  income  must be used as an asset by  the  respondent himself before its income becomes chargeable to tax.     The  learned  counsel for the respondent urged  that  as soon as the assessee found difficulty in obtaining yarn  the dyeing plant became redundant for its business and ceased to be an asset of its business and any income derived from  the rent  by letting out this asset was income received  by  the assessee  from  other sources and therefore was not  charge- able to excess profits tax.

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   In  our  opinion, the contention raised by  the  learned Attorney-General  is sound.  The High Court was in error  in engrafting  a  proviso on the rule deduced by  it  from  the authorities  considered by it, to the effect that a  commer- cial asset of a business concern which yields income must at the  time it was let out be in a condition to be used  as  a commercial asset by the assessee  himself.  We  respectfully concur   in the opinion of  the  learned Chief Justice  that if  the commercial asset  is not capable of being   used  as such, then its being let out to others does not result in an income  which is the income of the business, but  we  cannot accept  the view that an asset which was acquired  and  used for  the purpose of the business ceased to be  a  commercial asset of that business as soon as it was temporarily put out of use or let out to another person for use in his  business or trade.  The yield of income by a commercial asset is  the profit of the business irrespective of the manner in  which. that asset is exploited by the owner of the business. He  is entitled  to exploit it to his best advantage and he may  do so  either by using it himself personally or by  letting  it out  to somebody else. Suppose, for instance, in a  manufac- turing concern the use of its plant and machinery can advan- tageously be made owing to paucity of raw materials only for six  hours  in a working day, and in order to get  the  best yield  out of it, another person who has got  the  requisite raw materials is allowed to use it as a licensee on  payment of certain 6 consideration  for  three hours; can it be said  in  such  a situation with any  justification that’ the amount  realized from  the licensee is not a part of the business  income  of the  licensor.   In this case the company  was  incorporated purely as a manufacturing concern with the object of  making profit.  It installed plant and machinery for the purpose of its business, and it was open to it if at any time it  found that any part of its plant "for the time being" could not be advantageously  employed for earning profit by  the  company itself, to earn profit by leasing it to somebody else. It is difficult to hold that the income thus earned by the commer- cial  asset is not income from the business of  the  company that  has been solely incorporated for the purpose of  doing business and earning profits. There is no material  whatever for  taking the view that the assessee company was  incorpo- rated with any other object than of carrying on business  or trade. Owning properties and letting them was not a  purpose for  which  it was formed and that being  so,  the  disputed income  cannot  be  said to fall under any  section  of  the Indian  Income-tax  Act  other than section  10.   Cases  of undertakings  of this nature stand on an entirely  different footing and are distinguishable from cases of individuals or companies acquiring lands or buildings and making income  by letting  them on hire.  These latter cases may  legitimately fall  under the specific provisions of section 9 or  section 12,  though the High Courts in this country are by no  means unanimous on this subject; but for the purpose of this  case it is unnecessary to resolve that conflict.     It may be observed that no general principle can be laid down which is applicable to all cases, and each case has  to be  decided on its own circumstances. Decisions of the  Eng- lish  courts  given under the Finance Acts,  the  scheme  of which is different from the Indian Income-tax statutes,  are not  always  very helpful in dealing  with  matters  arising under the Indian law and analogies and inferences drawn from those decisions are at times misleading. We, however, are in respectful agreement with the observations of Lord

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7 President Strathclyde in Sutherland v. The Commissioners  of Inland Revenue(1) that if a commercial asset is  susceptible of  being put to a variety of different uses in  which  gain might be acquired, whichever of these uses it was put to  by the appellant, the profit earned was a user of the asset  of the same business. A mere substituted use of the  commercial asset  does  not change or alter the nature of  that  asset. Whatever  the  commercial asset produces is  income  of  the business  of which it is an asset, the process by which  the asset makes the income being immaterial.     Mr.  Chatterjee  for the respondent stressed  the  point that  as the dyeing plant in the present case could  not  be made  use of by the assessee in its  manufacturing  business owing  to  the non-availability of yarn, it ceased to  be  a commercial asset of the business of the assessee and  became redundant  to  that business and that being so,  any  income earned  by  this asset which had ceased to be  a  commercial asset was not an income of the business but must be held  to have been derived from a source other than business and fell within the ambit of section 12 of the Indian Income tax Act, and  on this income excess profits tax was not payable.   He contended that the facts of this case were analogous to  the case  of  Inland  Revenue Commissioners v.  lies(2)  and  it should  be  similarly  decided. In that  case  the  taxpayer carried  on  the  business of sand and  gravel  merchant  on certain  land  and at the same time he granted  licences  to three firms to enter his land and win gravel for  themselves in  return  for which he received from them a  royalty   for each cubic yard of gravel taken away.  It was held that  the royalties  were  not  part of the profits  of  the  business because, in granting the licences, the taxpayer was exploit- ing his rights of ownership in the land and was not carrying on  his business of a sand and gravel merchant.  The  income was held taxable as an income from an investment and did not fall  under Schedule D which concerns profits earned from  a trade. Mr. Chatterjee also laid emphasis on the observations of Lord (1)  (1918) 12 Tax Cas. 63.             (2) [1947] 1  A.E.R. 798. 8     Greene  M.R.  in  Croft v. Sywell  Aerodrome  Ltd.  (1), wherein  the learned Master of the Rolls observed  as   fol- lows:     "I cannot myself see that a person who leases the   land to  others, or grants licences to others to come   upon  it, is doing anything more than exploiting his    own rights  of property,  even  if the tenant or licensee      is,  by  the terms  of the lease or licence, entitled himself   to  carry on a trade on the land."   It  was urged that what the assessee was doing in  this case  was exploiting his rights of property by  letting  the dyeing  plant to other persons precisely in the same  manner as the owner of land in the case cited above was  exploiting his own rights to property by granting a licence to  another to  come on his land. The argument, in our  opinion,  though attractive, is fallacious.  The analogy between the case  of land  and of a dyeing plant for the purpose of taxing  stat- utes is inappropriate. The distinction becomes apparent from the following passage which occurs in Atkinson J.’s judgment in I les’s case(2) :--      "Then  it was suggested by counsel for the  Crown  that the  case was like the Desoutter case(3), where it was  held that, if you make use of a patent in your business and  also receive  royalties  from  the use of the  patent  by  others

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licensed  to use it, those royalties cannot be  regarded  as receipts from an investment. In other words, the door has to be either open or shut. A patent is either an investment  or it is not.  The suggestion was that freehold land is in  the same  position, and if you carry on business on part of  it, whatever you do with the rest by way of licensing or letting cannot  be  regarded as producing  income  from  investment. That,  however, is dead in the teeth of the judgment in  the Broadway Car Co. case(4). The same argument was tried there, but  Tucker L.J. said he thought the Desoutter  case(3)  had very  little to do with it, as there was a great  difference between land   (1)  [1942]  1  A.E.R. 110.                 (3)  [1946]  1 A.E.R. 58.   (2)  [1947]  1  A.E.R. 798                  (4)  [1946]  2 A.E.R. 609. 9 and  a  patent, and he did not think the  Desoutter  case(1) threw any light on the matter  ......  A patent is     quite different from freehold land."     These  observations  appositely apply to the case  of  a company  incorporated for the purpose of doing business  and earning profit by the process of manufacture.   Letting  out a  part of its machinery in a certain situation in order  to make the business advantageous as a whole does not alter the nature  of the income. The case of an owner of land  letting out  his land and carrying on exploitation of part  of  that land by selling gravel out of it, as at present advised,  in our  opinion, would fall under section 9 of the  Indian  In- come-tax Act, as income earned, no matter by whatever  meth- od, from land, and specifically dealt with by that  section. The observations therefore made in I les’s case(2) can  have no  apposite  application  to the case  of  a  manufacturing concern  letting  out a part of  its  machinery  temporarily which it cannot advantageously use itself.     Mr.  Chatterjee also laid stress on the decision of  the Court of Appeal in Inland Revenue Commissioners v.  Broadway Car  Co. Ltd.(3).  In this case the company carried  on  the business  of motor car agents and repairers on land held  on lease from 1935 to 1956 at an annual rent of pound 750.   By 1940  the company’s business had dwindled under  war  condi- tions  to such an extent that no more than one third of  the land was required.  In those circumstances the remainder was sublet for fourteen years at an annual rent of pound  1,150. The  general  commissioners of income-tax decided  that  the difference  of pound 400 between the outgoing of  pound  750 for  the land retained and the incoming of pound  1,150  for the  land disposed of was "income received from  an  invest- ment,"  and, the business not being one within  the  special categories  mentioned in the Finance Act, 1939,  that  pound 400 was not taxable. It was held that the word  "investment" must be construed in the ordinary, popular sense of the word as used by businessmen and not as a  (1) [1946] 1 A.E.R.58.                 (3) [1946] 2  A.E.R. 609.  (2) [1947] 1 A.E.R. 798.        2 10 term  of art having a defined or technical meaning and  that it was impossible to say that the commissioners had erred in law in coming to the conclusion that the transaction result- ed in an investment.  Scott L.J. in delivering his  judgment laid  emphasis on the point that after the business  of  the company  had dwindled, it partitioned part of the land  from the rest and sublet it by installing a heating apparatus for

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the sub-lessee. It was found that war conditions had reduced the  company’s business to very small proportions  and  they cut  their loss by going out of business in respect  of  the major  part of their land and put it out of their power  for 14 years to resume business there. In this situation it  was observed  that in that case they were dealing with  part  of the property of the company which had come redundant and was sublet purely to produce income--a transaction. quite  apart from the ordinary business activities of the company. It was pointed out that the question whether a particular source of income  was income or not must be decided, as it  could  be, according to ordinary commonsense principles.   The  short question to decide in this case is  whether  on the facts found, it could be said reasonably that the dyeing plant had become redundant for its business as a silk  manu- facturing  concern, simply by the circumstance that for  the time  being  it could not be used by it personally  for  the purpose of dyeing silk yarn owing to the non-availability of yarn.   It is difficult to conceive that the  company  would not  have  immediately  started dyeing yarn as  soon  as  it became available. Instead of dyeing yarn, another person was allowed  to  dye jute (we are told),  the  assessee  company making income out of its use as a commercial asset.  In this situation  it is not possible to hold that the  income  thus earned was not a part of the income of the business and  was not earned for the business by its commercial asset or  that this commercial asset had become redundant to the  company’s business of manufacture of silk. The analogy of Broadway Car Co.  Ltd. (1) therefore does not hold good for the  decision of the present matter, (1) [1946] 2 A.E.R. 609. 11     We  are therefore of the opinion that it was a  part  of the  normal  activities of the assessee’s business  to  earn money by making use of its machinery by either employing  it in  its own manufacturing concern or temporarily letting  it to  others for making profit for that business when for  the time  being  it  could not itself run it.   The  High  Court therefore was in error in holding that the dyeing plant  had ceased  to  be a commercial asset of the  assessee  and  the income  earned  by it and received from the  lessee,  Messrs Parakh & Co., was not chargeable to excess profits tax.  The result therefore is that we hold that the answer returned by the High Court to the question referred to it by the  Tribu- nal  was wrong and that the correct answer to  the  question would be in the affirmative and not in the negative.     The  appeal is allowed, but in the circumstances of  the case  we make no order as to costs. We have not  thought  it necessary  to  refer to all the cases cited at  the  Bar  as none  of them really is in point on the short question  that we were called upon to decide and analogies drawn from  them would not be helpful in arriving at our decision.                     Appeal allowed.        Agent for the appellant. P.A. Mehta.        Agent for the respondent: P.K. Chatterjee.