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C.P. Pictures Ltd. Vs. Commissioner of Income-tax, Madhya Pradesh, Nagpur and Bhandara - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 51 of 1959
Judge
Reported in[1962]46ITR1181(Bom)
ActsIncome-tax Act - Sections 10, 12, 12(4), 24(2) and 66(1)
AppellantC.P. Pictures Ltd.
RespondentCommissioner of Income-tax, Madhya Pradesh, Nagpur and Bhandara
Excerpt:
direct taxation - deduction - sections 10, 12, 24 and 66 (1) of income tax act, 1922 - assessee was carrying on business of exhibiting motion pictures - assessee executed lease agreement in respect of cinema - whether assessee entitled for deduction under section 24 (2) of its business losses in earlier years from income deprived by it by leasing cinema - temporarily letting out of commercial asset which was being used by assessee and exploited for his business does not amount to cessation of business activity by assessee - income received by assessee by leasing cinema chargeable under section 10 - held, assessee entitled for deduction. - - in the appeals filed by the assessee, it complained of the decisions of the income-tax authorities holding that its income came within the.....v.s. desai, j. 1. the assessee in this reference is a private limited company, which was carrying on the business of exhibiting motion pictures in its own cinema house known as 'bharat talkies'. on the 14th may, 1953, the assessee executed a lease agreement with one shri solao for a term of five years with effect from 1st may, 1953. under this agreement, the premises known as bharat talkies were leased to the lessee for the purpose of exhibiting motion pictures, on a monthly rent of rs. 2,000. the premises included the out-houses, restaurants, cycle-stands, pan-thelas, furniture, fixtures, machineries and goods with which the cinema house was fully equipped, which were described in schedules a to d annexed to the document. the stipulated rent of rs. 2,000 was stated as the total of the.....
Judgment:

V.S. Desai, J.

1. The assessee in this reference is a private limited company, which was carrying on the business of exhibiting motion pictures in its own cinema house known as 'Bharat Talkies'. On the 14th May, 1953, the assessee executed a lease agreement with one Shri Solao for a term of five years with effect from 1st May, 1953. Under this agreement, the premises known as Bharat Talkies were leased to the lessee for the purpose of exhibiting motion pictures, on a monthly rent of Rs. 2,000. The premises included the out-houses, restaurants, cycle-stands, pan-thelas, furniture, fixtures, machineries and goods with which the cinema house was fully equipped, which were described in Schedules A to D annexed to the document. The stipulated rent of Rs. 2,000 was stated as the total of the following rents :

Rs. 500 for property desired in Schedule A (cinema theatre).

Rs. 500 for property descried in Schedule B (projection and equipment).

Rs. 500 for property described in Schedule C (furniture).

Rs. 500 for property described in Schedule D (electric installation).

2. In the assessment of the assessee for the assessment year 1955-56, corresponding to the accounting period ending with 30th September, 1954, and for the assessment year 1956-57 corresponding to the accounting year ending with 30th September, 1955, the assessee claimed that the income derived by it by leasing the cinema theatre and equipment was income from business chargeable under section 10 of the Act and it was, therefore, entitled to deduction under section 24(2) of its business losses in the earlier years. The claim of the assessee was negatived by the Income-tax Officer, who took the view that after leasing out all its buildings, machinery, equipment and everything, the assessee had stopped exhibiting cinema films and had not undertaken any activity in the nature of business in that line; the income derived from the letting out of the assets could not, therefore, be held to be business income chargeable under section 10 of the Act and the losses of earlier years from business could not be allowed to be carried forward in the years of assessment. The Appellate Assistant Commissioner, in the appeals, which were filed before him by the assessee, held that the Income-tax Officer was right in holding that the income of the assessee came within the purview of section 12(4) and was chargeable under the said section and not under section 10 as contended by the assessee. In his opinion also, the assessee was not entitled to carry forward the losses of earlier years from business in the years of assessment. He was, however, of the opinion that the assessee would be entitled to a set-off of unabsorbed depreciation of 1954-55 in the assessment year 1955-56. He accordingly directed the Income-tax Officer to revise the assessment in accordance with the decision. From the decision of the Appellate Assistant Commissioner, appeals were taken to the Tribunal both by the assessee and the department. In the appeals filed by the assessee, it complained of the decisions of the income-tax authorities holding that its income came within the purview of section 12(4) and was not chargeable under section 10 and, therefore, the assessee was not entitled to carry forward the losses of business in the earlier years. The appeals filed by the department related to the set-off of the unabsorbed depreciation which was allowed by the Appellate Assistant Commissioner. The Tribunal dismissed the appeals filed by the assessee, holding that the assessee was not carrying on any business and the income which it derived during the relevant assessment years was rightly assessed by the Income-tax authorities under section 12. It also allowed the appeals filed by the department and reversed the direction which the Appellate Assistant Commissioner had given for revising the assessment by permitting unabsorbed depreciation of the previous year to be carried forward and allowed in the years of assessment, because the assessee conceded before the Tribunal that the direction given by the Appellate Assistant Commissioner could not be allowed to stand if it was held that the income of the assessee fell to be assessed under section 12 and not under section 10 of the Act. On an application made by the assessee under section 66(1), the Tribunal drew up a statement of the case and referred to this court the following two questions :

'1. Whether on a true construction of the lease deed dated May 14, 1953, and on the facts and circumstances of the case, the income of the assessee should be computed under section 12 of the Act

2. Whether the unabsorbed depreciation for 1954-55 when the assessee was carrying on the business can be set off against the income computed under section 12 in the assessment year 1955-56 under the provisions of the Act ?'

3. The assessee, as we have already stated, was carrying on the business of exhibiting motion pictures in its own cinema theatre. In the year 1953, it leased the theatre for the purpose of exhibiting motion pictures to a stranger for a period of five years, with an option to the lessee to renew the lease for a further period of three years. The theatre with its equipment was a commercial asset of the assessee, which was used in its business of exhibiting motion pictures and was capable of being so used at the date when it was leased to the stranger. The lease to the stranger of this asset was also for the purpose of exploiting it for the business of exhibiting motion pictures, which was the business which was carried on by the assessee. It was the contention of the assessee that by leasing out the asset for the duration of the lease, the assessee had not discontinued or abandoned its business, but had only exploited its commercial asset in the same business through the instrumentality of another. The assessee's contention is that it was incorporated as a business concern; with the object of making profit, it had owned a theatre and equipped it with the necessary fixtures, fittings and installations for the purpose of its business, and it could exploit this commercial asset for the purpose of carrying on its business of exhibiting motion pictures either by exhibiting them by itself or by letting it out to another for the same purpose. It was entitled to exploit its commercial asset in its business in a way most advantageous to itself and, if it felt that by the letting out of the commercial asset to another person for a temporary duration it may get the maximum benefit from a business point of view, such letting out would be one of the modes in which the assessee would be carrying on its business of exhibiting motion pictures.

4. Now, the view which the Tribunal took on an examination of the terms of the lease was that the assessee had left to the lessee to carry on its business of exhibiting motion pictures as the lessee might deem fit, and it merely protected itself against the damage to the leased property, plant and furniture. According to the Tribunal, it was difficult to spell out carrying on of any business by the assessee by such letting. None of the clauses of the lease even remotely suggested, in the opinion of the Tribunal, the carrying on of any business of exhibiting motion pictures by the assessee as a result of leasing of the cinema house. Since the business of exhibiting motion pictures in the thereafter was entirely left to the lessee, the lessor also could not be said to be carrying on the said business simultaneously. There was no clause in the lease which showed any connection of the lessor in the carrying on of the business of the lessee, and the assessee, by the lease which it had executed, had only concerned itself with the collection of rent and the safeguarding of its property. The duration of the lease was at least for a period of five years, if not for eight years, and by executing the lease for such a period, the assessee had completely ceased to carry on the business of exhibiting motion pictures for the duration of the lease. In the view of the Tribunal, there was absolutely no indicia of any trade or business being embedded in the activity of leasing out of the cinema theatre. In the opinion of the Tribunal, therefore, the assessee had discontinued its business, which it has carried on till it leased its commercial asset to a stranger. The income, therefore, which the assessee received as rent of the leased property was not income from business chargeable under section 10, but income from other sources chargeable under section 12 of the Act.

5. Mr. Palkhivala, learned counsel appearing for the assessee, has argued that the Tribunal has approached the question, which it had to consider, from an entirely wrong point of view. According to him, the view of the Tribunal appears to be that the mere circumstance of the execution of the lease was sufficient to hold that the assessee's business had been abandoned and the lease was executed by it thereafter only as a lease of the property belonging to its as owner. Mr. Palkhivala argued that it is well settled that an asset which was acquired or used for the purpose of a business does not cease to be the commercial asset of that business as soon as it is temporarily put out of use or let out to another person in his business or trade. It is not necessary that the commercial asset must be used only but the assessee himself in order that the yield of the income of the asset should be a profit of the business of the assessee. The letting out, therefore, of a commercial asset for a period for being used for the same business would be one of the modes of obtaining income by the exploitation of the commercial asset in the business of the assessee. The activity, and by engaging in this activity, the assessee is carrying on its own business. If it is to be held that the letting out was not as a business activity, but was an activity of the owner of obtaining rent of the property, it must be established that the assessee had abandoned its business or the commercial asset which it had used in business had ceased to be such, and the letting out only consisted of obtaining rent of the property which belonged to the owner. According to Mr. Palkhivala, therefore, the department, in order to hold that the income of the assessee in the present case was not income from its business, had to establish that the business of the assessee had been either abandoned by it and it had come to a stop, and the letting out of the theatre was not letting out of a commercial asset, but of an asset which had once been a commercial asset and which had thereafter been of no use to the assessee as a commercial asset. Mr. Palkhivala argues that the Tribunal has not applied its mind to ascertain this position and there is also no material whatsoever on record to support such a conclusion. That the terms of the lease are consistent with the terms which should be expected to be found when a landlord or an owner of a property lets out his property to another is not material in determining whether the lease indicates cessation of the business on the part of the lessor. If, says Mr. Palkhivala, letting out of a commercial asset is one of the modes, which a man carrying on business may employ, if he finds it advantageous, the mere circumstance that a lease of the asset has been executed will not mean that the lessor wants to discontinue his business. According to Mr. Palkhivala, not only there is no clause in the lease which indicates an intention to abandon or discontinue the business, but there are, on the other hand, several clauses which show an intention to the contrary. For instances, under clause 4(b) of the lease, the lessor is permitted to store machineries and other articles belonging to it within the demised premises free of rent. Clause 4(c) provides for the regular checking of the projection and sound equipment by the lessee and a right to the lessor to inspect the condition of the equipment and machineries from time to time whenever he wants. Clause 4(d) prohibits the removal of any part of the projector or the sound equipment or its use elsewhere than in the leased premises. Under clause 4(e), the lessee is under an obligation to replace all worn out parts by only genuine parts of original manufacture. Under clause 4(g), the head operator and his assistants are to be persons approved by the lessor and they are not to be dismissed or transferred without the written approval of the lessor. Under clause 5(a), the lessee, during the period of the lease, is not entitled to make additions or alterations to the existing building without the previous sanction of the lessor, but the lessor is to be at liberty to execute any work which it deems fit in order to effect any additions or alterations in the demised premises. It is also provided in clause 5(b) that the lessor will be entitled to keep a resident chowkidar on the demised premises. Under clause 5(c), the lessee is not entitled without the lessor's consent to dismiss any of the existing employees of the lessor as on the date of the execution of the lease until their services could be legally terminated. Clause 5(e) obliges the lessee to observe and perform all rules, regulations and conditions of the licence for exhibiting motion pictures by the Nagpur Corporation and the Government. Under clause 5(f), the lessee has to keep the cinema house in a working condition, and to make at his expense all constructions or other changes as and when necessary to ensure the same. Under clause 10, the lessee is to take over from the date of the lease all obligations arising out of the contracts already entered into by the lessor with the film distributors as detailed in a schedule annexed to the lease. Mr. Palkhivala says that the cumulative effect of all these clauses is that the assessee was anxious to maintain its cinema theatre and the equipment in a perfect condition; it also wanted to maintain the staff which it had employed and it was also anxious that the licences which the theatre had been granted by the Corporation and the Government for the exhibition of motion pictures would be maintained and not forfeited. These are indications, says Mr. Palkhivala, which would go to show that there was no desire on the part of the assessee to discontinue its business, and that the arrangement of lease, which it was adopting, was only a temporary arrangement with a view to take over exhibition of motion pictures itself at a subsequent date.

6. Now, it seems to us that, if an assessee, who was using a commercial asset himself for his business for the purpose of earning profits, lets out the asset to a stranger for being used for the same purpose for which it was used by the assessee, the mere circumstance that the asset had been let without being used by the assessee himself is not sufficient to come to a conclusion that the assessee has ceased to do the business which he was carrying on till then and has let out the property, which was once his commercial asset, to another. As has been held been held in Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd., 'an asset which was acquired and used for the purposed of the business does not cease to be a commercial 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 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. The view that in order to constitute business income the commercial asset must at the time it was let out be in a condition to be used as a commercial asset by the assessee himself is not correct.' By letting out the commercial asset for a period to another, therefore, the assessee may carry on the same business activity which he was carrying on when he was using the asset himself. It may no doubt be that a commercial asset, which the assessee has ceased to use as such because he has abandoned or discontinued his business, may also be let out by him and rend obtained therefrom. Whether, therefore, letting out of the commercial asset is a business activity of the business of the assessee exploiting the commercial asset or whether it is the letting put of property by an owner of the property not as an activity of the business would depend upon the facts and circumstances of each case. In order to hold, however, that the letting out does not constitute a business activity, it will have to be seen whether, apart from the mere execution of the lease, there are any other circumstances which indicate that the assessee has ceased to do business and is disposing of or abandoning dealing with once his commercial asset as an owner of property. In the present case, the assessee, which is a limited company, was incorporated as a business concern for earning profits by the business of exhibiting motion pictures. It was for that purpose that it had owned a theatre and equipped it with the necessary equipments. the object or purpose of the company has in no way changed no has the company disposed of its commercial asset or put itself in a position in which it cannot avail of them for the purpose of business excepting for their being let to a stranger. If, as is now well settled, letting out of a commercial asset is a made of carrying on the business and availing of the commercial asset for the purpose of the business it cannot be said that, by such letting alone, the company has ceased to do its business and the letting out is not a part of the business activity.

7. Mr. Joshi learned counsel for the revenue, has argued that although the mere circumstances that a commercial asset has been let out may not be sufficient to conclude that the business of the assessee has been discontinued or abandoned the question whether the letting out is the result of such abandonment or discontinuance has got to be considered on the facts and in the circumstances or the case, one of the relevant facts and circumstances, and an important one of them, being that the asset has been leased. If a person who was using his commercial asset for his business chooses not to use it himself and leases it out to another, taking rent from him for the leased asset as property belonging to him, it may be that he has leased it because he does not want to continue business any longer or because he wants to use it as a mode of carrying on his business. The circumstance, therefore, that the asset has been leased, has got to be considered in the light of the other circumstances of the case in order to arrive at a conclusion whether the lease is as a result of abandonment of the business or as a part of carrying it on. If the business is not to be abandoned and the lessor intends to resume it, the duration for which the property would be leased would be a short duration. In the present case, says Mr. Joshi, the duration is not a short duration, but a fairly long duration of five years, with a further option to the lessee to extend it to eight years. This, according to Mr. Joshi, would indicate a cessation of business on the part of the assessee. The tenor of the lease, according to Mr. Joshi, would indicate a cessation of business on the part of the assessee. The tenor of the lease, according to Mr. Joshi, again would show that the assessee had not kept any concern or connection with the business and all the terms of the lease are, as pointed out by the Tribunal, only aimed at safeguarding the property, plant, machinery and equipment, which was being used. Even the clauses of the lease obliging the lessee to conform to the regulations and conditions of the licences and requiring him further to maintain the theatre in a working order for all the time are consistent with the assessee being anxious to maintain his property in proper condition and available to him for the further letting out and for earning rent. If the assessee had not decided to discontinue its business of exhibiting the motion pictures in the theatre, there would have been some provision in the lease executed by it, which would have given an indication of that intention on its part by reserving some part to it in the running of the business of exhibiting motion pictures. Mr. Joshi then pointed out that in describing the rent and giving the details of the rent, the lessee mentions that the rent is in respect of certain specified parts of the rented property. There is no part of the rent which is in respect of the business of exhibiting motion pictures. The rent, therefore, which is stipulated to be received under the lease is only rent of the property and this also indicates, according to Mr. Joshi, that what was being let out was an item of the property belonging to the assessee and not a commercial asset leased out for the purpose of carrying on the same business. Mr. Joshi argues that the Tribunal, in arriving at its conclusion, has not only relied on the mere circumstance that a lease of the asset has been executed, but has also considered the other circumstances, viz., the fact that the entire commercial asset has been leased out; that no connection has been left by the assessee with the running of the business which has been left entirely to the lessee and that the duration for which the lease has been executed is a fairly long period extending to five years, if not to eight years. Mr. Joshi, therefore, argues that the conclusion which the Tribunal has arrived at is not the result of its wrong approach to the point under consideration, but after having properly appreciated the facts and circumstances of the case. The question essentially which the Tribunal has decided is a question of fact and if the conclusion has been arrived at by the Tribunal on material which was on the record, and which was relevant for the purpose of arriving at that conclusion, the finding of facts cannot be disturbed by this court on a reference under section 66(1) of the Act. If the finding of fact, which has been arrived at by the Tribunal, is accepted as the correct finding, the answer to the first question has to be in favour of the department.

8. In our opinion, in the present case, apart from the fact that the assessee has executed a lease of the commercial asset in favour of a stranger for a period of five years and has, for the said period, ceased to exhibit motion pictures itself, and left such exhibiting of the pictures to the lessee, there is no other circumstance indicating that the assessee has given up its business activity and dealt with what was his commercial asset as an owner of property. It can be taken as well settled that a mere circumstance that a commercial asset, which was being used by the assessee and exploited for his business, do is capable of being so used, has been let out by him temporarily to a stranger, will not amount to a cessation of the business activity by the assessee. If the letting out is a business activity itself and is carried on in the same business which the assessee was carrying on by using the asset himself, the circumstance that the period of the lease is a period of five years with an option to the lessee to renew it for a further period of three years, again, will not be sufficient to indicate that, by letting out the asset for that period, the assessee has made up his mind not to carry on the business which he was carrying on up to that time. It would depend upon the nature of the business and the circumstances and conditions relating to the same at the time when the lease was executed. If the letting out for a period could be regarded as one of the advantageous ways of exploiting the business asset in the course of a business itself, the duration for which such letting out should be made so that it may be most advantageous would have to be determined by the lessor himself. What is important to note is whether the letting out is done temporarily as distinguished from permanently and not whether it is for a shorter or a longer duration. It is not possible to say, in the present case, that from the fact that the duration of the lease is five years, a necessary inference follows that the assessee has made up its mind to discontinue the business of exhibiting films and will never resume it. If the assessee feels that the view of the business situation or in view of its own difficulties in the course of business which may take some time to tide over, that the best way of carrying on its business activity for the time being is not by exploiting the commercial asset itself but by letting it to a stranger, thus ensuring a fixed income from the business, the activity of the assessee in letting out the commercial asset would be an activity in the business of the assessee and the income received would be his income from business even if the letting may be for period of five years. At any rate, having regard to the nature of business in the present case, we do not think that a period of five years is such a long period as to warrant an inference that the lessor wanted to abandon or discontinue its business. As to the circumstance that the assessee has left no concern or part to itself in the actual exhibiting of the films in the theatre, we do not think that the said circumstance either by itself or in conjunction with others is capable of leading to the inference that the assessee wants to discontinue the business. Then again, the fact that the entire asset has been leased also will not indicate that the business is intended to be abandoned. The asset is such as is not capable of being leased in part. None of the circumstances, therefore, which Mr. Joshi has pointed out, can help in arriving at the conclusion that the activity of the assessee in letting out its commercial asset was not an activity in the business of the assessee but an activity of a different nature. In our opinion, therefore, on the facts and in the circumstances of the case, the view taken by the Tribunal that the income, which the assessee received from the letting out of the cinema theatre and its equipment under the lease for the purpose of exhibiting motion pictures, was not the income of the assessee from its business and it fell within the purview of section 12 of the Act is erroneous; and the said income of the assessee is its income from the business which it was carrying on and chargeable under section 10 of the Act.

9. We may refer to the decisions which were cited before us in the course of the argument in the present case. We have already referred to the decision in Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. Mr. Palkhivala relied on this decision for the proposition that the yield of the income by a commercial asset is the profit of the business irrespective of whether the asset is exploited by the owner himself or through the instrumentality of another. In this case, the assessee company, which was a manufacturer of silk cloth, and had installed a plant for dyeing silk yarn as a part of its business, let out the dyeing plant on a monthly rent, because it was experiencing difficulty in obtaining silk yarn, and on that account the plant was remaining idle for some time. The question was whether the sum representing the rent for five months realised by the assessee was chargeable to excess profits tax as profits of business or was income from other sources and was, therefore, not chargeable to excess profits tax. It was argued that because of the inability of the assessee to make use of it, it had ceased to be a commercial asset of the assessee, and thus, when it was let, the rent which was obtained by the letting of the asset was income received by the assess not from business but from other sources. This argument was negatived by the Supreme Court. It was observed that although if a commercial asset was not result capable of being used as such, its letting out to others did not result in an income which was the income of the business; an asset which was acquired and was used for the purpose of business an did not cease to be commercial asset of that business as soon as it was temporarily put out of use or let out to others for use in their business or trade. The yield of the income of the commercial asset was the profit of the business irrespective of the manner in which the asset was exploited by the owner of the business, and letting it out would be one of the modes of earning profits by the exploitation of the commercial asset. In our opinion, this decision would support the view which Mr. Palkhivala has contended for. In the present case, the cinema theatre with its equipment was a commercial asset which was acquired and used by the assessee for its business of exhibiting motion pictures. At the time when it was let to the stranger, it was capable of being used as a commercial asset for the purpose of exhibiting motion pictures, and was also let for the same purpose. In letting out the said commercial asset, therefore, the assessee was only exploiting its commercial asset to its best advantage, in the view that is taken in this decision. Mr. Joshi pointed out that this case is distinguishable from the present case on facts. In the first place, the dyeing plant which was let out in the this case was only a part of the business asset of the lessor. Secondly, the letting was truly temporary as being on a monthly rental and that too because of the non-availability of the silk yarn to the lessor. There was, therefore, no question in that case of the lessor either having intended to discontinue its business or to abandon it and, therefore, in those circumstances, the letting out could well be regarded as an advantageous way of exploiting a commercial asset. In the present case, says Mr. Joshi, the entire business of the assessee of exhibiting films in the theatre has come to a cessation as a result of the letting, because the exhibition of the films in the theatre since after the lease is carried on entirely by the lessee. Moreover, there does not appear to be any indication of a temporary difficulty, of the nature which was present in the Supreme Court case, in the way of the present assessee from carrying on its business of exhibiting motion pictures. The leasing out, therefore, by the assessee in the present case is not because of a temporary difficulty, but because of a desire to discontinue the business. Thirdly, in the Supreme Court case, the duration was very short. In the present case, the duration is a long period of five years indicative of abandonment of the business of the assessee. Now, what were the reasons in the present case for the assessee to have thought of leasing out the asset and to discontinue exhibiting film by itself ar not known on the record and it may not, therefore, be proper to speculate on the subject. What we find is that in the previous year, the assess appears to have suffered losses, because it had losses to carry forward and even the depreciation allowance had to be carried forward. It may, therefore, be that the assessee may have experienced some temporary financial difficulties in its business and may have, therefore, thought of obtaining a steady income in the business for a period of five years or so, until it would straighten out its difficulties and be in a position to resume the exhibiting of motion pictures itself. Whatever it may be, the circumstance that the period is five years or that there is no positive reason ascribed for letting out of the theatre in the present case would not, in our opinion, be sufficient to distinguish the case before us from the Supreme Court case, viz., Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd., so as to make the principle of that case not applicable to the present case.

10. The next case to which Mr. Palkhivala has referred is a decision of this court in Commissioner of Income-tax v. National Mills Co. Ltd. The assessee in that case was a company which was carrying on business of manufacturing textiles. It got into financial difficulties and ceased to do its manufacturing business in April, 1949. It was thereafter ordered to be wound up by the court in February, 1950. In October, 1950, the liquidator let the plant and machinery of the company at a monthly rent for a period of three years, the lessee having an option to renew the lease for a further period of three years. The lessee had also a further option to purchase the plant and machinery at a price fixed on the expiration of the lease. Under the terms of the lease, the lessors covenanted with the lessees to assist them in the running of the mills and securing quotas, licences and permits, etc., and to place at the disposal of the lessees such quotas, licences and permits as could be legally transferred, and the lessees covenanted to provide and allow the lessors accommodation in the premises for their use as offices and records, free of rent. The question that arose for decision in that case was whether the income derived by the company from the letting out of the plant and machinery was income from business which could be set off against its losses of the preceding year brought forward. The Tribunal had held in that case that the income derived by the company was income from business. This court held that there was material to justify the finding of the Appellate Tribunal that the income was from business and that the income so derived could be set off against the losses of the business of the manufacture of textiles brought forward from the preceding year under section 24(2) of the Income-tax Act. Mr. Palkhivala argued that the facts of the case before us are much stronger than the facts in the said case decided by this court and if, even on the facts of that case, it was held that the income of the assessee was income from business, there can be no doubt whatsoever that it must be so decided in the case before us. In that case, the business of manufacture by the company had actually stopped before the lease was executed and the company was in the process of being wound up. Under the terms of the lease, the lessee was given an option to purchase the mills outright at a price fixed. The liquidator was not in a position to carry on the business and his only object was to realise the assets of the business. There was, therefore, no question of the company resuming its business of manufacturer of textiles. Even on these facts, this court held that the income of the company derived from the lease of the asset was an income of the company from its business of manufacture of textiles. Mr. Palkhivala says that this was because the correct principle to approach the question is, as stated by this court in that case, that 'in order that the income of the assessee should be business income, it is not necessary that the income should be produced by the assessee, utilising the business assets itself. So long as those assets are used as business assets, it is irrelevant whether the business assets are exploited and used by the assessee itself or some one else. Where instead of carrying on the business itself, the assessee permits someone else to use the assets and carry on the identical business, then the activity of the assessee is a business activity.' In view of this principle, the circumstance whether the duration of the lease is short or long and the circumstance whether the lessor has left some concern or connection with the business in the terms of the lease are not matters of any significance. Mr. Joshi has pointed out that the decision of the case was based on whether there was material before the Tribunal to justify the finding that the income was from business. The court regarded the question which arose before it on reference as involving essentially a question of fact. It then pointed out the circumstances, which the Tribunal had considered in holding that the income was from business and held that, in view of that material on record, the finding of the Tribunal was justified. We do not think that the decision does no more than merely consider whether there was material before the Tribunal is arriving at its decision. It has dealt with the question, has considered the relevant judicial decisions having a bearing on it, and then has examined the finding of the Tribunal in the light of those decisions. The observations to which Mr. Palkhivala has invited our attention in that case are undoubtedly in favour of the assessee.

11. In a recent decision of the Madras High Court in Lakshmi Industries (Private) Ltd. v. Commissioner of Income-tax the facts were as follows : The assessee company which owned an oil and rice mill, manufactured groundnut oil and cake and sold them, leased the entire mill during the relevant year at a rent of Rs. 3,000 per month. It also had a small quantity of oil and groundnut in stock at the beginning of the year which it sold. The question before the court was whether the rent realised during the year from the leasing of the mill were profits of the assessee from the same business as that carried on by the assessee during the earlier years, so as to enable it to set off against the said profits the losses which it had sustained in earlier years. The income-tax authorities and the Tribunal had refused the set-off, holding that the rent realised by the assessee did not constitute profits from the same business which was carried on in the earlier years. On a reference to the High Court, it was held that 'the income realised by the assessee by letting out the entire mill was no less the income of the business which it was carrying on than the income which it would have realised had it itself worked the mill. From the mere fact that the entire manufacturing plant had been leased out for a duration, the assessee could not be said to have given up its business altogether and had no intention of resuming the business when favourable conditions offered themselves. The fact that the assessee sold the stock of oil and groundnut, although the sales were not of a large volume, showed that the assessee still carried on its business. The assessee was, therefore, entitled to carry forward and set off the loss of earlier years against the income of the relevant year.' This case, in our opinion, would entirely support the assessee. In this case, as in the case before us, the entire commercial asset was let out for a duration. Mr. Joshi has sought to distinguish this case by pointing out that the duration of the lease in this case was for a period of one year, and that there was some indication that the assessee had not discontinued its business, inasmuch as it had sold a stock of oil and groundnut which it had at the beginning of the year. We do not think that the circumstances pointed out are sufficient to distinguish this case from the case before us. As we have already pointed out, it cannot be said that the duration of one year would indicate a temporary cessation, while a long duration of five years would necessarily mean permanent cessation. If letting out is held to be an advantageous way of exploiting a commercial asset, the duration can as well be for such time for which advantage can be obtained by the letting. A period of five years is not such a long period as to indicate an intention to discontinue the business of the assessee. The circumstance that the assessee sold during the year some stock of oil and groundnut, which it had, undoubtedly showed its connection with the business. But the absence of such a circumstance in the case before us would not show that there was continuance of business on the part of the assessee. It may be pointed out that some of the terms of the lease do indicate in a certain manner that the assessee wanted the theatre and its equipment to be maintained in the manner in which it had maintained it while it was exhibiting motion pictures itself, so as to be available to it in the same condition when it would resume the exhibiting of films itself.

12. In our opinion, therefore, the view which the Tribunal has taken in the present case, that income which the assessee received from the lease of the theatre and its equipment was not its income from business in which it was engaged is erroneous and, consequently, the first question referred to us in this reference should be answered in the negative. We order accordingly.

13. In the view that we have taken and the answer which we have given to the first question, the second question does not arise for consideration and need not be answered. We do not, therefore, proceed to answer the second question.

14. The assessee will get its costs from the department.

15. Order accordingly.


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