CHAGLA, C.J. - The assessee is running a silk mill known as Sri Lakshmi Silk Mills. Artificial silk cloth is manufactured in these mills. There is also a dyeing plant attached to the mills for dyeing silk yarn. The assessees business was to manufacture silk cloth and also dye silk yarn. In the chargeable accounting period, 1st January, 1943, to the 31st December, 1943, the assessee, owing to the difficulty in obtaining silk yarn on account of the war, stopped his dyeing activities as a result of which the dyeing plant remained idle for some time. Therefore on the 20th August, 1943, he let this plant to Messrs. E. Parekh & Co. on a rental of Rs. 4,001 per month. The assessee received from E. Parekh & Co. Rs. 20,005 by way of rent for the period the plant was hired to the company during the accounting period. The Tribunal held that the sum of Rs. 20,005 was the assessees income in the chargeable accounting period from business as defined in Section 2 (5) of the Excess Profits Tax Act. The assessees contention was that the business fell under Section 12 being profits and gains from other sources and therefore the Excess Profits Tax Act had no application to this income, and the question of law that has been submitted to us is whether in the circumstances of the case the assessees income of Rs. 20,005 is profits from business within the meaning of Section 2 (5) of the Excess Profits Tax Act and therefore or otherwise liable to pay excess profits tax.
The point really lies in very narrow compass. If this particular income is the result of the assessees business and can be considered to be the profits and gains of that business, then undoubtedly this income is liable to pay excess profits tax. On the other hand, if it is not the profits or gains of the assessees business and is income derived from other sources and falls under Section 12 of the Income-tax Act, then the Less Profits Tax Act cannot apply to this income. It is undoubtedly an income for the purpose of the Income-tax Act. The question is whether it is an income from the assessees business for the purpose of the Excess Profits Tax Act.
The contention of Mr. Joshi on behalf of the Commissioner is that the dyeing plant is a commercial asset of the assessees business and that commercial asset was put to a particular use by the assessee and that use was that instead of working the plant himself he let it out to some other persons and obtained rent for it and thereby this commercial asset yielded income to him in this particular manner. According to Mr. Joshi, it makes no difference whether a commercial asset yields income by being used by the assessee himself or it is being used by someone else. 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 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. Parekh & Co. I can understand the principle for which Mr. Joshi is contending that it makes to difference what an assessee does with a commercial asset belonging to him. He may use is as he likes. So long as it yields income it is the income of his business. Various 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 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 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.
The first case to which I will refer is Sutherlands case reported in 12 Tax Cas. 63. There the assessee purchased a steam drifter for the purpose of using it in herring fishing and during the war it was commandeered by the Admiralty and put to an entirely different use namely a use which the Admiralty thought was essential in public interest for the purpose of prosecuting the war and the question was whether the hire that the assessee received from the Admiralty could be considered to be his income from the business and the Lord President in his judgment stated that when the assessee acquired the ship, he acquired her as an instrument, or, as the Lord Advocate phrased it, a commercial asset susceptible of being put to a variety of different uses in which gain might be acquired, and whichever of these uses it was put to by the appellant and profits earned, he was carrying on the same business, even although alterations were necessary on the vessel for the changes purpose, provided that each of these uses was one for which she as a ship was a adapted. Therefore, to my mind the test that was applied in this case was that the ship was a commercial asset and if it was put to any use, then the income derived from such use would be the income of the assessee. It is important to note that the ship in this case had not ceased to be a commercial asset as far as the assessee was concerned. I do not think the Advocate-General is right when he seeks to distinguish this case by saying that the ship was used for a purpose which fell within the ordinary shipping business and the Advocate-Generals contention is that in this case letting out of the dyeing plant is not part of the ordinary business of a silk mill owner. I do not think that distinction is sound because the Lord President emphasises the fact that a ship can be put to a variety of different uses. In this case also the dyeing plant could be put to different uses. As a matter of fact in this case it is not put to a different use at all, because what is done on this machine is the same that was being done by the assessee himself. The only difference is that instead of his doing it himself he lets it out to someone else to do it.
There is another decision in the same volume reported in Ensign Shipping Co. Ltd. v. Commissioners of Inland Revenue. There the assessee obtained from Government compensation for loss of use of two ships which were detained in port by order of Government for a period of 15 and 19 days and the Court held that the sum which the assessee received from Government was properly assessed to excess profits duty as a trading receipt by the assessee and Lord Justice Sergeant in his judgment felt that the case fell within the ratio of Sutherlands case and he held that the sums paid to the assessee were sums in respect of the use and control of the ship though arrived at by way of compromise of that claim. Here again the ship was a commercial asset which was being put to a particular use and an income was derived by the assessee from that use.
The third case relied on by Mr. Joshi is decision of the Calcutta High Court, Sadhucharan Roy Chowdhry, In re. In this case the assessee was the owner of a jute press and he leased it out to a private company and received a certain rent. The assessee was assessed in respect of this rent under Section 12 and his claim to an allowance for depreciation in respect of the press was disallowed on the ground that the assessee was not carrying on any business and so Section 10 did not apply. The Court held that the letting of the jute press at a rent was a business and the assessee was entitled to the allowance claimed by him under Section 10. Hence again the jute press was a commercial asset and the assessee instead of working it himself chose to have it worked by somebody else and received a rent himself and therefore the Court considered it to be an income from his business.
There are two cases which have been relied on by the Advocate-General, both cases of the English Court, one case reported in Inland Revenue Commissioners v. Broadway Car Co. (Wimbledon) Ltd. In that case the assessee company carried on the business of motor car agents and repairs on land held on a lease from 1935 to 1956 at an annual rent of Pounds 750. In 1940 the company sub-let for 14 years two thirds of the land at an annual rent of Pounds 1,150. The Commissioners of Income-tax held that the difference of Pounds 400 between the outgoing of Pounds 750 for the land retained and the incoming of Pounds 1,150 for the land disposed of was 'income received from an investment,' and, the business not being one within the special categories mentioned in the Finance Act, held that Pounds 400 was not taxable, and the Court held that the amount was an investment. In this case it is important to note that owing to war conditions the business of the assessee had dwindled and he did not require more than one-third of the land for the purpose of his business. Therefore the remaining two-thirds had ceased to be a commercial asset and therefore the use of the two-thirds land could not be considered as a commercial asset being put to a particular use. It was on those facts that the Court came to the conclusion that the income received by letting out two-thirds of the land was an investment and not a trading receipt from the business of the assessee.
In Inland Revenue Commissioner v. Iles, the assessee carried on the business of sand and gravel merchants on certain land and at the same time he granted licences to three firms to enter his land and excavate gravel for themselves in return for which he received a royalty. The Court held that the royalties were not part of the profits of the assessees business, because in granting the licences, the assessee was exploiting his rights or ownership in the land and was not carrying on his business of a sand and gravel merchant. Here also it is important to note that the assessee had excavated only a part of the land belonging to him and it was only with regard to this part that he was carrying on the business of a gravel merchant. The land that he let out on licence was virgin soil which had not been excavated at all and therefore it could not be said that the land which was let out on licence was a commercial asset of the assessee. Therefore, in this case, although the dyeing plant was a commercial asset of the assessee, inasmuch as it had ceased to be a commercial asset because of the war and could not be used as a commercial asset, the income which the assessee derived by letting it out to Messrs. E. Parekh & Co. cannot be considered to be the income of the assessee from his business. The position would have been entirely different if although the assessee could have made use of this dyeing plant he had chosen instead of working it himself to allow someone else to work it. Therefore in my opinion the Tribunal was wrong in the conclusion at which they arrived. I would therefore answer the question submitted to us in the negative. The Commissioner to pay the costs.
TENDOLKAR, J. - The facts giving rise to this reference are very few. The assessee owns the Sri Lakshmi Silk Mills and manufactures silk cloth. Attached to the mills there is a dyeing plant and this plant was used by the assessee for the purpose of dyeing silk yarn in connection with the manufacture of silk cloth in his mills. In the chargeable accounting period which was 1st January, 1943, to the 31st December, 1943, the assessee found that he could not work the dyeing plant owing to the difficulty of obtaining silk yarn on account of the war. As a result, the plant remained idle for some time; but on the 20th August, 1943, that is almost eight months after the beginning of the accounting period, the assessee let out the plant to Messsrs. E. Parekh & Co. on a rental of Rs. 4,001 per month. During the accounting period the assessee received by way of rental a sum of Rs. 20,005. The Appellate Tribunal held that this amount was chargeable as income from business as defined in Section 2 (5) of the Excess Profits Tax Act. It is the assessees contention that this is not income from business but it is income from other sources, and the question referred to us for decision is whether it is income from business or from other sources.
Reliance is in the first instance placed by the Advocate-General on behalf of the assessee on Section 12 (3) of the Income-tax Act. Section 12 deals with 'other sources' of income. Sub-section (3) thereof provides that where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, he shall be entitled to certain allowances under Section 10 (2), sub-clauses (iv) to (vii). The Advocate-General argues from this that this sub-section clearly shows that the letting out on hire of machinery or plant is not income from business, because, if it was, the provisions of Section 10 (2) would necessarily apply to it, and therefore there would be no occasion for enacting Section 12 (3) at all. To my mind this argument is not tenable. Section 12 applies only when the income does not fall within any of the heads of income enumerated in Section 6. If it does fall within any of those heads, no question arises of the applicability of Section 12. Before, therefore, we can come to Section 12 (3) it must be found a fact that the income we are dealing with is not income from any of the sources enumerated in Section 6. If it is income from business, which is one of the sources enumerated in Section 6, then Section 12 has no application at all. Sub-section (3), therefore, of this section to my mind does not help the Advocate-General at all.
We have then to consider whether the rental received by the assessee is income from business. Before us several cases have not been cited which are apparently conflicting and it shall be my endeavour to attempt to extract a ratio from these cases and to apply it to the facts before us. The first case that has been relied upon on behalf of the Income-tax Commissioner is the case of Sutherland v. Commissioners of Inland Revenue. In this case the assessee had purchased a drifter with the intention of using it as a fishing vessel and in fact used it as such. This vessel was acquired by the Admiralty compulsorily on hire and a question arose as to whether the hire received from the Admiralty was or was not profits of the assessees business. It was held by the Commissioner of Inland Revenue that they were part of the profits of the assessees trade or business. The Lord President Strathclyde in his opinion said at p. 69 :-
'When the appellant acquired this ship, he acquired her as an instrument, or as the Lord Advocate phrased it a commercial asset, susceptible of being out to a variety of different uses in which gain might be acquired, and whichever of these uses it was put to by the appellant and profits earned, he was carrying on the same business, even although alterations were necessary on the vessel for the changed purpose, provided that each of these uses was one for which she as a ship was adapted.'
The Lord President then proceeded to point out that fishing was in its nature a different industry from mine-sweeping, or patrolling, or watching a gap in a boom, or the like. He then proceeded to state :-
'It is the same piece of machinery, or implement, or commercial asset which is used to acquire profit. In short the business is that of the employment of a ship for gain in ordinary shipping business.'
It is contended by the Advocate-General that the true ratio of this case is that the assessee had acquired a ship which could be used for any of the legitimate purposes for which a ship is used in the shipping business. The acquisition of that ship, although compulsorily, by the Admiralty was under a charter-party; and since such a use of the ship was an ordinary user in the shipowners business, profits or such user were profits of the trade. With respect to the Advocate-General, I cannot agree that such is the true ratio of this case. The Lord President makes it plain that the business of this particular assessee was not to exploit the ship in any manner he could; it was to use the ship as a fishing vessel only, so that, the use of the ship in the manner in which it was actually used by the Admiralty was not contemplated by the assessee at all. The true ratio, as I conceive it to be, is that the ship was a commercial asset of the assessee. That asset was used to acquire profit and since the commercial asset acquired profits, they were profits or gains of a trade or business. I may add - and this may be relevant when we come to consider the other cases relied upon by the Advocate-General - that in this case at the date of acquisition of this ship by the Admiralty the ship was capable of being used by the assessee for his own business of fishing and it had not ceased to be a commercial asset in any sense of the world.
Reliance is next placed by Counsel on behalf of the Income-tax Commissioner on the case of Ensign Shipping Co., Ltd. v. Commissioners of Inland Revenue. In this case, during a coal strike two ships belonging to the assessee company, which were loaded with cargoes of coal and were about to put out to sea were detained in port by orders of Government for periods of 15 and 19 days. The company lodged a claim for compensation against Government apparently on the footing that the ships had been wrongfully detained and that they had thereby been deprived of profits which they would have earned if the ships had plied as they would ordinarily have. The claim for compensation was compromised; and it was held by the Commissioners of Inland Revenue that the amount received by way of compensation was a trading receipt. Now, with very great respect to the Commissioners of Inland Revenue who decided this case, I am not at all sure that if a case on similar facts arose before me, I would take the same view as the Commissioners took in this case. It appears to me that what the assessee obtained in this case was purely compensation for an alleged wrongful act. The compensation was no doubt assessed or attempted to be assessed in terms of loss of freight which the company suffered by reasons of the fact that they were not allowed to ply their vessels. But it appears to me difficult to say that therefore the amount of compensation is the equivalent of profits gained by running the ship if it had been allowed to be run. But assuming that the case was rightly decided, it was decided on the footing that what was obtained by the company in this case were really freight charged which they would have earned if they had been allowed to do so; and the ratio of this case must be found in the judgment of Sergeant, L. J., at page 1180. He there states :-
'It appears to me that on the facts of his case the Government substantially had the use and control of these two vessels for the periods in question, and that the sums paid to the company were sums paid in respect of that use and control, though arrived at by way of compromise of that claim and a number of other claims. The case seems to me to be one within the case of Sutherland v. Commissioners of Inland Revenue, and accordingly the sum in question is a trade receipt, as the Commissioners have found, and is a trade receipt in respect of the period in question during which the vessel was under the control of the Government.'
The ratio of the case of Sutherland v. Commissioners of Inland Revenue, which Sergeant, L.J., referred to is the ratio which I have attempted to state earlier, viz., that if a commercial asset produces profits in fact, then such profits are business profits. I may notice, again, that in this case at the date when the orders were served on the company prohibiting the vessels from leaving port, the vessels were actually loaded and were about to set out on a journey on which they would have earned freight. In other words, they were commercial assets in use at the time by the assessee and in no sense had they discontinued to be commercial assets to the assessee.
The third case that is relied upon on behalf of the Income-tax Commissioner is a decision of the Calcutta High Court reported in Sadhucharan Roy Chowdhry, In re. In that case, the assessee who owned a jute press leased it out to a private company on rent and it was held that the rent received by the assessee was income from business. It appears that the assessee was assessed under section 12 and the rent had been included in other sources of income with the result that he could not get the benefit section 10 (2) (vi) which he would have obtained if the income was from business. The Calcutta High Court held that the rent should have been assessed as business income and that the assessee was entitled to the benefit of section 10 (2) (vi) of the Indian Income-tax Act. In their judgment their Lordships of the Calcutta High Court placed reliance on the case of Sutherland v. Commissioners of Inland Revenue and proceeded to observe :-
'In my opinion the letting of a jute press at a rent is as much a business as the letting on a ship to freight, or the letting of a motor-car or any other kind of machines, or machinery for hire.'
It must be noticed, with regard to this case as well, that it was perfectly open to the assessee in this case to work the jute press himself; and there is not the remotest suggestion in this case that the jute press had ceased to be of any use to the assessee or had ceased to be a commercial asset in that sense. If, instead of exploiting the jute press himself and earning profits, the assessee resorted to another method of earning profits by giving it out on rent the profits he earned must necessarily, in my opinion, be the profits of the business.
I then come to the cases relied upon by the Advocate-General. The first of these case is a reported in Inland Revenue Commissioners v. Broadway Car Co. (Wimbledon) Ltd. In this case a company carried on business of motor car agents and repairs. For this purpose the had taken on lease land a at annual rent of Pounds 750 from 1935 to 1956. By the year 1940 the companys business had gone down owing to war condition with the result that not more than one-third of the land was require for the needs of their business. The remainder was sub-let for 14 year at an annual rent and the question for determination was whether the rents received by the company were profits of a business. It was held that they were not and that they were investments within the meaning of the English Finance Act. The true ratio of this case is that to the extent of two-thirds, the land had ceased to be a commercial asset to the assessee. He then determined to get what he could out of it and what he got was held not to be business profits. In the present case the Tribunal has found that the dyeing plant could not be used by the assessee for the purpose of his own mill because of difficulties created by war, with the result that the plant had ceased to be a commercial asset to the assessee at all.
The next case relied on by the Advocate-General is a case reported in Inland Revenue Commissioners v. Iles. In this case it was the business of assessee to excavate gravel farmland. He permitted four other companies to excavate gravel from land. He permitted four other companies to excavate gravel by paying royalties to him, and the question for determination was whether the royalties fell within the Schedule A and B of the English Act and were investments or were profits of business. It was held that they were investments within Schedules A and B. In this case, of course, it is quite plain that the portions of land on which the assessee allowed four other companies to excavated gravel, although adjoining the portion on which the assessee himself excavated grave, were virgin soil on which the assessee had not carried on his business at all and what he let out was rely land owned by him form which he derived profits.
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. I therefore agree that the question should be answered in the manner indicated by my Lord the Chief Justice.
Reference answered accordingly.