Desai, J. - This is a reference made to the High Court under S. 66(1) of the Indian Income tax Act, 1922. The question of law referred to High Court for its opinion thereon is as follows :-
'Whether, on the facts and in the circumstances of the case, the assessee company was entitled to the relief contemplated under S. 15C of the Indian Income-tax Act, 1922 ?'
A few facts may be stated :
2. We are concerned in this reference for the years 1960-61 and 1961-62, the corresponding accounting period being the years ending 31-3-1960 and 31.3.1961 respectively. The assessee company was incorporated on 9th September 1958 as a private limited company for the purposes of various objects mentioned in the Memorandum of Association and in particular in clause III thereof. The company duly applied to the proper authorities for the grant of an industrial licence, which licence was subsequently granted by the Government of India. The company proposed to carry on its business in collaboration with a well-known German concern viz. M/s. Farbenfabriken Bayer A.G., Leverkusen, West Germany. On the formation of the company and the subsequent grant of a licence to carry on the business by the Government, the assessee company investigated into the possibility of immediately starting the business. Due to difficulties in obtaining land and construction materials as also to save time, the assessee decided to enter into an agreement with another company called the Progressive Chemical Corporation Private Limited (hereinafter referred as 'Progressive'). Progressive had its own premises and machinery and at those premises it was carrying on the business of manufacture of some chemicals. A draft agreement was drawn up between progressive and the assessee company and although it was not executed, it was on the basis of the terms and conditions thereof that the assessee subsequently carried on its business in the manufacture of chemicals in the factory premises belonging to Progressive. As a matter of fact on 26th September 1960 the draft agreement with Progressive was placed before the Board of Directors of the assessee company when it was decided that they should await the opinion of one Director (then out of station) before the draft could be approved. It is the position admitted before the Tribunal that the draft agreement had not been executed although it is also the finding of the Tribunal that the assessee carried on its activities in these premises on the basis of the terms and conditions contained in the draft agreement.
3. During this period covered by the agreement the assessee company also acquired its own plant and machinery and actually used the same. From the accounts, the assessee had its assets in the nature of plant and machinery valued at Rs. 3,38,285/-. As on 31st March, 1961 these fixed assets were valued in the accounts the assessee company at Rs. 3,28,299/-. These items did not include the plant and machinery owned by Progressive and covered by the agreement between the assessee company and Progressive. These assets of Progressive as per its accounts as on 31st March, 1960 were valued at Rs. 44,460/-, but this was inclusive of the buildings valued at Rs. 31,075/-. The balance-sheet of Progressives as on 31st March, 1961 showed the value of these fixed assets at Rs. 44,460/- which included the cost of the buildings valued at the same figure of Rs. 31,075/-. It has been found by the Tribunal as matter of fact that Progressive admittedly used the buildings, plant and machinery for their own separate purposes during this period and they were assessed to a small income for these years on the sale of the products manufactured by them. Further, Progressive have also been allowed depreciation on their assets which included the buildings, plant and machinery.
4. The Income-tax Officer whilst making the assessments for the two years in question i.e. 1960-61 & 1961-62 granted rebate as provided under S. 15C of the Indian Income-tax Act, 1992. For the year 1960-61 he held that out of the total income of Rs. 50,720/- a sum of Rs. 26,867/- was exempt under S. 15C. Similarly for the year 1961-62 he held that out of the total income of Rs. 3,67,005/- a sum of Rs. 43,348/- was entitled to be exempted under S. 15C. Subsequently the Commissioner of Income-tax by virtue of his powers under S. 33B of the said Act called upon the assessee company by his letter dated 17th December, 1962 to show cause why the Income-tax Officers order granting relief under S. 15C should not be withdrawn and the assessments enhanced pro tanto, by its letter dt. 4th January, 1963 the assessee company objected to the Commissioner making the proposed revision and by the said letter the relevant facts pertaining to the incorporation, formation and the activities of assessee company were set out. It was also pointed out that because of the difficulty in obtaining land and cement for the construction of new premises an ad hoc arrangement with Progressive had been entered into. Is the said letter it was contended that the assessees undertaking was a completely new one, that the company had not purchased the premises of Progressive or its plant and machinery and that the arrangement contemplated was a leave and licence agreement. It was accordingly submitted that there was no transfer of the building, plant and machinery belonging to Progressive to the assessee company and therefore the assessee company was entitled to the benefit of the provisions of S. 15C. The Commissioner after considering the submissions of the assessee held by his order dated 4th February, 1963 that the entire profits and gains of the assessee company for these two years were liable to be taxed and that no part thereof was entitled to exemption under S. 15C of the said Act.
5. Being aggrieved by the aforesaid decision of the Commissioner, the assessee company went to the Income-tax Appellate Tribunal by way of appeals for these two years and contended that the order of the Commissioner was erroneous. It is unnecessary to set out the various contentions of the assessee company. On behalf of the Revenue the Departmental representative, however, sought to uphold the order of the Commissioner and urged that in fact there had been a transfer of some assets of Progressive to the assessee company as contemplated by S. 15C and therefore the assessee company was not entitled to any exemption.
6. By its common decision in Income-tax Appeals Nos. 805 and 806 of 1963-64 given on 24th September 1965 the Tribunal allowed the appeals rejecting the contentions of the Revenue and holding that the view of the Commissioner, that the expression transfer referred to in S. 15C of the Act meant a physical transfer and had no reference to a transfer of title or transfer of any interest in the buildings, machinery or plant previously used in any other business, was incorrect and could not be accepted. According to the Tribunal, it was clear that the word transfer is to be understood only as a conveyance by which the assessee obtains a property as its own asset. It was further observed that in the instant case under the agreement with Progressive the assessee only got a right to use the property as well as the machinery of Progressive and, therefore, it was not possible to hold that the assessee was ineligible for the relief on the ground that there had been a transfer of any building or machinery used.
In the result the Tribunal reversed the decision of the Commissioner and restored the original order of the Income-tax Officer granting the exemption.
7. As far as this Court is concerned; the connotation of the word transfer used in S. 15C of the Indian Income-tax Act, 1922, had come to be considered to be in Capsulation Services Private Ltd. vs. Commissioner of Income-tax, Bombay City-I. In the said case the assessee company had hired a godown belonging to M/s Pure Products Madhu Canning Ltd. for its business purposes and the question before the Court was whether such hiring amounted to a transfer to the assessee company within the meaning of the phrase the transfer to a new business of building previously used in any other business occurring in S. 15C(2)(i) It had been contended before the Division Bench by the assessee that even if the word transfer was capable of being construed in a broader sense for the purposes of this section, it could only mean the transfer of ownership of a building and not when rights other than those of ownership in a building were transferred. It was further submitted that in no event the creation of a monthly tenancy could be regarded as transfer within the meaning of the said section of the Indian Income-tax Act, 1922. These submissions were not accepted and Kntawala, J. (as he then was) speaking for the Bench went on to observe as follows :-
'The next contention on behalf of the assessee was that the words 'transfer to new business of building' implied that there is a transfer of ownership of the building. The submission was that if a right or interest in or to a building, other than that of ownership, was transferred, then it cannot be regarded as falling within the ambit of these words. The argument was that when a monthly tenancy is created the entire bundle of rights which go to constitute ownership are not transferred, but some limited rights like right to enjoy the property is carved out and is transferred. It was said that the section can only apply when the entire bundle of rights constituting ownership are transferred and not in any other case. Neither in the Transfer of Property Act nor in the Income-tax Act the word building has been defined. The word building ordinarily is not the only thing which is the subject-matter of the ownership but includes also dominion or the right of the ownership or of partial ownership. It is most comprehensive of all terms which can be used inasmuch as it is indicative and descriptive of every possible interest which the party can have. Ordinary modes of transfer as referred to in the Transfer of Property Act are sale, mortgage, lease, gift and exchange. In the case of sale, gift and exchange there may be complete transfer of ownership. But in the other two cases of transfers, namely mortgage or lease, the entire bundle of rights that go to constitute ownership are not transferred but some limited rights or interest in or to the property are transferred. Even in the case of mortgage or lease of immovable property, it is well-settled that it is a transfer of property. The words 'transfer to a new business of building' cannot, therefore, be restricted to a case 'where full rights of ownership are transferred', but they will be wide enough to include within their scope case where even rights or interest to or in such building is created. A lease of an immovable property as defined under the Transfer of Property Act is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity in consideration of a price paid or promised, or of money. The consideration under this definition may also take the shape of a share of crops, service or any other thing of value, to render periodically or on specified occasions to the transferor or by the transferee, who accepts the transfer on such terms. In our opinion, the words 'transfer to a new business of building .....' used in clause (i) of sub-S. (2) of S. 15C are wide enough to include cases where a transfer is created by creation of a lease in a building in favour of the new business. (pp. 574-75 of the report).'
It has been observed by the Bench at page 577 of the report that undoubtedly, as the section stood, it worked hardship. The decision goes on to say :
'If the building was taken on licence, then there was not transfer of building and in such a case an industrial undertaking, though it may be liable to pay compensation, will not be deprived of the relief granted by sub-s. (1) S. 15C. However, if a right or interest therein in the mature of a tenancy right was created, the relief granted by sub-s. (1) was taken away .....'
8. As far as this Court is concerned, therefore, the question is now decided. It is not possible to accept the submission made by the Revenue that any physical transfer of the assets of another concern would disentitle the assessee from exemption under S. 15C nor would it possible to accept the submission of the assessee, which found favour with the Tribunal, that such consequence would only follow if there was transfer by way of transmission of ownership.
9. The question that remains to be determined is then whether there has been transfer in favour of the assessee company of any interest in the property of Progressive It was submitted by Mr. Dastur appearing on behalf of the assessee, that having regard to the terms of the agreement, which was not executed but in fact was acted upon as found by the Tribunal, there was a mere licence in favour of the assessee company and not the creation of any interest in the factory or the premises of Progressive. On the other hand, Mr. Joshi on behalf of the Revenue submitted that there was a lease, although the parties choose to label the agreement as licence.
10. Now, it is well settled that the label put by the parties to a transaction is not decisive of the nature of the transaction. The proper conclusion will have to be reached on the basis of what rights have been created in favour of the assessee company under the agreement. Before, however, examining the various clauses thereof, on which emphasis was placed by respective Counsels, a few observations may be made about the difference between a licence and a lease. The word licence as defined in S. 52 of the Indian Easements Act, 1882, is a right to do or continue to do in or upon an immovable property of the grantor something, which would in the absence of such right be unlawful, and such right does not amount to an easement or an interest in the property. Whether an instrument operates as a lease or as a licence is a matter not of words but of substance. The question in each case is : Does the instrument in fact create an interest in property Formerly exclusive possession was regarded as a conclusive test; today it is not regarded as conclusive, but though not conclusive it is a very important indication and would normally be decisive unless there are circumstances indicating to the contrary. If the instrument only confers the use of property in a particular way or on certain terms whilst the same remains in the possession and control of the owner, the relationship between the parties must be regarded as one between a licensor and a licensee. In other words, normally for a lease there must be a power and intention to hold the property to the exclusion of the grantor. (See commentary in Mullas Transfer of Property Act, Sixth Edition, at pp. 664-665).
11. The question has come up before the Supreme Court in a number of cases; brief reference may be made to two. In Associated Hotels of India Ltd. vs. R. N. Kapoor, after considering the terms and conditions of the instrument in question, the Court went on to consider the distinction between a lease and a licence and laid down the following propositions :-
'(1) To ascertain whether a document creates a licence or lease, the substance of the document must be preferred to the form; (2) the real test is the intention of the parties - whether they intended to create a lease or a licence; (3) if the document created an interest in the property, it is a lease; but if it only permits another to make use of the property, of which the legal possession continues with the owner, it is a licence, and (4) if under the document a party gets exclusive possession of the property, prima facie, he is considered to be a tenant; but circumstance may be established which negative the intention to create a lease. Judged by the said tests, it is not possible to hold that the document is one of licence. Certainly it does not confer only a bare personal privilege on the respondent to make use of the rooms. It puts him in exclusive possession of them, untrammelled by the control and free from the directions of the appellants. The covenants are those that are usually found or expected to be included in a lease-deed. The right of the respondent to transfer his interest under the document, although with the consent of the appellants, is destructive of any theory of licence. The solitary circumstance that the rooms let out in the present case or situated in a building wherein a hotel is run, cannot make any difference in the character of the holding. The intention of the parties is clearly manifest, and the clever phraseology used or the ingenuity of the document -writer hardly conceals the real intent. I, therefore, hold that under the document there was transfer of a right to enjoy the two rooms, and, therefore, it created a tenancy in favour of the respondent'. (pp. 1269-70 of the report).
12. In Qudrat Ullah vs. Municipal Board, Bareilly, it was observed that there is no simple litmus test to distinguish a lease as defined in S. 105 of the Transfer of Property Act from a licence as defined in S. 52 of the Indian Easements Act, but the character of the transaction would turn on the operative intent of the parties. It was observed that propositions to be found in paragraphs 1022 to 1025 of Halsburys Laws of England, Third Edition, Vol. 23, indicate 'the crucial consideration in a lease versus licence situation', and these paragraphs, according to the Supreme Court, represent the guidelines to be followed by the Courts.
13. The question is whether the arrangement between the parties as represented by and contained in the draft agreement amounts to a lease The draft agreement has been made part of the statement of the case as Annexure D thereto, and it is found that under the same Progressive has given to the assessee company a licence to run its factory from 1st November 1959 upto 31st March 1961 i.e. for a period of one year and five months. Clauses 5 and 8 of the draft agreement have to be read together and they provide as follows :-
'5. The licensee shall be entitled to put up on the said premises any sheds or structures or rooms and such other construction as may be thought proper for the purpose of its business; Provided, however, that on the expiration or sooner determination of these presents the Licensee may while it is in possession of the said sheds, structures, rooms or other construction remove them which might have been erected by the Licensee; Provided, further, that in the event of the Licensor to the Licensee by two Calendar months previous notice in writing of its intention to take over at break-up value the said sheds or structures erected on the premises, the Licensor shall be at liberty to retain possession of the said sheds and structures and take over at break-up value the same on payment of the break-up value thereof which may be agreed upon by and between the parties thereto.'
'8. Notwithstanding anything herein contained it is hereby agreed that the Licensor shall be entitled at any time during the continuance of these presents to put up on the vacant part of the said premises any sheds, structures, rooms or other constructions as the Licensor may deem fit as well as to sub-let, assign or part with possession of the said vacant premises with or without such new construction put up thereon by the Licensor as aforesaid as also to sell any part of the machinery mentioned in the Schedule Second hereunder written'.
If these are considered along with the obligations cast on the assessee company in clause 6(e) of the draft agreement, it would seem that the assessee company has not been given any unfretted right in the vacant portion of land or pertaining to the factory, but that such right is subject to the effective control of Progressive. Even as far as the factory and the machinery are concerned, clauses 3 and 4 have to be read together and the intention of the parties has to be gathered from these clauses together with the actual finding of fact by the Tribunal that for the two years in question Progressive had used the building, plant and machinery for its separate purposes and had been assessed to a small income for these years on the sale of their products. It has also been found that they had been allowed depreciation on these assets in their own assessment. Finally the clauses to be considered are clauses 10 and 11; by the former it is provided that the licensee is not to assign or transfer its interest under this agreement, by the latter it is provided that Progressive are to retain with themselves the key of the main entrance to the factory and only deliver to the assessee a duplicate key thereof. As far as cl. 10 is concerned, it may be pointed out that the right of the occupant to transfer his interest under the document even with the consent of the owner was regarded in the Associated Hotels of India case as destructive of any theory of licence. The clause in the document which is to be scrutinised by us clearly provides that there is no such right in the assessee.
14. Mr. Joshi argued that the very fact that such a clause was provided would indicate that there was such right in the assessee company which had to be expressly negatived; and, according to him, such a clause would be more consistent with holding the instrument to be a lease rather than a licence. It is impossible to accept this submission. In fact the clause negatives any such claim or contention being canvassed by the assessee company and it cannot be read in the manner suggested by the learned Counsel for the Revenue.
15. Finally it has been pointed out by Mr. Dastur that the period contemplated under the draft agreement was a period of one year and five months and that any lease for such period could only be created by a registered instrument. This is also a minor factor to be borne in mind.
16. Bearing in mind all these aspects, it is impossible to hold that by this instrument an interest in the property was sought to be conveyed to the assessee company. At the highest it may be regarded as a licence given to the assessee company to utilise the factory and use the other vacant premises belonging to Progressive but subject to effective control by the owners and also subject to the right of the owners to use these premises as also the factory, which right has not been merely provided for in the agreement but in fact exercised by the owners. In this view of the matter, it must be held that there was no transfer of any building in favour of the assessee company as decided in 91 ITR 566 and the assessee company was, therefore, not disentitled to relief under S. 15C.
By the Court :
17. In the result, the question referred to us will be answered in the affirmative and in favour of the assessee. The Revenue will pay to the assessee the costs of this reference.