Skip to content


Saswad Mali Sugar Factory Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberI.T.R. No. 509 of 1985
Judge
Reported in(1999)153CTR(Bom)338; [1999]236ITR706(Bom)
ActsIncome Tax Act, 1961 - Sections 28, 36, 37 and 56
AppellantSaswad Mali Sugar Factory Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateK.B. Bhujle, Adv.
Respondent AdvocateR.V. Desai, Adv.
Excerpt:
.....the terms and conditions of the lease relating to stocks, sales, loans clearly indicate that the assessee-company intended to continue its business. under the lease-cum-sale agreement, the assessee-company clearly intended to sell the entire karkhana as a going concern on the expiry of two years frommarch 31, 1971. it is only on account of the court's intervention that the lease-cum-sale agreement stood substituted by a revised lease. the directors' report also indicates that the assessee-company clearly intended going out of business by converting the commercial assets into properties. even the revised lease clearly indicates the intention of the assessee-company to go out of business and to convert the assets into property. however, the appellate assistant commissioner as well as the..........can only be income from other sources and not business income. in the present matter, the assessee-company leased out to the society, the plant and machinery and the premises on annual rent of rs. 3 lakhs vide agreement of lease cum-sale. this was in view of the fact that the assessee-company was not in a position to carry on the business of manufacture and sale of sugar without the assistance of the state government and other financial institutions. the assessee-company was not a co-operative society. in the state of maharashtra, benefits were conferred upon co-operative societies by the state government to encourage manufacture and sale of sugar. the benefits were given to encourage the co-operative movement in the state. the assessee-company was registered under the companies act......
Judgment:

S.H. Kapadia, J.

1. At the instance of the Revenue, the Tribunal referred the following questions for the opinion of this court for the assessment year 1973-74 under Section 256(1) of the Income-tax Act, 1961.

'1, Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the lease rent received by the asses-see-company was not assessable as business income and that it had been rightly assessed by the Income-tax Officer as 'income from other sources' ?

2. Whether, on the facts and circumstances of the case, the interest of Rs. 3,91,104 paid by the assessee to United Western Bank Ltd., is a permissible deduction under Section 36(1)(iii) of the Income-tax Act, 1961 ?

3. Whether, on the facts and in the circumstances of the case, the amount of Rs. 52,002 paid by the assessee to Buckau Wolf is a permissible deduction under Section 37(1) of the Income-tax Act, 1961 ?

4. Whether, on the facts and in the circumstances of the case, the assessee-company is entitled to the deduction of travelling expense of Rs. 25,000 under Section 37(1) of the Act ?'

The assessee-company was carrying on the business of manufacture and sale of sugar up to the end of the accounting year 1970-71 (assessment year 1972-73). On March 31, 1971, the sugar factory machinery and the premises were leased out to Saswad Mali Sahakari Sakhar Karkhana Ltd., on an annual rent of Rs. 3 lakhs. The Saswad Mali Sahakari Sakhar Karkhana Ltd., is hereinafter referred to, for the sake of brevity, as 'the said society'. According to the assessee-company, the State Government was approached for financial assistance when it was made clear to the assessee-company that the State Government favoured only such sugar factories which were run as co-operative societies. Accordingly, the society was registered on December 21, 1970. Under the circumstances, a lease came to be executed on March 31, 1971. By the lease agreement, the entiresugar plant was leased out to the society initially for two years on an annual rent of Rs. 3 lakhs. Under the said agreement, the company intended to sell the karkhana as a going concern on the expiry of the lease to the society. The said lease dated March 31, 1971, was, in effect, a lease-cum-sale agreement. The directors' report for the 40th year of the company's working for the accounting year ending July 51, 1972, also spelt out that the assessee-company had parted with the manufacturing assets with a view to sell the assets to the co-operative society. Further, in 1973, an agreement was executed for return of new sugar machinery to the suppliers, viz., Buckau Wolf India Engineering Works Limited. However, some of the shareholders of the assessee-company presented a company petition bearing No. 9 of 1973 to the High Court against the assessee-company and the society, inter alia, challenged the lease-cum-sale agreement dated March 31, 1971. In the said petition, the petitioners prayed for setting aside the lease-cum-sale agreement. In the meantime, the said society also instituted against the assessee-company, suit bearing No. 115 of 1975 in the court of the Civil Judge, Senior Division, Solapur, demanding specific performance of the lease-cum-sale agreement dated March 31, 1971. Subsequently, the society filed another suit bearing No. 86 of 1974, for recovery of an amount of Rs. 19.62 lakhs paid by the society to the assessee-company for purchase of new machinery to be supplied by Buckau Wolf Limited. Ultimately, the company petition bearing No. 9 of 1973, came to be disposed of by consent terms. Under the said consent terms, the assessee-company and the society agreed for substitution of the lease-cum-sale agreement dated March 31, 1971, by a new lease. According to the revised lease agreement, the original lease rent of Rs. 3 lakhs for the user of lands, buildings, plant and machinery payable by the society was increased from Rs. 3 lakhs to Rs. 6.50 lakhs per annum for the period commencing from August 1, 1971, to July 31, 1974. Under the revised lease agreement, the initial period of lease was increased from two years to thirty years from August 1, 1974, with an option to the society for extending the same for a further period of thirty years. Under the consent terms, the society agreed to withdraw the suit for specific performance referred to hereinabove. Under the said consent terms, the society agreed to withdraw the suit bearing No. 115 of 1973 and suit bearing No. 86 of 1974. Accordingly, Company Petition No. 9 of 1973 came to be disposed of. This reference relates to the assessment year 1973-74 for the relevant accounting year ending July 31, 1972. The company filed its return on July 13, 1973, followed by a revised return on September 23, 1975, During the year in question, the assessee-company's sources of income were income from property, sale of sugar including sugar export incentive, interest from loans and advances, dividends and lease rent from the society. As regards business income, the Income-tax Officer found that the lease rent received from the society, asper the lease agreement dated March 31, 1971, represented income from other sources. That, it did not constitute business income. This finding was given by the Income-tax Officer on the basis of the terms of the lease and the surrounding circumstances, referred to hereinabove. The assessee had further claimed deduction of Rs. 3,91,104 for interest payments made by the assessee-company to United Western Bank for purchase of machinery. The said amount was claimed as business expenditure. The Income-tax Officer came to the conclusion that before the above machinery came to be received by the assessee-company, the sugar manufacturing business was given away to the society. The Income-tax Officer also found that the machinery was required to be installed by the society. That, the machinery was not purchased by the society. That ultimately, the assessee-company returned the machinery to the suppliers Buckau Wolf Ltd. That, the machinery for which the loan was raised was not purchased by the assessee-company. That, it never formed part of the assets of the assessee-company nor was it ever used for the business of the assessee-company. Hence, the claim for interest payment stood disallowed. The assessee had further claimed deduction of Rs. 52,002 being compensation payable by the assessee-company to Buckau Wolf Limited for delayed payment of advances against new sugar machinery ordered by the assessee-company. The Income-tax Officer found that the new machinery was not purchased by the assessee-company, but it was returned to the supplier. Hence, the Income-tax Officer rejected the claim for deduction of the above compensation as business expenditure. The assessee-company further claimed travelling expenses of Rs. 36,729. In this connection, the assessee-company claimed that though sugar manufacturing business was carried on by the society during the relevant year, the assessee had to incur travelling expenses for going to Delhi, Bombay, etc., in connection with several matters related to purchase of new machinery. The Income-tax Officer found that travelling expenses to the tune of Rs. 21,614 was incurred by the assessee-company for obtaining licence for another Sakhar Karkhana viz., Sri Dhyaneshwar Sahakari Sakhar Karkhana Limited, with whom the assessee-company was trying to negotiate sale. The Income-tax Officer found, therefore, that these expenses cannot be said to be expenses for the business of the assessee's business. In the circumstances, travelling expenses to the tune of Rs. 25,000 came to be disallowed. The assessee-company further claimed, vide revised return income from Mahatma Jotiba Hostel at Pune as income from business. However, the Income-tax Officer rejected the claim of the assessee on the ground that running of a hostel did not constitute part of the assessee's business activity and also on the ground that all along in the past, income from this hostel was shown and assessed as income from property. Being aggrieved by the order passed by the Income-tax Officer, the matter was carried in appeal to the Commissionerwho allowed the appeal on all counts. The Appellate Assistant Commissioner, inter alia, came to the conclusion that the intention of the assessee-company was to carry on the business through its instrumentality, viz., the said co-operative society. The Appellate Assistant Commissioner accordingly concluded that income from lease constituted income from business. Being aggrieved by the order passed by the Appellate Assistant Commissioner of Income-tax, Pune, the Department carried the matter in appeal to the Tribunal.

2. After considering the terms and conditions of the lease and the surrounding circumstances, the Tribunal came to the conclusion that the assessee's intention was not to carry on its business, but merely to let out the business assets. In view of the above finding, viz., that the assessee's intention was not to carry on business, but to merely let out the business assets, the Tribunal disallowed the claim of the assessee for deduction in respect of compensation paid by the assessee to Buckau Wolf Limited. Similarly, the Tribunal disallowed the claim made by the assessee for deduction in respect of the payment of interest to United Western Bank on the ground that the assessee's intention was not to carry on business, but merely to let out the business assets. Further, the Tribunal confirmed the finding of the Income-tax Officer for disallowing Rs. 25,000 claimed as deduction by the assessee-company out of the total amount of Rs, 56,729 on account of travelling expenses. Accordingly, the matter has come by way of reference under Section 256(1) of the Income-tax Act before this court.

3. The main issue which arises before us for consideration in the present matter is : Whether the assessee-company was exploiting the assets as commercial assets or as income yielding properties Mr. Bhujle, learned counsel appearing on behalf of the assessee-company, contended that although the co-operative society was a separate and distinct legal entity vis-a-vis the assessee-company, the assessee-company carried on the business through its instrumentality, viz., the co-operative society. He contended that in order to raise finances, the assessee-company was required to carry on the business through the co-operative society. He contended that the assessee-company could not pay off the dues and in view of the Government policy giving benefits to co-operative societies in the State of Maharashtra, engaged in the manufacture of sugar, the above arrangement was arrived at. Accordingly, learned counsel contended that the activity of the assessee-company should be regarded as continuation of its business. Learned counsel appearing on behalf of the assessee-company further contended that the members of the co-operative society were also shareholders of the assessee-company and, in substance, the business carried on by the assessee-company is only sought to be carried on by the co-operative society of the same members and, therefore, the society was only an instrumentalityof the assessee-company. In this connection, he submitted that a commercial asset is susceptible of being put to different uses in which gain might be acquired. A mere substituted use of the commercial asset did not change or alter the nature of that asset and whatever the commercial asset produces, is income of the business. He contended that the process by which the asset makes income, is immaterial. Learned counsel for the assessee-company further pointed out that although initially the assessee-company entered into lease-cum-sale agreement with the society, subsequently, the same was substituted by a revised lease. Learned counsel for the assessee-company further pointed out that in the proceedings before the High Court, all earlier resolutions passed by the company stood cancelled and in the circumstances, he contended that in view of the revised lease, the intention of the assessee-company was to exploit the assets as commercial assets and, therefore, the income received by the assessee-company as rent under the revised lease constituted income from business. Learned counsel for the assessee further contended that a bare perusal of the terms and conditions of the revised lease indicates that the assets were required to be used only for manufacture of sugar. That no other purpose was permitted under the lease and, therefore, the assessee had an interest in the society carrying on sugar manufacturing business. He further pointed out that even the licence to manufacture sugar stood retained by the assessee-company and, therefore, the company retained all its rights over the assets and the licence required for carrying on the business of sugar manufacturing and the inference drawn by the Department that the company intended to close down the business was, therefore, not supported by any evidence on record. He further pointed out that the terms and conditions of the lease relating to stocks, sales, loans clearly indicate that the assessee-company intended to continue its business. He further contended that the assessee-company had advanced loans to agriculturists for the purposes of manufacture of sugar. He further pointed out that the assessee-company supplied tractors to the agriculturists. Learned counsel for the assessee-company contended that under the above circumstances, the co-operative society was a mode provided to carry on the business and in furtherance of that object, the lease came to be executed. Learned counsel for the assessee-company placed reliance on the judgments of the Supreme Court in the case of CIT v. Vikram Cotton Mills Ltd. : [1988]169ITR597(SC) ; CEPT v. Shri Lakshmi Silk Mills Ltd. : [1951]20ITR451(SC) . Learned counsel for the assessee-company submitted that even if this court comes to the conclusion that the lease rent constituted income from other sources as the assessee-company intended to go out of business, even then the assessee-company carried on its business of letting out tractors to agriculturists for the purposes of manufacture of sugar even after executing the lease agreement and in the circumstances, he contended that theloan obtained by the assessee-company from United Western Bank was for business purpose. In the circumstances, he contended that the assessee-company was entitled to deduction in respect of interest paid by the asses-see-company to the said bank. In support of his arguments, he relied upon the judgment of the Supreme Court in the case of Veecumsees v. CIT : [1996]220ITR185(SC) . He further contended that since the assessee-company could not pay the price to Messrs. Buckau Wolf Ltd. regarding purchase of machinery in time, the assessee-company had to pay compensation and since the assessee's intention was to carry on business, the assessee-company was entitled to claim deduction in respect of the said compensation paid to Buckau Wolf Ltd. which was wrongly disallowed by the Income-tax Officer. He further contended that in view of his above arguments, the Income-tax Officer erred in disallowing deduction of travelling expenses to the extent of Rs. 25,000.

4. We do not find any merit in the contentions advanced on behalf of the assessee-company. Under section 28 of the Income-tax Act, 1961, profits and gains of any business carried on by the assessee-company at any time during the previous year are chargeable to tax under the head 'Profits and gains of business or profession'. In such a case, a large number of deductions, reliefs and benefits are available under the Act as mentioned in Section 30 onwards. Section 56 provides that chargeable income of every kind not included under the heads shall be charged under the head 'Income from other sources'. The question as to whether a particular factory or plant is used as a commercial asset or whether it is used as property has become a vexed question for which no general principle can be laid down. Hence, each case has to be decided on its own circumstances. Basically, it will depend on the intention. Intention is an inference to be drawn from the relevant facts. Where, either by word or conduct, the assessee expresses its intention to go out of business by converting the commercial asset into property, the income that accrues to such an assessee can only be income from other sources and not business income. In the present matter, the assessee-company leased out to the society, the plant and machinery and the premises on annual rent of Rs. 3 lakhs vide agreement of lease cum-sale. This was in view of the fact that the assessee-company was not in a position to carry on the business of manufacture and sale of sugar without the assistance of the State Government and other financial institutions. The assessee-company was not a co-operative society. In the State of Maharashtra, benefits were conferred upon co-operative societies by the State Government to encourage manufacture and sale of sugar. The benefits were given to encourage the co-operative movement in the State. The assessee-company was registered under the Companies Act. Under the lease-cum-sale agreement, the assessee-company clearly intended to sell the entire karkhana as a going concern on the expiry of two years fromMarch 31, 1971. It is only on account of the court's intervention that the lease-cum-sale agreement stood substituted by a revised lease. Even under the revised lease, the rent came to be increased from Rs. 3 lakhs to Rs. 6.50 lakhs per annum for the entire period commencing from August 1, 1971, up to July 31, 1974. This was in view of the fact that the sale component came to be deleted under the revised lease. Under the revised lease agreement, the initial period of lease was increased from two years to thirty years with an option to the society for renewing the same for a further period of thirty years. It is important to bear in mind that an option was given to the society for extending the lease for a further period of thirty years. Even the finding of fact recorded by the Income-tax Officer shows that the machinery for which loan was raised from United Western Bank came to be returned to the suppliers. It was never used for the business of the assessee-company. That, an attempt was made even by the assessee-company to obtain licence for another Sakhar Karkhana, viz., Dhyaneshwar Sahakari Sakhar Karkhana with whom the assessee-company was trying to negotiate sale. The directors' report also indicates that the assessee-company clearly intended going out of business by converting the commercial assets into properties. It is true that at the intervention of the court, the lease-cum-sale agreement stood substituted by the revised lease. However, the intention of the assessee-company in entering into the lease-cum-sale agreement with the society was to sell the plant and machinery and the premises to the society for which a price was also fixed. Even the revised lease clearly indicates the intention of the assessee-company to go out of business and to convert the assets into property. The long duration of the revised lease is also one of the factors which supports our finding regarding the intention of the assessee-company in treating the assets as income-yielding properties. The period of the revised lease may not be a conclusive factor, but it is certainly a relevant factor to be taken into account. Even the memorandum of the company did not contemplate leasing to be a business activity of the assessee. In view of our finding that the assessee's intention was not to carry on business, but to let out the business assets as income-yielding properties, the claim of the assessee-company for deduction regarding the compensation paid to Buckau Wolf Ltd. and for deduction on account of interest paid to the United Western Bank as also the claim for deduction on account of travelling expenses cannot be granted. In fact, the record shows that attempts were made to obtain sugar manufacturing licence for Dhyaneshwar Sahakari Sakhar Karkhana with whom the assessee-company also tried to negotiate the sale. This circumstance along with the above mentioned circumstances establishes the intention on the part of the assessee-company to go out of business by converting the assets into property. In the case of CEPT v. Shri Lakshmi Silk Mills Ltd. : [1951]20ITR451(SC) , the assessee-company was a manufacturerof silk cloth and as a part of its business, the assessee-company installed a plant for dyeing silk yarn. During the chargeable accounting period, owing to a difficulty in obtaining silk yarn on account of the Second World War, it could not make use of its plant which remained idle for some time. In August, 1943, it was let out to a person on a monthly rent. The chargeable accounting period was January 1, 1943, to December 31, 1943. The question which arose for determination before the Supreme Court was whether the sum representing the rent realised by the assessee was chargeable to excess profits tax as profits of business or was it an income from other sources and was, therefore, not chargeable to excess profits tax. On an examination of the facts on record, the Supreme Court found 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 the machinery in its own manufacturing concern or temporarily letting it out to others for making profit for their business. Under the circumstances, the Supreme Court came to the conclusion, on the facts of that case, that the plant had not ceased to be a commercial asset of the assessee and the sum representing the rent received from the lessee was, therefore, income from business. In the present matter, as discussed hereinabove, the facts on record indicate that the plant, machinery and the premises had ceased to be a commercial asset of the assessee. The conduct of the assessee, as indicated by the various circumstances brought on record, show that the assessee was exploiting the assets as income-yielding property. The intention of the assessee was to go out of business by converting the commercial assets into property. In the circumstances, on the facts of the present case, the rent received by the assessee-company cannot constitute income from business. Hence, the judgment of the Supreme Court in the case of CEPT v. Shri Lakshmi Silk Mills Ltd. : [1951]20ITR451(SC) has no application to the present case. In the case of CIT v. Vikram Cotton Mills Ltd. : [1988]169ITR597(SC) , the Tribunal held that the company had an intention to restart the business and the intention of the company in letting out its assets was to exploit the commercial assets for business purposes and, therefore, the rental income was business income. The Supreme Court laid down in the said judgment that the question as to whether the assessee was exploiting the asset as a commercial asset or as an income-yielding property is predominantly a matter of intention. That intention is an inference to be drawn from the relevant facts. That, it would depend on the facts of each case. In the present matter, as stated hereinabove, the evidence on record indicates that the assessee-company intended to dispose of the assets. Initially, they entered into lease-cum-sale arrangement for two years. That, under the said arrangement, the assets were required to be sold at the end of two years. That, even under the revised lease, the tenure and the other terms and conditions, discussed hereinabove, show that the intention wasto go out of business by converting the commercial assets into property. In the circumstances, the rent received by the assessee-company constituted income from other sources and not business income. In the circumstances, on the facts of the present case, the judgment of the Supreme Court in Vikram Cotton Mills' case : [1988]169ITR597(SC) has no application to the facts of the present case. In the case of Veecumsees v. CIT : [1996]220ITR185(SC) the assessee ran a jewellery business. Thereafter, the assessee commenced business in the exhibition of cinematographic films. In 1961, the assessee obtained loans for building a cinema theatre. For the years during which the assessee exhibited films in the said theatre, the interest paid on the loans obtained for constructing it were allowed by the Revenue as deduction under Section 36(l)(iii) of the Income-tax Act, 1961. The Income-tax Officer declined to grant deduction on the ground that the business of exhibition of films was no longer in existence. The Assistant Appellate Commissioner allowed the deduction. The Tribunal found that there was no dispute that for construction of the theatre, the assessee had made heavy borrowings and the interest on such borrowings had been allowed by the Revenue as a deduction as the assessee was running the theatre as its own business. The Tribunal also found, on facts, that the business carried on by the assessee as a jeweller and in the running of the theatre, were composite. The Tribunal also found, on facts, that the assessee was carrying on both the businesses in jewellery and in the exhibition of films till July 31, 1965, and that only thereafter, the activity of exhibition of films stood discontinued. Accordingly, the Tribunal upheld the decision of the Appellate Assistant Commissioner and permitted deduction under Section 36(1)(iii) of the Income-tax Act. On a reference, the High Court came to the conclusion that since the closing of the cinema business had not affected in the least, the assessee's business in jewellery, there was no interconnection between the two businesses and the High Court disallowed the deduction. On appeal, the Supreme Court found the judgment of the Tribunal to be erroneous. On the facts, the Supreme Court found that the business carried on by the assessee as a jeweller and in running the cinema theatre was composite and, therefore, the assessee was entitled to the deduction of the interest paid on the loans in question under Section 36(1)(iii) of the said Act, 1961. On the facts, therefore, the judgment of the Supreme Court in Veecumsees' case : [1996]220ITR185(SC) has no application to the facts of the present case. In the present case, the supply of tractors cannot give the right to the assessee to claim deduction of interest on loans raised. On the facts, we have come to the conclusion that the total business of manufacturing and selling sugar came to be closed down. In the judgment of the Supreme Court, there existed two distinct and separate businesses, viz., running of cinema theatre and business of jewellery. The cinema business came to be shut down. On the facts, it was found thatthe jewellery business continued. In the present matter, supply of tractors was incidental to the main business of manufacturing and selling sugar which, as stated hereinabove, stood closed. Hence, under the circumstances, interest on loans raised cannot be claimed as an item of deduction and the judgment of the Supreme Court, therefore, has no application to the facts of the present case.

5. Accordingly, question No. 1 is answered in the affirmative and against the assessee. Questions Nos. 2, 3 and 4 are accordingly answered in the negative and against the assessee.

6. In its order, the Tribunal has considered one more point, viz., whether the income derived by the company from leasing out the hostel to the students constituted income from business. This point also arises in companion references. The hostel has been set up by the assessee-company for students who reside therein. It is for the students studying in Pune and surrounding cities in the State of Maharashtra. Originally, income from this source was shown as income from property. Subsequently, a revised return was filed claiming income from the hostel as income from business. The Income-tax Officer rejected the claim of the assessee and treated the said income as income from property. However, the Appellate Assistant Commissioner as well as the Tribunal have treated the said income as business income, particularly in view of fresh evidence being brought on record. The material subsequently placed before the Appellate Assistant Commissioner and the Tribunal indicate that licence was given by the Pune corporation enabling the assessee-company to run the hostel. Further, rent is charged to the students on college term basis and not month to month. In addition, licence fees exceeding Rs. 500 are payable annually as also municipal charges, water charges, etc., which depend on actual user and not at fixed rate. The memorandum of association produced by the assessee also show that one of the objects of the assessee-company was to earn income from the hostel. The students were permitted to occupy the hostel pursuant to a licence which required them to vacate the premises on the expiry of the stipulated period. The running of the hostel was similar to a boarding or lodging house. In the circumstances, the premises were not let out to the students. There was no relationship of lessor and lessee vis-a-vis the students. It is a case of permissive occupation by the students. Hence income from the hostel constituted business income. The assessee-company runs this hostel as a business proposition and with a view to make profits. All essential facts point to income in a commercial sense.

7. The reference is accordingly disposed of with no order as to costs.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //