Per Dr. V. Balasubramanian, Vice President - These are departmental appeals. There are four grounds common to all the four appeals, viz., the treatment of the lease rent as business income; disallowance of interest payment; disallowance of travelling expenses and the treatment of receipts from the hostel as property income. For the assessment year 1974-75 there is an extra ground relating to expenses incurred in the transport of machinery. All the grounds are considered below.
2. The assessee-company was carrying on the business of manufacturing and selling sugar up to the assessment year 1972-73. The ITO found that thereafter it leased out the factory with the sugar manufacturing machinery to a co-operative society named the Saswad Mali Sahakari Sakhar Karkhana Ltd. The assessee was to receive a sum of Rs. 3 lakhs as lease rent as per their lease deed dated 31-3-1971 and with effect from 1-8-1971. Before the ITO it claimed the receipts to be income from business on the ground that the leasing activity formed part of the assessees business. For the assessment year 1973-74 a similar claim was made before the ITO supported by the authority of various High Court decision cited. Holding that as in the earlier decision in the case of New Savan Sugar & Gur Refining Co. Ltd. v. CIT : 74ITR7(SC) applied to the facts of the case, the ITO treated the lease amount received as income assessable under section 56 of the Income-tax Act, 1961 (the Act). According to him, the machinery and the premises had been leased out to the co-operative society with the permanent intention of discontinuing the sugar manufacturing business and in consonance with the Government policy to help industries in the co-operative sector. Following the decision of the AAC for the assessment year 1973-74, the AAC held that the lease income has to be assessed under the head Profits and gains of business or profession and accepted the assessees claim. This is challenged in the departmental appeals.
3. The learned counsel for the departmental has pointed out that the AACs order for 1973-74 was the subject-matter of appeal before the Tribunal and in IT Appeal No. 557 of 1978 dated 5-4-1980 the Tribunal has upheld the order of the ITO and rejected the assessees claim. Since the same position obtained for the years under appeal, according to the learned counsel, there was no reason to go into the assessees claim based on the same facts.
4. Without prejudice to the above, the learned counsel has also pointed out that on merits the contention of the assessee that the alleged lease was a business activity cannot be accepted. The assessee was a joint stock company carrying on the main activity of sugar manufacturing. Up to the assessment year 1972-73 this was done. It would appear that orders were placed in 1969 for the purchase of machinery worth Rs. 145 lakhs. Part of this machinery was actually got into the factory as well. However, on account of the Governments policy to encourage co-operative societies in this sector, the assessee had difficulty in carrying on the business. It was as a result of this clear and unworkable position that the assessee stopped its business with a permanent intention of leasing out the machinery and premises. The balance sheets of the assessee for the period ending 31-7-1972, 31-7-1973 and 31-7-1974 clearly indicate that the idea was to enter into a long-term lease at a substantial lease rent. The learned counsel has pointed out that the profit available to the assessee during the years prior to alleged leasing out was less than Rs. 3 lakhs per year. The assessee, therefore, seems to have made a commercial decision to enter into the long-term lease and to enhanced income receipt. Reference is made in his connection to the notice convening the extraordinary general meeting of the shareholders specifically referring to the contemplated transfer of assets. The learned counsel also took us through the agreement dated 31-3-1971 constituting a lease-cum-sale. Referring to specific clauses of the agreement it was pointed out that these clearly indicate an ultimate intention to stop the business and lease out the machinery, etc. It is also seen that the assessee was to go completely out of the sugar business taken over by the co-operative society. On the contrary, according to the learned counsel, there were no prospects nor any indication of the assessee resuming the business closed. Not only was there no intention of the company doing business on its own; even an idea of conducting the business the co-operative society could not be inferred from the conduct of the assessee.
5. The shareholders of the company having objected to the sale, the matter was taken to the High Court. The High Court granted a stay order on 27-7-1973. There was a compromise order approved by the High Court. The details covered by the agreement and the compromise order. according to the learned counsel, can in no way be considered as an agreement of management. It gave clear indications of an agreement of lease with absolutely no intention of continuing the business by the assessee. That this process continued subsequent to the assessment year 1978-79 further supported the departments case. Even facts which came to light after the assessment year or of the assessment can, according to the learned departmental counsel, be taken into consideration for arriving at the intention of the assessee in this regard. Reliance is placed to support his case on the decision in New Savan Sugar & Gur Refining Co. Ltd.s case (supra), Sultan Bros. (P.) Ltd. v. CIT : 51ITR353(SC) , Seth Banarsi Das Gupta v. CIT : 106ITR559(All) and Seth Puran Chand (HUF) v. ITAT : 127ITR773(All) . In these matters the form of the transactions cannot be ignored for what is wrongly taken as a matter of substance. When the assessee had entered obviously into a lease of certain properties, this indicated the real nature of the transaction and the form of the agreement between the parties. It would be erroneous to rely on what is pointed out as the substance of the transaction and thereby come to a wrong conclusion. Reference is made in this connection to the decisions in CIT v. B. M. Kharwar : 72ITR603(SC) , Pandit Lakshmikanta Jha v. CIT : 75ITR790(SC) and CIT v. S. Ramal Ammal  135 ITR 292 .
6. The learned counsel for the assessee has pointed out that the decision for the assessment year 1973-74 made by the Tribunal did not take into account several factors of importance. Some other facts referred to in the arguments advanced before the Tribunal were also not properly taken note of. As a result of these, it is pointed out, the assessee had to file a miscellaneous petition. The miscellaneous petition was heard and several corrections were made by the Tribunal in its order for the assessment year 1973-74. According to the learned counsel, the corrections were so many and so basic in nature that the very decision of the Tribunal could found to be erroneous on the face of it. Against such a reality, according to the learned counsel, it was not proper to rely on that order of the Tribunal.
7. It is pointed out that the lease of the business has to be considered as a whole including considerations of items like goodwill involved for coming to the conclusion whether a business was carried on. The decision in CIT v. Bosotto Bros. Ltd. : 8ITR41(Cal) , following earlier decision in the case of Mangalagiri Rice Factory v. CIT  2 ITC 251, was relevant in this connection. The matter was considered also in Sadhucharan Roy Chowdhry. In re. : 3ITR114(Cal) by the Calcutta High Court. Since then a different approach to this problem has been made by all other High Courts, following the decision of the Supreme Court in the case of CEPT v. Shri Lakshmi Silk Mills Ltd. : 20ITR451(SC) . The clear ratio arising from these decisions is that in arriving at a decision one should have regard to the facts of the particular case and in particular the document has to be read as a whole. In the present case the facts in the documents themselves were disputed as would be clear. The matter was thus taken to the Court. According to the learned counsel, the effect of this fact itself was that the alleged lease-cum-sale of 31-3-1971 has to be properly read in the light of the attendant circumstances. If this is done, all the clauses in the agreement dealing with alleged sale go out and the property remains that of the assessee and only with view to carry on the business is sugar.
8. The assessee had to collect sugarcane of proper variety. For this purpose the assessee owned its own lands extending to several acres. The lands were cultivated by the assessee and some of them through agents. The assessee had also taken on lease certain lands for cultivation. Since the sugarcane was to be grown and the good quality of the crops had to be maintained, facilities for irrigation have also to be secured by the assessee. The assessee had a tractor and this was made available to the cultivators of the sugarcane used exclusively in the assessees own factory.
9. Referring to the balance sheets and the profit and loss account for several years, it is pointed out that after the lease of 31-3-1971 having effect from 1-8-1971 every report indicated that the assessee was contributing all the ancillary activities necessary for the continuation of the business. This was so far every year after the lease was entered into. Thus, the assessee was lending money to the sugarcane cultivators. In fact it is pointed out that such lending was restricted only to cultivators. In 1961 there was a ceiling on land but as a manufacturer of sugar this did not affect the assessee. The other items and ancillary interests which supported the assessees case are, according to the learned counsel, manufacture of sugar as a matter of fact; making available the tractor for ploughing to the cultivators; payment of irrigation dues for the supply of water and holding of agricultural lands by purchasing them and also taking them out on lease. All the ancillary facilities like the tractor, irrigation, etc., were given only to the shareholders of the assessee and those under its control who produced sugarcane useful in the factory. All these would go to show that even after the alleged lease the assessee was continuing an integrated operation of cultivating the necessary sugarcane for the exclusive use in the assessees factory. According to the learned counsel, the assessee. if it had been a mere lessor of machinery and building, would not have taken the trouble or ventured into the activities like advancing monies to sugarcane growers, getting them produce the best quality sugarcane, enter into contracts with them to get them on to the assessees own factory though leased out, etc. Referring to the entries in the balance sheet it is pointed out that the balance sheet for 1973 showed that the assessee had 1566 acres of freehold sugarcane producing land. It maintained almost the same extent of leasehold land. Similar information is available from the balance sheets for 1974 and 1975, particular reference is made to page 90 of the former and also pages 14 to 15. The profit and loss account of 1973 indicates the payment of tractor hire of rs. 1,17,078, expenses on farm Rs. 10,184, agricultural rent Rs. 41,820 relating to the leased out land for sugar cultivation and irrigation expenses of rs. 1,92,974. All these ancillary activities are continued during the period of lease and also later on. The assessee had 15 tractors right from the year 1944 and they were utilised and continued to be used even during this period.
10. Referring to the facts leading to the lease, it is pointed out that even in 1932, the assessee-factory was established with a crushing capacity of about 1,000 tonnes. To increase the crushing capacity to 1,250 tonnes per day which could be further extended to 2,000 tonnes, an agreement dated 24-10-1969 was entered into. There was no question of the assessee giving the lease of the factory to anyone and certainly not on a permanent basis. According to the learned counsel, the lease was forced on the assessee in order to maintain the business intact on account of financial difficulties and a non-co-operative governmental policy. The assessee having entered into agreements for the purchase of substantial amount of machinery was liable to pay nearly Rs. 1.44 crores towards price of the machinery. A sum of Rs. 36 lakhs had to be paid by December 1969. The assessee could pay only Rs. 26 lakhs by that date; the balance could not be raised and paid. The assessee could not raise any money from the public sector. It went to the United Western bank borrowing a sum of Rs. 37 lakhs in 1973. This is indicated in paragraph 12 of the report of the directors. On 27-3-1973 the alleged purchase agreement had to be cancelled. Reference is made in this connection to the notice issued to the shareholders. Clause (1) of the notice referred to the cancellation of the Special Resolution No. 5 passed in the extraordinary general meeting of the the company held on 12-9-1970 providing for the transfer of the sugar manufacturing licence standing in the name of the company to and in favour of the proposed Saswad Mali Sahakari Sakhar Karkhana Ltd. A petition was filed on 29-6-1973. The two years lease originally contemplated was to end on 31-7-1973. A sale agreement was to be effected thereon. It was at this juncture a stay order was obtained from the High Court on the petition of some of the members of the company. This finds expression at page 3 of the directors report for the year 1973. Many of the shareholders of the company are members of the co-operative society. This, in fact, clearly projects the purpose for which the said change was made by the assessee. The conversion of the company into a co-operative society was done strictly on the advice of the solicitors and in order to facilitate the business of the company itself. There was a compromise and all the earlier resolutions had to be cancelled in order to have this.
11. Referring to various clauses in the lease agreement it is pointed out that these also support the assessees case. Thus, clause (1) (b) specifies that the factory cannot be used for any purpose other than sugar manufacture. Certainly such a clause would not have found a place if the assessee is not interested in the business. On the contrary. if the assessees business was not kept in view, the assessee would not have bothered about the manner in which the leased machinery was utilised by the co-operative societies. Clause (4) (iv) indicates that the co-operative society has not taken over loans. etc. On account of the compromise clause (11) dealing with the sales goes altogether out of the picture. Stress is laid also on the sub-clause (D) and (E) of the deed dated 30-7-1976. Particular stress is laid on clause (19) (B) of the new deed which deals with the determination of the lease. In fact it is pointed out that the lease agreement was determined with effect 31-7-1983.
12. At this stage the learned counsel for the department pointed that what happened after the assessment under appeal was not before the ITO and this particular evidence should not be admitted. This, however, is a matter of fact and though may have a relevance to the decision on the point at hand, we are not relying on this information.
13. Reference is made to the decisions in Velji Deoraj & Co. v. CIT : 68ITR708(Bom) and Everest Hotels Ltd. v. CIT : 114ITR779(Cal) . The learned counsel for the assessee has pointed out that the case of New Savan Sugar & Gur Refining Co. Ltd. (supra) was considered by the Gujarat High Court in CIT v. Vania Silk Mills (P.) Ltd. : 112ITR701(Guj) . The Andhra Pradesh High Court decision in CIT v. Aryan Industries (P.) Ltd. : 138ITR718(AP) is also relevant. In fact, according to the learned counsel, in New Savan Sugar & Gur Refining Co. Ltd.s case (supra) the assessee had no concern with the production done by the factory at all - a fact which distinguishes the present appeals from that case.
14. We have considered the matter. Normally we would have followed the decision of the earlier bench on this point, but as pointed out by the learned counsel for the assessee the order of the bench was subjected to substantial corrections on the application of the assessee. It would not be proper to say that after these corrections the decision of the Tribunal should be followed as such. It is for this reason that the arguments were against heard from both the parties on the entire issue.
15. On a consideration of the facts we have no hesitation in coming to the conclusion that the activity of the assessee should be regarded as a continuation of its business. It is true that the assessee has entered into certain transactions which might give a colour of sale. But even these transactions are properly explained by the objectives and the circumstances leading to them. There is no doubt about the fact that the assessee had in fact ventured on a substantial increase in its business activity so as to produce more sugar per day than earlier. Orders for more and extensive machineries were given by the assessee. The facts also indicate that the assessee could not pay off the amounts required for discharging the purchase price. It would appear that against such a contingency the assessee approached the bankers for loans. The assessees attempt to get financial assistance from institutions appear to have not been successful particularly in view of the partiality of the Government policy towards co-operative societies. The attempt to sell off the machinery appears to be a camouflage in the circumstances to acquire the extra machinery indented and at the same time carry on the business through the medium of the co-operative society. It is clear that there are several members of the co-operative society who are shareholders of the assessee-company. In effect, therefore, the alleged sale is only from a company to a co-operative society whose members are mainly shareholders of the company. Even though the company and the co-operative society are distinct and separate legal entities, in substance the business a carried on by the assessee-company is only sought to be carried on by a co-operative society of the same members. If, for insurance, the encouragement given by the Government only to co-operative societies is considered and the financial difficulties faced by the assessee as regards the machinery, etc. to be purchased, are taken into account, one cannot dispute the fact that in substance the assessee was only trying to conduct the business of sugar manufacturing through another instrumentality. It may be that in strict above questions, but ultimately the owners of the company and the owners of the society being almost the same, the resulting position as regards the business cannot be ignored. It is in this context that the cancellation of the earlier resolutions for the sale of the business, etc., have to be seen. The compromise before the High Court also projects the same facts in clearer light. Thus, on the one hand there are facts which go to show that the assessee was prevented from carrying on an extended business and was trying to carry on the business even on an extended scale by adopting other legal modalities. In the face of this position prima facie it would not be correct to say that the assessee was trying to wind up its business.
16. It is also seen that with the failure of the alleged attempt to sell the business to a co-operative society mainly comprised of the same members, the assessee took an alternate method of retaining control over the business by entering into a lease. Even if for the purposes of argument we ignore the common members of the company and the co-operative society for this purpose, there is substantial evidence to show that the alleged lease to the co-operative society was for the purpose only of running the business. The clauses of the agreements as well as the compromise support the assessee in this regard. it is specifically provided in the lease that the factory can be used only for the purpose of sugar manufacture. We are not sure whether any damage to the machinery can happen by utilising the machinery not for sugar machinery can happen by utilising the machinery not for sugar manufacture but for some other purpose. But certainly it can be stated that in the premises leased out the lessee could have without damage to the premises or violating any of the warranties relating to the building assigned to its care carry on any other business. But the lease clearly prohibited this. This shows that the assessee had interest in the society carrying on only sugar manufacturing business. Even if the society were to profit much more by carrying on any other business in the premises and with the machinery, it could not have legally done so. In other words, it is the business designated by the assessee which the society has to do.
17. the assessee retained the licence. In fact the shareholders petition to the Court was directed against the sale of the sugar business. Such sale was obstructed and did not take place. Thus, on the one side the assessee was prevented from selling the business, even though to a co-operative society comprised to its own members. On the other side the company retained the full equipment such as the licence, etc., for carrying on the business. The circumstances which, therefore, seem to have engulfed the assessee from the financial, legal and governmental policy points of view can only indicate that the assessee interest in and the intention to continue the business. The inference of the departmental authorities, therefore, that the assessee had intention to close down the business has neither any evidence to support it nor can be inferred from the above facts.
17A. It is also noteworthy that the several clauses in the lease such as those relating to the stock, sales, outstanding loan, etc. give support to the idea of continuing business and not the business wound up, and taken over or restarted by the lessee. More important than this are the other items of evidence relating to the production of sugarcane. The assessee continued to retain the land both owned as well as taken on lease. The assessee advanced loans to the agriculturists for the production of sugarcane; incurred expenditure on ploughing, irrigation, etc., and the supply of materials to the agriculturists. The assessee maintained during these years a good number of tractors for helping the agriculturists. If the intention of the assessee was not to carry on the sugar manufacturing business, it need not have laid much stress on carrying on the agricultural activity in the first place. Its extra concern for advancing loans to the sugarcane growers and persuading them to produce better quality sugarcane and sell the same to the factory of the co-operative society also stresses its extra interest and concern in the continuance of the sugar manufacturing business. Even though, therefore, for the department certain clauses of the lease deeds and also certain observations in the directors report have been pointed out to indicate that the assessee had no intention of carrying on the business, from the conduct of the assessee and the financial and other commitments entered into by it, the departments stand in this regard cannot be accepted as correct. During the period of the lease and also later on all the ancillary activities which the assessee earlier carried on as a sugar manufacturer were carried on.
18. Thus we find both on the positive as well as the negative sides evidences to support the assessees claim that it intended to carry on the business. It was prevented from carrying on the business which it was doing earlier. Its attempt to expand the business looked like getting frustrated on the issue of finance. There was opposition from the members themselves to the transfer of the business to anyone else including a co-operative society consisting of the same members. The only modality, therefore, the assessee could use to carry on the business being through a co-operative society, the course open to the company perhaps was to enter into a lease as regards the machinery and the premises and get the sugar manufacturing business running through the co-operative society. The negative evidence relating to the carrying on of the ancillary activity, the huge support extended financially and materially to the agriculturists producing sugarcane solely for supply to this factory and the retention of the manufacturing licence and other legal rights with the only shows that the business was expected to be carried on though a proper instrumentality if not by itself. We, therefore, hold that the income of the assessee from the alleged lease should be treated as business income assessable as such.
19. Several cases were cited for both sides in support of their respective stands. In our view, the facts of New Savan Sugar & Gur Refining Co. Ltd.s case (supra) clearly indicated on the terms of the lease deed that the intention of the assessee was to part with the entire machinery of the factory and the premises with the obvious purposes of earning rental income. There was no intention to treat the factory and the machinery as a commercial asset during the subsistence of the lease. On the contrary the finding was that the intention of the assessee was to go out of business altogether. The facts in the present case point out to a reverse conclusion. In Sultan Bros. (P.) Ltd.s case (supra) the Supreme Court clearly laid down that whether particular letting was business or not is to be decided in the circumstances of each case. Each case, according to their Lordships, had to be looked at from the businessmans point of view, to find out whether the letting was the doing of a business or the exploitation of his property by the owner. In that case a private company constructed a building on a certain plot of land, fitted it up with furniture and fixtures and let it on lease fully equipped and furnished for the purpose of running a hotel. Apparently the assessee was not running the hotel earlier and the question of continuing a business did not arise. This decision does not help the department.
In Seth Banarasi Das Guptas case (supra) the Allahabad High Court held that the leasing out of a sugar mill did not amount to a business on the clear finding that the business was stopped and the assets employed in the business ceased to be commercial assets. The facts in the present case are that the assessee was adopting every possible method, including conversion of a company into a co-operative society and carrying on ancillary activities, to continue and not stop the business.
In Seth Puran Chand (HUF)s (supra) also there was a factual finding that there was no intention to carry on the business of sugar mills originally carried on by an HUF subsequently transferred to a limited company.
In CIT v. Prem chand Jute Mills Ltd.  114 769, their Lordships of the Calcutta High Court laid down the following principles for determining whether an income is income from business :
'1. In order to be a business income there must be evidence of exploitation of a commercial asset.
2. Exploitation of a commercial asset does not necessarily mean exploitation by the assessee himself at all material times. The assessee may temporarily cause it to be exploited by another person against payment of consideration and for this purpose may execute a lease for a fixed period even with option to renew.
3. But, in order that the income derived from the lease should be taxable it must be shown that the lessors intention was that during the period of the lease the asset leased out must remain and be treated as a commercial asset and be exploited as such.
4. This intention of the lessor has to be ascertained from the cumulative effect of all the terms of the lease and other material circumstances.' (p. 769)
The attempts at settlement and the clauses in the lease deed in that case indicated an intention on the part of the assessee to ensure that the assets retained its commercial character. An analysis of the facts of the present case lead us to a similar conclusion. At page 779 the decision of the Calcutta High Court in the case of Everest Hotels Ltd. (supra) obtains. This also lends further support to the assessees case.
A similar question came up for consideration before Gujarat High Court in the case of Vania Silk Mills (P.) Ltd. (supra). The company carrying on the business of manufacturer of silk in that case could not install certain machinery because air-conditioning facilities were not available. The machinery was given on lease to a sister concern carrying on an identical business. Analysing the terms of the lease and the circumstances attending the lease their Lordships of the Gujarat High Court held that the income under the lease agreement was assessable as business income. They relied on the decision of the Supreme Court in the case of Shri Lakshmi Silk Mills. Ltd. (supra) and the Bombay High Court in the case of CIT v. National Mills Co. Ltd. : 34ITR155(Bom) .
In Aryan Industries (P.) Ltd.s case (supra), the Andhra Pradesh High Court considered the case of leasing out a whole factory for a period of 18 years. Discussing the case law at length their Lordships came to the conclusion that the assessees income should be assessed as business income. It was specifically pointed out that the assessee in that case had not either by word or conduct expressed its intention of discontinuing the business altogether as was done by the assessee in New Savan Sugar & Gur. Refining Co. Ltd.s case (supra). In our view the decided cases leave us with no doubt that in the totality of the state of affairs, legal and the factual, the income from the lease was assessable under the head Profits and gains from business of profession for all the years under appeal. This point is decided in favour of the assessee.
20 to 30. [These paras are not reproduced here as they involve minor issues.]
31. The departmental appeals are dismissed.