JAGANMOHAN REDDY, J. - The question that the Income-tax Appellate Tribunal was asked to refer by this court under section 66(2) of the Indian Income-tax Act, 1922 (No. XI of 1922) is :
'Whether, on the facts and in the circumstances of the case, the income derived by way of rent in respect of factory, buildings, godowns, etc., of the assessee is income from business assessable under section 10 of the Indian Income-tax Act or income from property assessable under section 9 of the Indian Income-tax Ac ?'
The answer to this question would depend upon the nature of the assets in relation to the activity of the assessee.
The facts stated by the Tribunal are that the assessee, which was a public limited company, used to carry on the business of pressing cotton. It owned its own cotton press. The assets of the business consisted of buildings, godowns, machinery, etc. The assessment years for which this question has arisen are 1954-55, 1955-56, 1956-57 and 1957-58 for which the respective previous years are the calendar years ended December 31, 1953, December 31, 1954, December 31, 1955, and December 31, 1956. Prior to these years, due to adverse circumstances, the business of pressing cotton was stopped by the assessee by a resolution to this effect passed by the general body on November 19, 1950. By a further resolution passed on August 20, 1953, the general body of shareholders authorised the letting out of the building premises. By a third resolution passed by the board of directors on May 12, 1954, it was decided to put up the machinery, i.e., the press, for sale. It is said that though the buildings were let out as decided by the general body, no sale of the machinery had by then taken place in any of the previous years concerned. Admittedly, no cotton pressing business was being carried on by the assessee in any of these years. The assessee contended that the income derived from the rent of the buildings was business income and sought to set up certain leases in the previous years. But the department took the view that on the facts stated the income arising from the letting out of the buildings, etc., was income falling to be assessed under section 9 of the Act. An appeal to the Appellate Assistant Commissioner and to the Tribunal were all rejected.
The question whether an income falls under one head or the other must necessarily depend upon the facts and circumstances of each case. It is indisputable that in the scheme of the Income-tax Act, 1922, the tax is one, though under section 6, these are different heads of charge. If the income falls under any particular head, it has to be charged under that head. Section 9 deals with tax payable under the head 'income from property', in respect of the bona fide annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business, profession or vocation carried on by him the profits of which are assessable to tax, while section 10 concerns with the payment of tax by an assessee under the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. Section 12 is the residuary section i.e., the tax payable by an assessee under the head 'Income from other sources' in respect of income, profits and gains of every kind which may be included in his total income if not included under any of the preceding heads. While this division of various heads of income is specific, the difficulty often arises as to which of the heads a particular income derived from property belongs. As has been seen, section 9 itself contemplates any income derived from property which may be utilised for the purpose of business to be charged under the head under section 10 or a property which is a part of a commercial asset or a business asset, i.e., any asset which is used for the purpose of business or commerce or trade. If the income is derived from the use of a commercial asset, that income would be chargeable under the head 'business' irrespective of the fact whether the person owning the asset has himself earned the income or someone else earned the income by the use of that asset, though paying only a rent for it.
Mr. Kuppuswami has contended on the rationale of the decision in Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. that the asset in this case is a commercial asset, inasmuch as the machinery, etc., has not been sold and, therefore, the income-tax authorities were wrong in classifying the income derived for the years in question under the head 'Income from property'. As we have said earlier, the determination of this question depends upon the facts and circumstances of each case and no two case are alike.
In the case referred to, it was admitted that the dyeing plant, which was let out, was a commercial asset of the assessee, because it was a commercial asset of the assessees business for the purposes of earning profit. This asset, i.e. the plant for dyeing silk yarn, remained idle for some time owing to difficulty in obtaining silk yarn on account of the war and later was let out and the income therefrom was sought to be included under the head Income from business'. It was contended that once a commercial asset was let out and was not used by the owner thereof for a business purpose, it ceased to be an asset of its business and any income derived from the rent by letting out that asset was income received by the assessee from other sources and, therefore, not chargeable under the Excess Profits Tax Act. In the High Court the learned Chief Justice had observed :
'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.'
Tendolkar J., who had agreed with the Chief Justice, was also of the same view. He said :
'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.'
Their Lordships of the Supreme Court, while agreeing with these observations, thought that the High Court was in error in holding that the asset had ceased to be a commercial asset. Mahajan J., at page 455, observed :
'The yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business. He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else. Suppose, for instance, in a manufacturing concern the use of its plant and machinery can advantageously be made owing to paucity of raw materials only for six hours in a working day, and in order to get the best yield out of it, another person who has got the requisite raw materials is allowed to use it as a licensee on payment of certain consideration for three hours; can it be said in such a situation with any justification that the amount realised from the licensee is not a part of the business income of the licensor. In this case, the company was incorporated purely as a manufacturing concern with the object of making profit. It installed plant and machinery for the purpose of its business, and it was open to it if at any time it found that any part of its plant for the time being could not be advantageously employed for earning profit by the company itself, to earn profit by leasing it to somebody else. It is difficult to hold that the income thus earned by the commercial asset is not income from the business of the company that has been solely incorporated for the purpose of doing business and earning profits.'
This case was distinguished by their Lordships of the Supreme Court in a subsequent case, Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax. That was also a case under the Excess Profits Tax Act and the income sought to be made liable to tax was income from certain property which was derived from letting out the plant and machinery by the assessee-firm to a company. The High Court had held that it was income from business and hence liable. If the income was not from business, it would not be chargeable under the Excess Profits Tax Act. The question therefore arose whether the assessee in that case was a firm carrying on business. In April, 1940, the buildings and the leasehold rights of the partnership were sold to a public limited company for that purpose. The said company further took on lease at an annual rent the plant and machinery of the assessee-firm. The assessee-firm did not thereafter manufacture anything and it had, accordingly, no further trading or commercial activity. In the said circumstances, the Supreme Court held that the letting out of the plant and machinery by the assessee-firm to the company could not be held to fall within the body of the definition of 'business' under section 2(5) and as the assessee-firm had, therefore, no business during the relevant period to which the Act applied, section 10A could not be invoked by the excess profits tax authorities. Das J., after nothing the definition of 'business' under section 2(5) of the Excess Profits Tax Act and section 2(5) of the Indian Income-tax Act and the observations of the Judicial Committee in Commissioner of Income-tax v. Shaw Wallace and Co. that the words used in the definition of business were no doubt wide but underlying each of them was the fundamental idea of the continuous exercise of an activity, observed at page 773 thus :
'The word business connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose. On the other hand, a single and isolated transaction has been held to be conceivably capable of falling within the definition of business as being an adventure in the nature of trade provided the transaction bears clear indicia of trade. The question, therefore, whether a particular source of income is business or not must be decided according to our ordinary notions as to what a business is'.
The case of Commissioner of Income-tax v. Shri Lakshmi Silk Mills Ltd. was, thereafter, distinguished on the ground that the respondent-company was continuing its business of manufacturing silk cloth and that only a part of its business, namely, that of dyeing silk yarn, had to be temporarily stopped owing to difficulty in obtaining silk yarn on account of the war. It was also observed that the court had clearly indicated that no general principle could be laid down which would be applicable to all cases and that each case must be decided on its own circumstances according to ordinary commonsence principles.
There are several other decisions of the Supreme Court determining the nature of the income; but since each of those cases depended entirely on facts before it, it would not be of much help in referring to them.
It is clear from the facts of this case that the assessee-company, which was carrying on the business of pressing cotton, had stopped its business as early as 1950. Though it had machinery, it was not let out. On the other hand, it was decided to sell it away, and the income was sought to be earned only from the lease of its building premises. Its business activity having ceased totally, the asset was not part of the business asset. It ceased to be a commercial asset. As such the income from the rents derived by the lease of the property is an income assessable under section 9 of the Act. Let the reference be answered accordingly with costs to be borne by the assessee; advocates fee Rs. 200.
Reference answered accordingly.