D.K. Kapur, J.
1. Two references under S. 256(1) of the I.T. Act, 1961, being References No. 50 and 51 of 1974, have been made by the Income-tax Appellate Tribunal at the instance of the Additional Commissioner of Income-tax, Delhi, for the assessment years 1965-66 and 1966-67. The assessed in this case is a private limited company which was in the process of erecting a factory for running a flour mill at Moradabad right up to 31st August, 1964. Even after the factory had been installed, the company for reasons that will appear hereinafter was unable to commence actual production at its factory. On 16th June, 1965, the company (assessed) entered into a lease agreement with a firm known as M/s. Rajasthan Traders whereby the machinery and mills situated at Moradabad were let out for five years at an annual rent of Rs. 2,00,000 payable in half-yearly Installments of Rs. 1,00,000 each. In the two assessment years in question which ended for accounting purposes on 31st August, 1964, and 31st August, 1965, various questions arose concerning the manner in which certain expenses incurred by the company were to be dealt with for the purpose of computing the actual cost of machinery, plant and building. This question was common for both the years. In addition, in the second assessment year in question, the fact that the plant, machinery and building had been let out to another firm gave rise to the question whether the income from such lease was to be computed under the head 'Profits and gains of business' or under the head 'Other sources'. The actual questions which have been referred to us by the Tribunal are :
2. For 1965-66 and 1966-67 :
'Whether the expenses incurred under the heads 'salaries, managing director's remuneration, interest and electrical energy charges' before the commencement of the business represent an element of actual cost of machinery, plant and buildings of the assessed and as such depreciation and development rebate are admissible with reference to these amounts also.'
3. For 1966-67 :
'Whether, in the circumstances of the case, income from the lease of plant, machinery and building should be computed under the head 'Profits and gains of business' ?'
4. The facts giving rise to the reference have been set out in detail in the statement of the case, but in addition a very large number of documents have also been annexed to provide ready reference to what actually happened.
5. The company was promoted with a view to purchase, erect, construct, set up, acquire and take over flour mills; although the promotion was in 1961, even in the assessment year 1965-66 the company had not commenced its business because the machinery was still in the process of installation. In the years corresponding to the assessment year 1965-66, the company incurred an expenditure of Rs. 1,67,085 which included Rs. 42,000 on account of the managing director's remuneration, Rs. 45,260 on account of establishment, Rs. 54,966 on account of interest and Rs. 29,830 on account of electrical energy. The salaries and wages included in this account were paid to fitters, electricians, overseers, etc., for the erection of the factory building and the installation of the machinery. The electrical energy was used for drilling, welding, running of lathes and electric motors. The interest was paid on loans obtained from the Central Bank of India and M/s. Raghbir Saran Bal Mukand. The ITO took the view that all he expenses debited to the profit and loss account could not be taken into consideration as the business had not started. For the second year, i.e., 1966-67, the ITO found that the building was not set up prior to 25th July, 1965, and hence, the expenses incurred up to that date were not allowed. It was also held that even if the business had been started in the sense that the lease had been given and manufacturing was being done in the property, the ITO came to the conclusion that the income could be assessed not under the head 'Profits and gains of business' but under the head 'Other sources'. In view of this, some of the expenses such as depreciation and interest were allowed, but other expenses such as salaries to managing director, audit-fees and other expenses were disallowed. On appeal to the AAC, the conclusion of the ITO that the income was assessable under the lead 'Other sources' was upheld, but some of the expenditure was allowed. The assessed then appealed to the Tribunal.
6. It is now necessary to set out in short the conclusion of the Tribunal on the two points in question.
7. On the first point for the assessment year 1965-66, it was held that the expenditure incurred on salaries, wages, electrical energy and interest were relatable to the acquisition, construction or installation of the factory building and machinery and hence formed part of the actual cost of the fixed assets of the assessed. The Tribunal then proceeded to elaborate these expenses and in some cases allowed the entire expenses, but in the case of establishment charges, managing director's remuneration and salaries and wages relating to the construction of the building and erection of machinery, it allowed either 50% and directed the apportionment between the building and machinery in the proportion of the value shown in the balance-sheet as on 31st August, 1964. In short, either the whole of the expenses were allowed as capital cost for the purpose of allowing depreciation and development rebate or part of the expenses were allowed and the same had to be apportioned between the building and the machinery as directed.
8. In the year 1966-67, the Tribunal's directions were on the same lines as far as the expenditure incurred before 25th July, 1965. So, his point was common to both the years.
9. As regards the question whether the income should be computed under the head 'Business' or under the head 'Other sources', the Tribunal interpreted the decision of the Supreme Court in New Savan Sugar and Gur Refining Co. Ltd. v. CIT : 74ITR7(SC) and came to the conclusion that the circumstances showed that the intention of the assessed was to start a business and failing that to lease it out for a temporary period so that the manufacture could be started by the company itself in more propitious circumstances; and came to the conclusion that the giving on lease was for exploiting the commercial assets, and, thereforee, the lease was part and parcel of carrying on of business by the company.
10. At the hearing, it was pointed out to us that the statement of case did not include the final order of the Tribunal, and so we have examined the orders of the Tribunal, passed in the two assessment years in question, disposing of the assessed's appeals with the consent of the parties for the purpose of reference, as they are not part of the statement of the case. This was in order to avoid seeking a further statement of case from the Tribunal. Actually, we find that the quotation from the final order given for the assessment year 1966-67, is sufficiently detailed to provide all the material for deciding the controversy which has arisen relating to the second question arising the controversy which has arisen relating to the second question arising in the assessment year 1966-67.
11. Turning to the first question which is common for the two years, we find that the procedure adopted by the Tribunal is in accordance both with normal business practice and common sense. It has also been accepted by the Supreme Court as the accepted accountancy rule for determining the cost of fixed assets in Challapalli Sugars Ltd. v. CIT : 98ITR167(SC) . The expense of setting up a fixed asset not only includes the cost of purchasing machinery, plant and land, but also the cost of making the same fit for actually starting the manufacturing process. The expenses allowed by the Tribunal in computing the cost of fixed assets such as interest, salaries, cost of electrical energy, and so on, were in accordance with the Supreme Court judgment. So, we would answer the first question in favor of the assessed. This is the question which is common to the two years 1965-66 and 1966-67. The answer would be in the affirmative.
12. This is an authority for holding that it is possible to infer that an asset is a commercial asset even though it has not been exploited in any business by the assessed himself.
13. All the cases cited before us have turned on the question as to when an asset is a commercial asset, and when it is merely a capital asset which is not commercial asset. The test appears to depend on the nature of the asset. If an asset has been exploited commercially before the lease is given then the question can easily be decided by determining the intention of the parties. But, when the asset has never been previously commercially exploited, then it may be urged that the asset has not become a commercial asset, and cannot become a commercial asset by merely letting is out. This raises a fundamental question as to what is a commercial asset
14. It would appear that a commercial asset is a term utilised in the reported cases to define a capital asset which is used in a business. If your have an asset, you can exploit it in various ways. You can use it in business yourself by actually running it. It may be a car, it may be a mill, it may be a shop or it may be any other asset which can be commercially exploited. At the same time, you can use the same asset to yield rent by giving it on hire under a contract to some other person. If such an asset which is or can be commercially exploited is given on hire or rent to some other person, then the question will arise : Is the asset being commercially exploits by the owner For answering this question we have to examine the facts existing before the asset was leased out and then we have to see the subsequent facts. From these facts, we can infer what was in the mind of the assessed or the person concerned. That is the type of test we have to apply to the present case.
15. One of the judgments cited before us was CIT v. National Mills Co. Ltd. (In liquidation) : 34ITR155(Bom) , wherein the judgment of Chagla C. J. analyses the problem before us. A businessman may utilise business assets commercially. Those are the assets which the businessman uses to carry on business and to make profits. It is there stated that the same asset can be used by the owner by permitting somebody else to use the assets and to carry on the same business. It was observed (p. 160) :
'Even in such a case, the activity of the assessed would be a business activity. It would be carrying on the same business through a different instrumentality. It is not necessary that in order that the income of the assessed should be business income, it should be produced by the assessed utilising the business assets itself. So long as those assets are used as business assets, it is irrelevant whether the business assets are exploited and used by the assessed itself or someone else.'
16. Then an important passage occurs which is as follows (p. 160) :
'It is true that you have a different situation under certain circumstances. The assessed may stop doing business altogether, and these assets may cease to have the character of business or commercial assets. Then, they take on an entirely different character. They become capital assets, and qua those assets the assessed is not carrying on any business, but qua those assets the assessed has become their owner. As an owner the assessed may also exploit those assets and receive income. But the income which it receives is no longer business income because no business is being carried on and the assets are not business assets. In such a case, the income would be an income derived by the owner from his capital assets, and the head of income under which such income would fall for the purpose of the Income-tax Act would be section 12 and not section 10. Whether a business is carried or not and whether assets of an assessed are business assets or not are questions of fact, and they must be decided by the Tribunal on the evidence led before it.'
17. The last portion of this quotation is very important because it has been inferred that the assessed's intention was a question of fact which had to be determined by the Tribunal and the court was concerned with whether the finding of the Tribunal was based on sufficient material.
18. If this test is applied to the present case, the question for decision boils down to an analysis of the question whether there was sufficient material for the Tribunal to reach the conclusion that the asset in question was a commercial asset and the utilisation of the mill, plant and machinery by letting the same to another party was a business activity. The Tribunal has inferred this fact from the nature of the activity which was carried out by the assessed-company in setting up the building and plant. It has also inferred the result from later event such as the reversion of the mill to the assessed at the end of the lease. The conclusion is that it was a temporary measure to tide over a period of difficulty. From the same facts, on might have inferred that the company was unable to exploit the flour mill because of certain intervening events and thus decided to treat the asset as a 'capital asset' rather than a 'commercial asset', as has been done in some other cases. The result depends on how the facts are looked at.
19. One of the basic features of this case is that the documents on which reliance has been placed by the assessed have been annexed to the statement of the case. The sequence of events can thus be examined by the court also. It is quite obvious from the balance-sheet as on 31st August, 1964, that the fixed assets were ready by 31st August, 1965, does not show any additions to the buildings, machinery, etc., but shows that the fixed assets have been re-grouped as appears in the note below the schedule of fixed assets. So, this would show that the factory was ready by 31st August, 1964. In spite of the factory being ready, it was not worked by the company, but let out as per lease deed dated 16th June, 1965. There is a term in this lease stating that the period of five years will commence either from 10th August, 1965, or from the date when the license is obtained for working the mills. This is why it has been found that 25th July, 1965, was the date on which the lease became effective. There is also a note in the balance-sheet dated 31st August, 1965. In the lease deed one of the reasons for giving the lease is stated thus : 'Whereas the said mill is lying idle, in the absence of the requisite permit and/or license required for its running for the production and manufacture of whole meal, atta, suji, maida, rawa, etc.' Clause No. 4 of the lease deed states that the lessee will be allowed to represent the Lesser for obtaining the permit or license. Clause No. 5 provides that in case the permit is not obtained within eight months, the lease will come to an end and will be cancelled. Clause No. 13 of the document shows that power connection for 316.2 K.W. will be obtained at the cost of the Lesser and the lessee would take steps to get the power connection facility with the active help of the Lesser. In his connection, another annexure to the statement of case shows that on 6th June, 1963, there was an agreement between the assessed and the U.P. State Electricity Board about the supply of electricity. But for two years the power connection had not been obtained probably because the flour mill could not start production. One other noteworthy feature of the lease agreement is that the lease is for running the machinery and plant as a flour mill and not for any other purpose. Though, there is no express term in the lease to this effect, this seems to be inherent in most of the terms, particularly because the license was to be for production of whole meal, atta, suji, rawa, etc.
20. Turning to some of the antecedent facts, i.e., facts before the lease agreement was entered into, it appears that the assessed-company had taken active steps for running the business as a flour mill itself. The documents which supports this are the electricity agreement dated 6th June, 1963, entered into by the assessed-company with the U.P. State Electricity Board and some other documents which may now be referred to. On 30th October, 1963, the assessed-company entered into a contract appointing M/s. Raja Ram Anil Kumar as sub-agents for selling its products. This is for district Bareilly. Then there is an agreement dated 19th September, 1963, with M/s. Raghbir Saran Bal Mukand appointing them selling agents on certain terms. A miller, Shri Shiv Nath Gauba was appointed to run the flour mill by letter dated 2nd January, 1962. Thus, all this and some other facts would show that the company had taken two major factors accounting for a change in the stand of the assessed-company were due to a change in the licensing policy relating to flour mills and the death of Shri Rajindra Nath, managing director. It would appear that up to 21st June, 1963, there was no bar to setting up a flour mill without any industrial license under the Industrial (Development and Regulation) Act, 1951. However, by notification published in the Gazette of India on 25th June, 1963, there was a change in policy. After that date, an industrial license became necessary. The previous position is disclosed from a letter dated 28th November, 1961, received by the assessed-company from the Under-Secretary, Ministry of Commerce and Industry. In that letter it was stated that as the workers were below 100 and the fixed assess below Rs. 10,00,000, the scheme would not require a license. Another notification dated 21st June, 1963, states that the Central Government gave a period of three months for starting a roller flour mill without license. The alteration made by that notification is : 'the Central Government hereby specifies a period of three months from the date of publication of the notification as the period after the expiry of which no owner of an industrial undertaking pertaining to roller flour milling shall carry on the business of the undertaking except under and in accordance with a license issued by, or as the case may be, the permission of the Central Government'. Thus, the position that emerges is that when the assessed-company was setting up the factory initially, there was no requirement to get an industrial license under the Industrial (Development and Regulation) Act, 1951. On 21st June, 1963, this policy was altered. If the assessed-company had started the business within three months of that notification, there would be no necessity to get a license. But, thereafter an industrial license under the Act became necessary. There was thus a new restriction regarding the commencement of production in the factory.
21. It is impossible to say whether the failure of the assessed-company to get an industrial license was due to some shortcoming or due to some inability, but the fact remains that the assessed-company did not get an industrial license and, hence, gave the factory on lease. An impediment of this type is a legal bar to the running of the factory by the assessed. The absence of the license made it impossible for the assessed to run the factory itself. Of course, possibly the assessed might have obtained this license. But the factory was not ready before 31st August, 1964. However, the assesseds did get the license when it eventually started running the factory. The fact that there was an impediment to the running of the factory outside the control of the assessed, makes the case somewhat similar to the case of Shri Lakshmi Silk Mills Ltd. : 20ITR451(SC) , decided by the Supreme Court and discussed earlier. In that case, the dyeing plant could not be run by the assessed because the war had created a shortage of silk yarn which made the plant ideal as far as the assessed was concerned. In the present case, the absence of a license which was not previously required made it impossible for the assessed to run the business. This cannot be treated as being the same thing as an abandonment of the project as happened in the case of New Savan Sugar and Gur Refining Co. Ltd.  74 ITR (SC).
22. In the case of Narain Swadeshi Weaving Mills v. CEPT : 26ITR765(SC) , the Supreme Court had to deal with the case where there were three partners in a partnership firm which ran the Narain Swadeshi Weaving Mills. Then, a public limited company under the name of Hindustan Embroidery Mills Ltd. was formed to take over the business of the partnership firm. The company was also connected with the partners of the firm who became directors with others in the company. The company took over the partnership firm's building and leasehold rights, but as far as the machinery and plant were concerned, they were on lease on an annual rent. There were on lease on an annual rent. There were two other firms, M/s. Uppal & Co. and Ram Singh & Co., who became the managing agents and selling agents of the new company. The question before the court was whether the rent paid by the limited company to the partnership firm could be considered to be a business income under the Excess Profits Tax Act. It was held by the court that the partnership did not carry on any business and did not have any commercial activity after it sold its building and leased out its plant and machinery. It is noteworthy that in that case there was not the slightest impediment to the partnership firm continuing the business and the parting with the building and leasehold right and giving of the plant and machinery on rent was a virtual and complete termination of commercial activity as far as the partnership firm was concerned. In the present case, the situation leading to the impossibility of the assessed-company itself carrying on the business in running the flour mills has been forced on the company and that also temporarily. There was apparently no intention to close down the proposed commercial activity, but only a new impediment had prevented the company from running the factory by itself.
23. Keeping all these circumstances in view, it cannot be said that the inference drawn by the Tribunal is not based on any material. When two views are possible, and this is a case which stands on the borderline, the court should accept the Tribunal's view. So, it would follow that we would have to concur with the Tribunal.
24. The cases cited before us indicate that when there are commercial assets being used in business which are let out, then it is possible to infer in some cases that there is a continuation of the business even during the letting period; in other cases the nature of the circumstances would indicate whether there has been an abandonment of the idea of using the assets for commercial purposes. These two lines of cases are very distinct and the conclusion depends on the circumstances of the case.
25. There is yet a third line in which assets of a capital nature which are intended to be used for business are not actually used for business. The only case of this type which has come to out notice is the one decided by the Allahabad High Court in Sri Ram Mahadeo Prasad v. CIT : 42ITR211(All) , in which case the newly set up oil mills were let out temporarily. The court there inferred from the circumstances that the assets were commercial though they have actually not been used as such. The background of the present case shows that not only was the factory complete, but every step had been taken which any prudent businessman might take to run the mill such as having an agreement for supply of electricity; having selling agents and commission agents; having a miller, taking steps to get supply of wheat, etc. One of the annexures to the statement of case shows that the company had written to the Regional Director (Food), Northern Region, New Delhi, for supply of imported wheat to the flour mill and they wanted to take ad hoc quota for trial of this wheat for purpose of grinding. This letter was written long before the factory was leased. Thus, the company had every intention of running the factory as a commercial project. But due to its difficulties in getting the industrial license, the assessed-company leased out the mill for a period of five years. This also must be taken as a method of commercially exploiting the assets. When a person is unable to run his business due to legislative action in the way in which he had originally planned, it cannot be said that it is abandonment of business to run it in some other way for a short period.
26. There is a case reported as CIT v. Vikram Cotton Mills Ltd. : 106ITR829(All) , in which a textile mill was being run by a company which made losses. A winding up petition was filed in the High Court and there was a scheme under s. 153 of the Indian Companies Act, 1913, whereby the assets were let out to another company at a rent of Rs. 2,00,000 per year. The High Court held as follows (p. 834) :
'In the present case the Tribunal has pointed out that the company had no intention to permanently discontinue its business. It adopted the method of using its business assets through another company by way of a lease in order to resolve its very serious financial difficulties. Since the liabilities were liquidated the assessed-company was able to regain possession of its business assets with an intention to utilise them for carrying on its manufacturing business. In our opinion there was sufficient material to justify the finding of the Tribunal that the income derived from the lease of the plant and machinery was income from business and that the income so derived could be set off against losses of the company from the business of the manufacture of textiles brought forward from the preceding year under section 24(2) of the Income-tax Act.'
27. This was the case of a company which was forced to let out its factory due to business losses. No doubt, the factory was a commercial asset because it was being run by the company itself. On principle it is difficult to distinguish the said case from the present case. The mere fact that the assessed-company did not run the factory itself is no distinguishing feature because obviously the company could not run the business due to the absence of an industrial license. The absence of the industrial license was a legal bar to otherwise exploiting the business assets of the company. This does not mean that there was no business commercially or commercial assets as commonly understood. The assessed-company intended to run the factory for commercial or business purposes, but was prevented to do so by reasons outside its control.
28. There is another aspect of the case that helps us to decide the question referred to us. No doubt the company was floated as per its memorandum of association for the purpose of purchasing, erecting, constructing, setting up, acquiring and taking over flour mills, etc., and for this purpose the company constructed the mills which are now the subject-matter of this reference. But, in addition to these objects, there are other objects mentioned in the memorandum of association. It may be useful to refer to clause No. 3 which is reproduced as annex. 'H' annexed to the statement of case. The opening words of this clause are :
'To buy, sell, manufactured, repair, alter, improve exchange, let out on hire, import, export, and deal in all factories, works, plant, machinery, tools, utensils appliances......'
29. Thus, one of the objects of the company was to hire out factories. No doubt, if there is a person whose business is to hire out machines or plants, etc., he would be said to be doing business although in normal circumstances this might be considered a non-business purpose. Similarly, on the facts of the present case, the objects clause permitted the assessed to hire out its factory as part of its business activities. thereforee, the leasing of the factory would be a part of the business by the assessed. So, in addition of all the previous reasons given, it would appear that the leasing of the factory was a business activity.
30. In the circumstances, we would answer the second question for the assessment year 1966-67 in favor of the assessed and against the department and would hold that, in the circumstances of the case, income from the lease of the plant, machinery and buildings was rightly computed under the head 'Profits and gains of business' by the Tribunal. We would leave the parties to bear their own costs.