Skip to content


Commissioner of Income-tax, Delhi-ii Vs. Super Fine Cables Private Ltd. - Court Judgment

LegalCrystal Citation
Subject Direct Taxation
CourtDelhi High Court
Decided On
Case NumberIncome-tax Reference No. 73 of 1974
Judge
Reported in(1984)41CTR(Del)84; [1985]154ITR532(Delhi)
ActsIncome Tax Act, 1961 - Sections 56 and 56(2)
AppellantCommissioner of Income-tax, Delhi-ii
RespondentSuper Fine Cables Private Ltd.
Excerpt:
.....case it is not income from business or profession - property not exploited in commercial sense by assessed - factory did not continue to be commercial asset after letting out - impugned income to be assessed as income from other sources. - - in these circumstance, the letting out was treated as the exploitation of a commercial venture in the best possible way because of the particular circumstance of the case. this is common commercial practice and the judgment is best explained by reference to this method of running cinema shows. if you happen to be the owner of a commercial asset, you can exploit it yourself and enjoy the profits thereof. you might decide that the best way of exploiting the asset is to get a fixed return and as a commercial venture an arrangement may be made with..........itself. 10. the two lines of cases, i.e., holding that the income is either a business income or a letting income, have also been the subject-matter of several decision by the supreme court which have been applied by the various courts to the particular facts of the case before the courts. these judgments are extensively analysed in the aforementioned decision, addl. cit v. rajindra flour and allied industries p. ltd. : [1981]128itr402(delhi) . in cept v. shri lakshmi silk mills ltd. : [1951]20itr451(sc) , the supreme court held that the temporary letting out of a machinery, etc., was not cessation op business, but was a commercial exploitation of the asset. it may be mentioned that the asset would otherwise have been unproductive of income. in new savan sugar and gur refining co. ltd......
Judgment:

Kapur J.

1. For the assessment year 1968-69, the following question has been referred to us as a result of this court's order under s. 256(2) of the I.T. Act, 1961 :

'Whether, on the facts and in the circumstance of the case, the income arising out of the letting out of the factory building fell for assessment under the head 'Profits and gains of business or profession' and not under the head 'Income from other sources' ?'

2. The facts as stated by the Tribunal relevant to the question may be quoted : 'The assessed is a private limited company incorporated on January 10, 1959. For the year under reference, a return had been filed disclosing an income of Rs. 2,622. It set up its factory in 1959 for the manufacture of cables. For some reason or the other, the manufacture of cables could not be started till the year 1961, when the factory building was leased out on a rent of Rs. 750 per month. The income from the lease of the factory was assessed as 'Income from other source' after allowing reasonable expenses from year'. In this particular assessment year, the assessed claimed that the income arising from the business of exploiting a commercial asset, but this was not accepted by the ITO or the AAC. The Tribunal, however, came to the conclusion that the income from the lease should be assessed under the head 'Business'. This has lead to the reference.

3. The question referred to us has to be read in the context of the relevant section, namely, s. 56 of the 1961 Act, which states in sub-s. (2) that in particular certain types of income have to be treated as income from 'Other sources'. One of the examples given is in clause (iii) which reads :

'Where an assessed lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head 'Profits and gains of business or profession'.'

4. This provision indicates that where a building containing machinery, such as a factory, is let out, it is income fro other sources if it is not income from business or profession. There are various cases decided by the courts in which either the income from business. There are thus two sets of cases and it sometimes becomes difficult to indicate a dividing line between the two sets of cases.

5. As far as this court is concerned, three judgments on this point can be cited as indication of what can happen in a case of this type. In Addl. CIT v. Rajindra Flour and Allied Industries P. Ltd. : [1981]128ITR402(Delhi) and CIT v. Northern India Theatres P. Ltd. 0065/1980 : [1981]128ITR497(Delhi) , it was held that the income was not from 'other sources', but was from business. The judgment in both cases was delivered by one of us (Kapur J.). In Addl. CIT v. Kanta Behan : [1983]140ITR187(Delhi) , it was held that the income was from 'other sources' and not under the head 'Income from house property'.

6. The decision in such cases naturally turns on the facts of each particular case. In the case of Addl. CIT v. Rajindra Flour and Allied Industries P. Ltd. : [1981]128ITR402(Delhi) , a flour mill was set up as a business venture, but some adverse and difficult circumstance arose which made it impossible for the company to run the business itself. The managing director, who was the moving spirit behind the venture, died and his widow had to take over the job. The assessed had arranged credit facilities and negotiated for appointing a sole selling agent, etc., and had taken all steps to run the mill, but they could not get the five years. On the expiry of the lease period, the assessed itself took over the mill to run the same. In these circumstance, the letting out was treated as the exploitation of a commercial venture in the best possible way because of the particular circumstance of the case.

7. In the case of CIT v. Northern India Theatres P. Ltd. 0065/1980 : [1981]128ITR497(Delhi) , the commercial asset was a cinema. This included a cycle stand, a car parking area and a furnished restaurant. There was an arrangement by which the premises together with equipment were let out at a rent of Rs. 10,000 per month for a period of ten years. The license for running the cinema was in the name of the assessed, but it was run by one Hari Singh under the agreement. It was treated in that case as an exploitation of a commercial venture and not a mere letting out of property. It is not necessary to elaborate the reasons in that judgment, but it may be mentioned that it is quite common for cinemas to be utilised by getting a fixed hire for showing a particular, firm independent of the actual receipts at the box office. This is common commercial practice and the judgment is best explained by reference to this method of running cinema shows. There being a producer, a distributor and an exhibitor, the actual profits of a firm come from showing the firm in the cinema which have to be distributed among the three parties in a particular manner. So, if the exhibitor gets a fixed hire from some other person, who runs the cinema, it is practically the same as he would have got if he had run the cinema himself.

8. In the case of Addl. CIT v. Kanta Behan : [1983]140ITR187(Delhi) , there was a cinema which was let out at Rs. 3,000 per month, which was treated as property income starting from the assessment year 1950-51. As a result of rectification proceedings in the assessment years 1955-56 to 1962-63, the question arose whether the income had to be assessed under the head 'Property' or under the head 'Other sources'. There was never claim by the assessed that a commercial asset was being exploited and there were no facts in the judgment indicating that the letting was ever treated as a commercial project. It was always treated by the assessed as income from letting out the property which was eventually treated as income from 'Other sources'.

9. As indicated above, the test in all these cases is whether the income arises from the exploitation of a commercial asset or merely because the property has been let out and the assessed is enjoying the income by way of rent. There are no circumstances in the present case which indicate that the property was being exploited in a commercial sense by the assessed. In fact, the assessed has not at any stage run the factory itself.

10. The two lines of cases, i.e., holding that the income is either a business income or a letting income, have also been the subject-matter of several decision by the Supreme Court which have been applied by the various courts to the particular facts of the case before the courts. These judgments are extensively analysed in the aforementioned decision, Addl. CIT v. Rajindra Flour and Allied Industries P. Ltd. : [1981]128ITR402(Delhi) . In CEPT v. Shri Lakshmi Silk Mills Ltd. : [1951]20ITR451(SC) , the Supreme Court held that the temporary letting out of a machinery, etc., was not cessation op business, but was a commercial exploitation of the asset. It may be mentioned that the asset would otherwise have been unproductive of income. In New Savan Sugar and Gur Refining Co. Ltd. v. CIT : [1969]74ITR7(SC) , a hotel was let out. It was held by the court on the construction of the terms of the lease that the asset in question had ceased to be commercial asset.

11. Thus, in each case, what has to be seen is what has to be seen is whether the asset is being exploited commercially by the letting out or whether it is being let out for the purpose of enjoying the rent. The distinction between the two is a narrow one and has to depend on certain facts peculiar to each case.

12. The question before us is whether there are any facts to indicate that the letting out of the factory in this particular case can be described as a commercial exploitation of the factory. If you happen to be the owner of a commercial asset, you can exploit it yourself and enjoy the profits thereof. At the same time, these profits can vary. They may be sometimes high, sometimes low, and there may sometimes even be a loss. You might decide that the best way of exploiting the asset is to get a fixed return and as a commercial venture an arrangement may be made with with somebody else to run the asset giving fixed return. It is the nature of that arrangement and the reason for that that are relevant for the purpose of determining whether you have let out the property for business purposes or merely for enjoying the rent. This is type of test which is common to all the cases.

13. As stated in some of the judgment, it is not necessary that the assessed must himself exploit the commercial asset. It may be exploited by himself or through the agency of somebody else. There are circumstances which prevent or make it impossible for an assessed to exploit the asset himself or, it may be more convenient to exploit the asset through another agency. If the asset remains a commercial asset in the hands of the assessed after the letting out arrangement has been made, the income continues to be classed as business income. But if it ceases to be a commercial asset, then the income has to be taxed as income from from 'Other sources'.

14. In the present case, there are no facts indicating that the asset in question, i.e., the factory, continued to be a commercial asset even after the letting out.

15. The Tribunal has quoted from the judgment of Mahajan J.(as he then was), in the case of CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] ITR 20 It was said (p. 455 of 20 ITR) :

'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.'

16. The answer to the question referred to us has to be in the negative, in favor of the Department and against the assessed. As there is no appearance for the assessed, we do not make any order as to costs.


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