J.B. Mehta, J.
1. The question which has been posed in this reference at the instance of the revenue is as under :
'Whether, on the facts and in the circumstance of the case, the Tribunal was right in holding that the income of Rs. 10,600 earned by the assessee by giving on hire its machines was assessable as business income of the assessee ?'
2. For the assessment year 1968-69 this reference is made by the Tribunal at the instance of the revenue, while for the subsequent assessment years 1969-70 and 1970-71 on identical facts the question which has been posed by the Tribunal at the instance of the revenue is as under :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the rent income or the hire charges of machine received by the assessee from M/s. Jasmine Mills Pvt. Ltd. was assessable as income from business ?'
3. The assessee is a private limited company carrying on manufacture and sale of art silk cloth. During the assessment period 1968-69 it imported two machines, viz., Raschel Lace Machine and High Speed Warp Knitting Machine, on a licence which was issued in its name. On their arrival in India, these machines were installed at the premises of M/s. Jasmine Mills Pvt. Ltd., a sister concern of the assessee, under a lease agreement with that sister concern. The sister concern was to pay a monthly rent of Rs. 2,280 for the first machine and Rs. 2,200 for the second machine to the assessee. In the first assessment year as these machines were given on hire only for a part of the year, the assessee received only Rs. 10,600 by way of rent and/or hire charges and the same was declared as income from business. The Income-tax Officer rejected the assessee's claim that the said amount of Rs. 10,600 was business income and considered it to be income from other sources. In appeal, the Appellate Assistant Commissioner, however, held that the said income of Rs. 10,600 should be treated as income from assessee's business and, therefore, the development rebate was allowed on the said two machines let on hire to the sister concern. The revenue preferred an appeal before the Tribunal and the Tribunal having confirmed the view taken by the Appellate Assistant Commissioner and having held that the said income of Rs. 10,600 was business income of the assessee, the development rebate was allowed for on the said two machines let on hire to the sister concern. The revenue has, therefore, come up on this reference. An identical question for the two subsequent years has been referred in the other reference and there the amount was for the entire year in question.
4. The Tribunal has in terms recorded a finding that these two machines in question, which were imported by the assessee, could be used in the assessee's business which was of manufacture of art silk cloth. The said machines, however, could not be installed at the assessee's premises because the air-conditioning facility was not available there. Therefore, the terms of the lease had been arrived at dated November 7, 1967, and November 15, 1967, with the sister concern for letting these two machines on hire for the five-year term on a monthly rent which was agreed as aforesaid. Clause 2 provided that it was distinctly understood that all the incidental expenses of maintenance and working such as rent, municipal tax, excise duty, etc., wherever applicable, were to be borne by the sister concern and were incumbent upon them. Clause 3 in terms provided that the assessee would have always priority charge on this machine in case they needed any of the processes or products manufactured thereon. Clause 4 provided that the arrangement would automatically continue in force for a further period of five years unless three months' notice before the date of expiry of this lease was received by either party for cancellation or modification thereof. The same terms have been agreed upon for both the machines, by these two documents dated November 7, 1967, and November 15, 1967. The Tribunal construed the terms of the lease deed and held that the lease agreement did not show that the machines were given on hire on semi-permanent basis as contended by the revenue, because the agreement clearly provided that the assessee had a right to terminate the lease agreement by giving three months' noticed. The Tribunal further held that it was not disputed that the sister concern, M/s. Jasmine Mills Private Ltd., used these two machines for a business which is identical with the assessee's business. The Tribunal also relied upon clause 3(o) of the memorandum of association which provided as one of the object, '... to purchase or otherwise acquire, and to sell, exchange, surrender, lease, mortgage, charge, convert, turn into account, dispose of and deal with the property and rights of all kinds, and, in particular, mortgages, debentures, patents, annuities... privileges and choses-in-action of all kinds'. Therefore, the object of this manufacturing concern was also to give its properties on lease. Applying the settled legal position in Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. : 20ITR451(SC) and Commissioner of Income-tax v. National Mills Co. Ltd. : 34ITR155(Bom) and having particular regard to the object clause 3(o) as above, the Tribunal held that the income of hire in question in these years by giving these two machines on hire to the sister concern was its business income.
5. In the aforesaid Shri Lakshmi Silk Mills decision : 20ITR451(SC) , the assessee-company was the manufacturer of silk cloth. As part of its business it had installed a plant for dyeing silk yarn. During the chargeable accounting period in question from 1st January to 31st December, 1943, owing to difficulties in obtaining silk yarn on account of war, it could not make use of this plant and it remained idle for some time. In August, 1943, it was, therefore, let out to a person on a monthly rent. The question had arisen whether the sum representing the rent for 5 months realised by the assessee was chargeable to excess profits tax as profits of business or it was income from other sources and was, therefore, not chargeable to excess profits tax. The High Court had proceeded on the principle that if an assessee derived income from a commercial asset which was capable at the time of being used as a commercial asset then it was income from his business whether he used that commercial asset himself or he let it out to somebody else to be so used, as such, then its being let out does view which was accepted partially by their Lordships by holding at page 455 that the High Court was in error in engrafting a proviso on the rule deduced by it from the authorities considered by it, to the effect that a commercial asset of a business which yielded income must at the time it was let out be in a condition to be used as a commercial asset by the assessee himself. Their Lordships laid down the whole ratio in the following words (page 455) :
'We respectfully concur in the opinion of the learned Chief Justice that if the commercial asset is not capable of being used as such, then its being let out to others does not result in an income which is the income of the used for the purpose of the business ceased to be commercial asset of that business as soon as it was temporarily put out of use or let out to another person for use in his business or trade. 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 if 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.'
6. Therefore, their Lordships pointed out that there was no material whatever to take the view that the assessee-company was incorporated with any other object than of carrying on business or trade. Owning properties and then letting them out was not a purpose for which it was formed and that being so, the disputed income cannot be said to fall under any section of the Indian Income-tax Act, 1922, other than section 10. Their Lordships pointed out that the cases of undertaking of this nature started on an entirely different footing and were distinguishable from cases of individuals or companies acquiring lands or buildings and making income by letting them on hire. These latter cases might legitimately fall under the specific provisions of section 9 or section 12, but as there was no unanimity of opinion on that subject in the various High Courts, that conflict was kept open and was not finally resolved by their Lordships. Their Lordships were in respectful agreement with the observations of Lord President Strathclyde in Sutherland v. Commissioners of Inland Revenue  12 TC 63 that a commercial asset was susceptible of being put to a variety of different uses in which gain might be acquired, and whichever of these uses it was put to by the appellant-assessee, the profit earned was a user of the asset of the same business. A mere substituted use of the commercial asset did not change or alter the nature of that asset. Whatever the commercial asset produced was income of the business of which it was an asset, the process by which the asset made the income being immaterial. Thereafter, their Lordships distinguished other cases as the fallacious argument was sought to be urged on the inappropriate analogy without making any distinction between the case of land and of a dyeing plant for the purpose of such taxing statue. Atkinson J.'s pertinent observation in the case of Inland Revenue Commissioners v. Iles  1 All ER 798 that a patent was quite different from a free-hold was held really to apply appositely to such a case of a company incorporated for the purpose of any business of earning profit by the process of manufacturing and letting out a part of machinery in certain circumstances in order to make the business advantageous as a whole. It did not alter the nature of the income. The case of an owner of land letting out his land and carrying on exploitation of part of that land by selling gravel out of it, was prima facie held to fall under section 9 of the Indian Income-tax Act, as income earned, no matter by whatever method from land, and specifically dealt with by that section. It was, therefore, held that the facts in Iles' case  1 All ER 798 being thus different could have no apposite application to the case of a manufacturing concern letting out a part of its machinery temporarily which it could not advantageously use itself. Thereafter their Lordships considered that line of decisions where the question had arisen in the context of a part of the company's property becoming redundant, it was sublet purely to produce income, a transaction quite apart from the ordinary business activities of the company. It was pointed out that the question whether a particular source of income was income or not must be decided according to ordinary commonsense principles. Their Lordships pointed out that the short question which must be decided in such cases was whether on the facts found it could be said reasonably that the dyeing plant had become redundant for its business as a silk manufacturing concern, simply by the circumstance that for the time being it could not be used by it personally for the purpose of dyeing silk yarn owing to the non-availability of yarn. It was difficult to conceive that the company would not have immediately started dyeing yarn as soon as it became available. Instead of dyeing yarn another person was allowed to dye jute, and so, it was the assessee-company making income out of its use as a commercial asset. In that situation it was not possible to hold that income thus earned was not a part of the income of the business and was not earned for the business by its commercial asset or that that commercial asset had become redundant to the company's business of manufacture of silk. Therefore, the analogy of the other line of decisions in Broadway Car Co. (Wimbledon) Ltd.  2 All ER 609 did not hold good for the decision of the case before their Lordships. It was, therefore, held that this being a part of the normal activities of the assessee's business to earn money by making use of its machinery by either employing it in its own manufacturing concern or temporarily letting it to others for making profit for that business when for the time being it could not itself run it. The High Court's view was erroneous that the dyeing plant had ceased to be a commercial asset of the assessee and the income earned by it and received from the lessee was not chargeable to excess profits tax.
7. Even in the subsequent decision in New Savan Sugar & Gur Refining Co. Ltd. v. Commissioner of Income-tax : 74ITR7(SC) , at page 14, their Lordships have reiterated the ratio in Shri Lakshmi Silk Mills Ltd. : 20ITR451(SC) , that a part of the assets did not cease to be commercial assets of that business merely because it was temporarily put to a different use or let out to another and accordingly the income from the assets would be profits of the business irrespective of the manner in which the assets were exploited by the company. Their Lordships, however, emphasised what had been laid down in that decision that no general principle could be laid down which would be applicable to all cases and that each case must decided on its own circumstances according to ordinary common sense principles. The material facts which concluded the question in Shri Lakshmi Silk Mills Ltd. : 20ITR451(SC) were that only a part of the machinery was let out on lease and the rest of the machinery was worked by the assessee. The letting out of the machinery was for a short period of five months and there was also no letting out of the premises of the factory by the assessee. Their Lordships held that in this case, on the terms of the lease deed, the intention of the appellant was to part with the entire machinery of the factory and the premises with the obvious purpose of earning rental income and not to treat the factory and the machinery as a commercial asset during the subsistence of the lease. The intention of the appellant was to go out of the business altogether so far as the factory and machinery was concerned. The income from the lease could not be assessed under section 10 but was liable to be assessed under section 12. Therefore, it was held that the appellant was not entitled to the allowance of additional depreciation or development rebate. This later decision makes it abundantly clear as to what cases it would fall within its ambit, e.g., when there would be intention to get out of the business altogether so far as the factory and machinery were concerned with the obvious purposes of earning only rental income and not to treat the factory and machinery as a commercial asset.
8. In the present case the very terms of the lease were eloquent when only two machines which were useful in the business of the assessee were let out to the sister concern. The very object of this manufacturing concern was to manufacture and, therefore, the assessee could utilise this commercial asset in its own business or let out the same because of the temporary difficulties as it had no facilities of air-conditioning at its factory when these machines were imported and had to be installed. They were installed in the sister concern in such advantageous manner by getting these terms agreed with the sister concern that the assessee would have priority charge on these machines in case they needed any of the processes or products manufactured thereon. The assessee was also careful to retain the clause in this five years' lease when further extension of five years was agreed that this arrangement would automatically come in force for a further period of five years unless three months' notice before the date of expiry of that lease was received by either party for cancellation or modification thereof. Therefore, the assessee disclosed the clear intention not be part permanently with this commercial asset because it had not become redundant, and it could effectively use the same. In fact, the assessee reserved all through the lease the priority right to use these machines whenever it needed the same and further reserved its option to terminate the lease before any question arose for its further extension for a further period of five years. Therefore, the intention was clear of making commercial exploitation of this commercial asset in the most advantageous manner because the assessee could not instal the machines at its premises in the absence of air-conditioning facilities. Therefore, the Tribunal rightly applied the settled legal position of Shri Lakshmi Silk Mills Ltd. : 20ITR451(SC) .
9. The learned standing counsel vehemently relied upon the fact that these machines having been right from the very beginning of their import into India installed only in the sister concern, they have never become part of the commercial asset of the assessee and they could not become part of their commercial asset in the absence of any air-conditioning facilities. He also relied on the fact that the objects clause made a clear difference because one of the objects was to lease the property as per the relevant clause in the memorandum and, therefore, this redundant asset which could not be used had been let out by the assessee. These contentions are under a complete misconception. The concern is a manufacturing concern and there was no dispute that these two machines can be used by the assessee in its own manufacture and were actually used by the sister concern in identical business. Merely because for want of air-conditioning facilities the assessee at present could not instal them in its premises, it could not be said that these two machines were not part of commercial assets of the assessee's business in which it can be used. There was no question of any redundancy when the intention was so eloquently expressed in the terms of the lease of these machines, reserving therein the priority rights whenever occasion arose as per the need of the assessee's business and even the right was reserved to terminate the lease before it got further renewed for five years' term. It would be completely a misreading of the objects clause when such a manufacturing concern was only with a view to better exploitation of its commercial assets was leasing only two machines to the sister concern when it could not instal them for want of adequate air-conditioning facilities in its premises. The argument of redundancy in such a context was thoroughly misconceived. Similarly, the argument was equally misconceived that merely because temporarily for want of air-conditioning facilities these machines could not be installed in the assessee's premises, these machines were not part of the commercial assets of the assessee, even though they were capable of being used as such in installation of air-conditioning facilities and were actually used in the sister concern in the identical business. The Tribunal has followed the settled legal position. Therefore, both the references must be answered in the affirmative, i.e., in favour of the assessee and against the revenue. Both these references are accordingly disposed of an the revenue shall pay the costs of the assessee in each case.