1. This reference, under Section 66(1) of the Indian Income-tax Act, relates to the assessment year 1961-62, and the question is;
' Whether, on the facts and in the circumstances of the case, the assessment of the sum of Rs. 6,489 under Section 12 instead of Section 10 of the Income-tax Act, 1922, is justified in law '
2. At the relevant time, the assessee was a firm of partnership carrying on a business of running a powerloom factory at Madurai with 12 power-looms. The assessee manufactured handloom cloth for a number of years and for that purpose he used fixed assets consisting of machinery and buildings at No. 28, Chairman Muthuramier Road, Madurai. The business was carried on up to April 12, 1954, and thereafter the manufacturing was stopped, with the result that the machinery and buildings were lying idle. With effect from November 1, 1956, the powerlooms were, however, commissioned again to work by one Radhakrishnier under the terms of an agreement dated June 13, 1957. This agreement was renewed on April 16, 1958, and one of the terms of this agreement was that Radhakrishnier was at liberty to shift the powerlooms with all the related equipments to T. S. No. 539/1-17, Navarathnapuram, Second Lane, Ramnad Road, Madurai. We shall presently refer to the other terms of the agreement in fuller detail. For the assessment year 1956-57, the income of the assessee from and under the agreement was treated as income from other sources. But, for the assessment year 1958-59, the income from the same source was charged to tax as income from business and this pattern was followed in the next year too. For the year 1960-61, however, the department changed its attitude and charged the income as one from other sources. The department applied this view for the assessment year 1961-62 as well. The revenue as well as the Tribunal have all concurred that the income from the said source was rightly charged as income from other sources under Section 12. The main steps for coming to that conclusion were these. They all regarded the agreement as a lease of the powerlooms with their equipments for a fixed period of nine years with a fixed monthly payment to the assessee by the lessee. Heavy reliance was placed on the facts that the business had come to a stop on April 12, 1954, and it was considered that thereafter the assessee did not himself resume the business of manufacture of handloom cloth but leased out the powerlooms with the allied equipments as from November 1, 1956. The assesseehimself did not use the capital assets for manufacturing cloth but leased out the same and obtained income. In the circumstances, therefore, the revenue as well as the Tribunal thought that the income from leasing out the powerlooms was not income from business.
3. The second agreement has been styled by the parties as a deed of agreement of agency. That by itself may not be of much significance. By that agreement, the assessee appointed the second party as his managing agent for a period of nine years from April 1, 1958. As the second party was already in possession of the powerlooms as the managing agent of the assessee under the first agreement, the second party was by the second agreement authorised to shift the looms and accessories to the new premises and there put the looms into commission and work them as in the old premises. The ownership of the looms should always be with the assessee. The second party should make a deposit of Rs. 5,000 with the assessee which was not to earn any interest but was to be refunded at the end of the term, but that was subject to the condition that the machinery and equipment with the accessories were handed back to the assessee in good condition at the termination of the agency period. The second party should be in charge of the entire management and working of the looms and should have the full freedom to decide the number of shifts to be worked and in the matter of appointment of workers, submitting the necessary returns and working of the powerlooms subject to the relevant rules and regulations such as may be prescribed from time to time by the Government and local authorities. ' The second party shall act as the power agent of the first party in all matters pertaining to the factory and its running, subject to Clause 9,' and the second party was also authorised to make himself as the occupier for purposes of submitting returns. The purchase of yarn and other store materials for running the looms should be made by the second party and the property in such goods should vest in that, party, who would control the entire sales in his own discretion and subject only to the payment to the first party of the profits guaranteed to him under Clause 9. That clause provided that the second party guaranteed a net profit, of Rs. 650 only per month to the first party, which should be a fixed one not subject to any variation at any time during the period of the agreement of agency. The second party should meet all the public charges. A further provision in the agreement was that the licence for all the installations should stand in the name of the first party, though the second party should be entitled to make such applications, appeals and the like and sign such papers as may be necessary for the purpose of obtaining or renewing the necessary permits for the running of the looms in the name of the first party during the continuance of the agency and the first party for all purposes appointed the second party as his power agent.
4. The question is whether, having regard to the terms of the agreement, the income derived by the assessee can be said to be income under the head ' Profits and gains of a business carried on by him '. The term ' business ' is of a wide import and may include a variety of activities from or through which income is derived. The expression 'carried on by him' is also suggestive of the fact that the activities which constitute business should be those of the assessee. When we look at the terms of the agreement, keeping in view the requirements of Section 10(1), we have no doubt that the agreement does not amount to a lease. Repeatedly, the agreement emphasises the fact that the second party has only been nominated as the managing agent or agent of the assessee. The licence for all purposes in respect of the installations should continue in the name of the assessee and all applications, appeals and other things which may be necessary for renewing the permits for the running of the looms should also be in the name of the assessee during the continuance of the agency. The assessee would have the right to inspect. Specific provision has been made that the assessee or his authorised representative shall be entitled to visit and inspect the machinery during the working hours, though the inspection was for the purpose of satisfying the assessee that the machinery was being kept in a good condition. The intention of the parties as expressed being one to create the relationship of principal and agent in relation to the working of the looms, we do not see why we should read the document as a lease, unless there are circumstances which will justify such a view. It is true that the second party has been put in possession. But that is explainable, because even as an agent or managing agent, to commission the powerlooms and run the same, he would have to be put in possession. The fixed payment of a monthly profit of Rs. 650 has been strongly relied on for the revenue and it is contended that this shows that the assessee has no interest in the outcome of the business of running a powerloom by taking the risk and getting the advantage or disadvantage thereof. Apart from the fact that this fixed payment taken by itself or appreciated in the light of the other circumstances cannot in our view be regarded as rent, the fixation of an invariable monthly payment does not necessarily negative the idea that the assessee carried on the business. There may be people who may take risk and then make a profit or incur loss, but there may be others who may not be willing to take risk, but still willing to run a business by themselves or through other means and proceed cautiously and make a moderate profit. Logically speaking, there is no reason why the latter category of activity is any the less a business carried on by such persons. If there is a commercial asset and it can be exploited in many ways which in the process may be of a wasting character or subject to wear and tear, we should be inclined to think thatirrespective of the particular mode or means of working, the activity will be of a commercial character and would fall within the wide ambit of business. But, in this case, it is not necessary to go to that extent and hold that, even regarding the agreement as a lease, it is a business activity. The Punjab High Court in Dal Chand & Sons v. Commissioner of Income-tax, has held that lease of a factory was as much a business of an assessee as the running of it by itself and so the income derived from such leasing out was rightly assessable under Section 10. The assessee in that case acquired a ginning factory and made additions thereto, running the factory till a particular period and at the end of it, leased it out on an annual basis. For the assessment year 1952-53, the Income-tax Officer assessed the depreciation amount allowed as a profit of the business, rejecting the contention of the assessee that the lease amount was not a profit assessable under Section 10(2) of the Indian Income-tax Act but was only assessable under Section 12 and hence the second proviso to Section 10(2)(vii) did not apply. The Punjab High Court, referred to a number of decided cases and concluded that what, in such circumstances, the court had to decide was whether, in the facts and circumstances found by the Income-tax Appellate Tribunal, the assessee itself carried on business or not. The court was inclined to think that so long as a business asset was exploited as such and profits or gains were earned from them, the same were profits and gains of a business; however the owner of the commercial asset exploited the same.
5. But, in this case, on a consideration of the terms of the agreement, we are satisfied that it did not amount to a lease. The relationship created by that document, as we have already stated, was only of a principal and agent. That will be sufficient to enable us to answer the reference in favour of the assessee.
6. But, Mr. Balasubrahmanyan, for the revenue, contends that one of the tests to find out whether an assessee carried on business within the meaning of Section 10 is to see whether there is fluctuation in its yield. From this point of view, learned counsel suggests that, since the monthly payment to the assessee was a fixed one, the test of business is not satisfied. We are unable to agree with this view. While the test as a general one may be useful, it is not a conclusive test. Other circumstances may exist which may show that, notwithstanding the fixed yield, the activity is a business. The present is illustrative of the point. If an assessee finds, for reasons of his own, that he cannot himself run a business but he could do it by employing a servant or appointing an agent, but at the same time he feels that he need not bother himself with looking into accounts or supervising the business himself he may as well agree with the agent that he may lookafter and carry on the business but on a guaranteed profit. We do not see why, in such circumstances, notwithstanding the fixed guaranteed payment, the activity is not business or loses its character as a business.
7. Mr. Balasubrahmanyan next contended that the subject-matter of the agreement is not the business but only the looms and their accessories, more especially when the assessee had stopped the business of manufacturing handloom cloth some years earlier to the agreement. We think that this is not a proper reading of the terms of the agreement. They clearly show that the powerlooms have been put into the hands of the second party in order that he may bring them into commission and carry on the business and not to keep them idle. The business itself consists in this case of working the machinery and producing handloom cloth and that is what the second party has been asked to do under the agreement. Mr. Balasubrahmanyan referred us to Clause 7 of the agreement and contended that in view of the fact that this clause gave the second party the fullest discretion and liberty to carry on the business, it should be taken that the assessee had nothing to do with the actual carrying on of the business. But that clause itself, as we have already noticed, says explicitly that the second party would so act only as the power agent of the first party in all matters pertaining to the factory and its running.
8. On that view of ours as to the terms and effect of the second agreement, it is not necessary for us to examine the larger question whether exploitation of a commercial asset by other means including leasing it out, will amount to an assessee, who is the owner of such an asset, carrying on such business.
9. We answer the question in favour of the assessee with costs. Counsel's fee, Rs. 250.