Sabyasachi Mukharji, J.
1. The assessee is a private limited company and was running a jute mill. Its accounting year is the calendar year. The relevant assessment year under consideration is the assessment year 1962-63. On 31st December, 1958, the company had a paid up share capital of Rs. 12,15,000. The profit and loss account balance at debit was Rs. 12,05,087. The company was thus very badly off. In the directors'report dated 8th August, 1959, accompanying the account for 31st August,1958. after refering to the unsatisfactory financial position and circumstances under which the company was placed, it was stated that 'faced with such a discouraging position your directors decided to close down the factory'. It appears that at about that time, there was a dispute pending before the Industrial Tribunal for adjudication. The company had issued a notice of closure on the 2nd August, 1958, which led to the said industrial dispute. On the 6th July, 1959, there was an agreement under which the period from 29th July, 1958, to 31st December, 1959, was to be treated as the period of lay-off. The management agread to reopen the mill on the 1st January, 1960, and work with full complement of working 165 looms within three weeks thereof. The management required finances of Rs. 6 lakhs for which an application was made to the State Government which the union of the workmen agreed to support. On 16th November,1959, there was a meeting of the board of directors. In that meeting, it was found that it was not possible to start the mill from January, 1960, due to lack of funds. It was, therefore, decided that subject to the confirmation of the shareholders the mill should be given on lease. The managing director was authorised to carry on the negotiations therefor.
2. The factory was given on lease to M/s. Barrackpore Industries Ltd. The lease related only to the jute mills. There were other properties belonging to the assessee consisting of rice mill, a workshop, a pattern shop, godown and staff quarters. These were excluded from the lease. Even with respect to the jute mills certain items of machinery were left out of the agreement. The annual rent was fixed at Rs. 5 lakhs payable in 12 equal monthly instalments. The lease was for a period of five years subject to renewal for another period of five years. Though the Tribunal has referred to the said lease, the said lease has not been annexed. It appears that before the expiry of the said lease on the 11th August, 1962, there was another lease between Barrackpore Industries Ltd., the lessee, on one part and Huldibari Tea Association Ltd. who was stated to be the new lessee and the assessee-company as the lessor. It recited the first deed of lease dated 22nd December, 1961, made between the assessee and the Barrackpore Industries Ltd. and, inter alia, recited as follows :
'...Whereas by a deed of Lease bearing date the 22nd day of December, 1961, and made between the said Katihar Jute Mills Private Ltd. therein referred to as the lessor of the one part and the said Barrack-pore Industries Ltd. therein referred to as the Lessee of the other part and registered in the office of the Registrar of Assurances, Calcutta, in Book No. 1, Volume 167, pages 55 to 94 being No. 6222 for the year 1961 the Lessor for consideration therein mentioned demised unto the Lessee All That Jute Mills known as 'Katihar Jute Mills' including its fixed andmovable machineries (save as therein excepted) the power house (both electric and steam) boiler house, warehouses, foundry workshop, factories godown including the two godowns let out to the Government and other structures and buildings and land, the Railway siding (but excluding the Rice Mills together with the old workshop and the shed adjacent thereto the pattern shop one small godown and the staff quarter attached thereto and one General stores godown and the open space opposite to the Rice Mill) shown in the plan attached hereto and thereon delineated within red border together with the lands and buildings thereto more fully described in the First Schedule thereto and delineated in the map thereto and shown in border and all manner of rights privileges easements appendages advantages and appurtenances whatsoever to the said Katihar Jute Mills belonging to in anywise appertaining thereto or therewith usually held used and occupied or enjoyed together with the benefit of all quota rights and the Indian Jute Mills Association working time agreement (subject as hereinafter mentioned) licence and marks held by the Lessor or in which the Lessor may be entitled in connection with the said Mill To Hold the same excepting all or any Jute Mills machinery a list whereof is set out in the Second Schedule hereto for the period of 5 years commencing from 1st day of January, 1960, with option for renewal for another five years as hereinafter contained Yielding And Paying therefor unto the Lessor an annual rent of Rs. 5,00,000 (Rs. five lakhs) payable in twelve equal monthly instalments of Rs. 41,666.67 each first of such monthly instalment to be paid on or before the 3rd day of each and every month succeeding the month for which such rent is due without any abatement or deduction whatsoever except as provided therein.'
3. Thereafter the lease went on to state that the lessee had agreed with the lessor to surrender the said jute mill and the machinery and power looms, as demised, under the said original deed of lease by relinquishing all the right, title and interest which the lessee held in respect of the same under the said lease upon the lessor granting a new lease in favour of the new lessee immediately after the execution of the said lease. The said lease, inter alia, recited further as follows :
'In consideration of the rent hereby reserved and the covenant and condition herein contained and on the part of the New Lessee to be paid observed and performed the Lessor doth hereby demise unto the New Lessee All That the Jute Mills known as Katihar Jute Mills including its fixed and movable machineries (save as hereinafter excepted) the power house (both electric and steam) boiler house, warehouses, foundry workshop, factories, godowns including the two godowns let out to the Government and other structures and buildings and land the Railway siding (butexcluding the Rice Mill together with the old workshop and the shed adjacent thereto, the pattern shop, one small godown and the staff quarter attached thereto and one general stores godown and the open space opposite to the Rice Mill) shown in the plan attached thereto and thereon delineated within red border Together with the lands and buildings belonging thereto more particularly described in the Schedule thereto and delineated in the map hereto annexed and shown in border and all manner of rights privileges easements appendages advantages and appurtenances whatsoever to the said Katihar Jute Mills belonging or in anywise appertaining thereto or therewith usually held used occupied or enjoyed together with the benefit of all quota rights and the Indian Jute Mills Association working time agreement (subject as hereinafter mentioned licenses and marks held by the Lessor or to which the Lessor may be entitled in connection with the said mills To Hold the same excepting all or any jute Mills machinery a list whereof is set out in Second Schedule hereto for the period of 2 (two) years 9 (nine) months commencing from the first day of April one thousand nine hundred and sixty-two Yielding and Paying therefor unto the lessor an annual rent of Rs. 5,00,000 (Rupees five lakhs) payable in twelve equal monthly instalments of Rs. 4l,666.67 (Rupees forty-one thousand six hundred and sixty six and sixty seven naya paise) each first of such monthly instalment to be paid on or before the third day of month for which the same shall become due and every subsequent instalment to be paid on or before the Third day of each and every month succeeding the month for which such rent is due without any abatement or deduction whatsover except as provided herein.'
4. The new lessee covenanted with the lessor, inter alia, as follows :
' Clause (v): Not to make any major alterations or additions to the building and not to make major additions and/or replacements of machinery without the previous consent in writing of the Lessor which consent shall not be unreasonably withheld.
(vi) To polish cleanse or oil the said plants machinery fixtures and other fittings with lubricating oil of good quality at such intervals as is usual and customary so as to keep them clean and free from rust and in good running order.
(ix) The New Lessee shall perform and observe all the requisitions and restrictions imposed by the Indian Jute Mills Association Act and other Mills and bye-laws in connection with the factory or working thereof or under Act ordinance regulations or notifications for the time being in force notwithstanding that the same is addressed to Katihar Jute Mills Private Ltd.
(x) To permit the Lessor and other persons whom it may authorise with or without previous notice to enter upon the demised premises at alltimes for the purposes of viewing and examining the state and conditions thereof and also of the power plants boilers fixed and machineries fixtures and other apparatus and to repair any defect or want of reparation in the building or machinery or plants or receiving requisitions therefor from the lessor provided such requisitions are covered by the terms of this demise.
(xii) To provide access to the Lessor or its representative assignee, hirers and/or licensees to the Rice Mill and appurtenances till such time as the Lessor does not make provision for independent roadway or passage and to allow the Lessor to erect boundary wall separating the Rice Mill from the demised premises.
(xvi) Without the previous consent of the Lessor not to use the batching to spinning machinery of the mills for processing any other fibres, than jute and similar fibres. In the event of weaving to finishing machinery being used for fibres, other than jute the New Lessee shall on the termination or expiry of the period of this demise, put the said machines in the same order and conditions as it existed before being used for such other similar fibres.
(xviii) To insure and keep insured the demised premises including the building machinery in the name of the Lessor with some first Class Insurance Companies against fire riot labour trouble for the sum of Rs. 20,00,000 (Rupees twenty lakhs) and to pay all premium necessary therefor provided however that in case the mill is modernised the amount of Insurance will be increased from Rs. 20,00,000 (Rupees twenty lakhs) keeping in view the money spent for modernisation and all premium payable therefor shall be borne and paid by the New Lessee. In the event of any machines being added by way of replacement or otherwise the value or price thereof to be chargeable and/or subject to adjustment with the lessor under the term of this indenture, the amount of the policy should be proportionately increased from Rs. 20,00,000 (Rupees twenty lakhs) as aforesaid.
(xix) At the expiry or sooner determination of the term hereby created to yield up and deliver up peaceful possession of the demised premises together with all plants, machinery, fixtures and all additions improvement and replacements thereof in proper and working condition reasonable wear and tear damage by fire earthquake and other force majeure being excepted subject to the provisions mentioned hereinafter.
(xxii) To take over jute in process at the market rate with option to take over the finished goods raw materials store spare parts and moulds and other accessories at such rate as may be agreed upon between the parties.'
5. The lessor by the said lease also covenanted, inter alia, as follows:
'(ii) To receive from the Insurance Company all such monies by virtue of Policy of Insurance and to pay the same to the New Lessee for being applied in rebuilding and reinstating the demised premises.
(iii) At the expiration of the lease to take over jute in process at the market rate and will have the option to purchase the raw materials and stores at such price as may be agreed upon between the parties and to allow the New Lessee to store the articles not taken over in a godown free of rent till removal of the same by the New Lessee within 6 (six) months from the date of taking over and allow the New Lessee's representative look after the same and give all facility for removal thereof during the said period,'
6. The lessor further agreed as under :
'(iv) The New Lessee shall hold all and any jute Mill Machinery particulars whereof are given to in the second schedule hereto solely as licensee during the subsistence of this Lease or any renewal thereof on the terms and conditions herein contained in so far as the same are in no way inconsistent with the incidents of a licence without any additional payment until the New Lessee has become a member of the Indian Jute Mills Association and a signatory to its current working time agreement and on acquiring the parties herein will seek the approval of the said Association to the determination of the said Licence and on the determination of the said Licence the new Lessee shall be entitled to hold and hold all or any of the said jute Mill Machinery with prior consent of the Association on loan during the subsistence of this Lease or any renewal thereof in accordance with these presents without any additional payment and the said licence shall forthwith determine. The New Lessee shall apply forthwith for membership of the I.J.M.A. and if accepted shall continue as a member during the subsistence of this Lease and shall also be solely responsible to the said Association for the demised premises. The lessor shall remain member of the said Association and relieve the New Lessee of such obligation on determination of the Lease for any reason.
(vii) The Lessor shall deliver possession of the godown let out to the Government of Bihar by letters of Attornment to be addressed by the lessee at the request of the lessor and the New Lessee will be entitled to receive the rent with effect from the 1st day of April, 1962, and will also be at liberty to eject the said tenant at its cost.
(viii) The New Lessee has taken over with effect from the 1st day of April, 1962, the present labourers workmen and staff at the Mills. The liability regarding the staff and workmen appertaining to the period of this demise shall be that of the New Lessee and the liability if any for Provident Fund and gratuity appertaining to the period prior to the said date of commencement of this demise and also subsequent to the expiry thereofshall be that of the Lessor. If during the period of this demise any workman or staff is discharged any compensation if payable for the entire period of service shall be paid to such workman or staff by the New Lessee. On the expiration of this demise the Lessor shall similarly take over the workmen and staff and will be liable for payment of compensation for the entire period if any payable to such workmen after the determination of this demise.'
7. It was further agreed that in case of replacement of machinery or other capital expenditure the differences between the sale value of replaced machinery after modernisation and the capital outlay would be on the account of the Lessor and the additional rent would be calculated on the difference between the sale value of the replaced machinery and the capital outlay.
8. The lease further stipulated as hereunder :
'(xvi) All machinery scrapped or surplus after modernisation or declared by the New Lessee to be surplus at the commencement of the lease shall belong to and be removed by the Lessor within 6 months of the date of their being declared so surplus and till removal shall be stored by the New Lessee in a proper godown at the cost and risk of the Lessor.'
9. The ITO in making the assessment for 1962-63 treated the income from the lease as rental arising from other sources. He disallowed also a sum of Rs. 3,033 being legal expenses relating to the lease agreement as capital expenditure. The assessee did not raise any contention before the ITO, in this assessment, that the lease rental should be assessed under the heading 'business' and not under the heading 'other sources'. The ITO had, therefore, no occasion to examine whether the said income was assessable as arising from the business, which he said was from other sources. The assessee, thereafter, appealed to the AAC contending that the income was the business income only and should be assessed as such. The AAC held that there was no evidence to show that the granting of the lease constituted an adventure in the nature of trade and that there was no evidence of any business activity regarding the receipt of the lease rent. He, therefore, rejected the assessee's contention on this aspect of the matter. He also confirmed the disallowance of Rs. 3,033 being the expenditure on lease agreement.
10. There was further appeal by the assessee to the Tribunal. The Tribunal, after considering the relevant clauses of the lease and the relevant provision of law, held that the rental income was assessable as business income and, therefore, was assessable under Section 28 of the I.T. Act, 1961. The Tribunal also held that the sum of Rs. 3,033 spent in connection with lease agreement was an expenditure of a revenue nature incidental to theassessee's activities under either Section 37 or Section 57(iii), as the case may be. The Tribunal, therefore, allowed the assessee's appeal.
11. Upon this, under Section 256(1) of the I.T. Act, 1961, the following two questions have been referred to this court:
'1. Whether, on the facts and in the circumstances of the case, the income of the assessee from lease rent was assessable as business income under Section 28 of the I.T. Act, 1961, or as income from other sources under Section 56 of the said Act ?
2. Whether, on the facts and in the circumstances of the case, the sum of Rs. 3,033 spent in connection with lease agreement is an expenditure of a revenue nature incidental to the assessee's activities under Section 37 or Section 57(iii), as the case may be ?'
12. Counsel for the revenue urged before us that the factory was let out on rent at a time when the assessee's business was entirely closed. Once the business came to a close the accumulated assets, according to counsel for the revenue, ceased so exist as business assets and whether the assessee had been carrying on any business at all or not, it was urged that Section 28 of the Act would not have any application. It was, secondly, urged that the facts and circumstances of the case and the relevant clauses of the lease showed that the intention of the assessee was to put off the premises and not to keep it for earning any income. It was, lastly, submitted that there was nothing on record to show that the memorandum of association of the assessee-company authorised the company to carry on the business of letting out. Counsel for the revenue drew our attention to several decisions, viz., the decision in the case of Narain Swadeshi Weaving Mills v. CEPT : 26ITR765(SC) , in the case of Tripurasundari Cotton Press Co. Ltd. v. CIT : 62ITR193(AP) , in the case of Bolla Tirapanna & Sons v. CIT : 71ITR209(AP) and also in the case of New Savan Sugar & Gur Refining Co. Ltd. v. CIT : 74ITR7(SC) . He urged that the lease was for a long period. Indeed, according to him, the lease was for the same period as was the situation in the case of New Savan Sugar & Gur Refining Co. Ltd. v. CIT : 74ITR7(SC) , referred to hereinbefore. Counsel cited the above decision to urge that the lease was also for everything and the assessee had closed its business. Most of these decisions and the principles involved in respect of leasing by a company of its factory or its building were reviewed by this court in the case of Everest Hotels Ltd. v. CIT : 114ITR779(Cal) . This decision was again considered by this court in the case of CIT v. Prem Chand Jute Mills Ltd. (Income-tax Reference No. 194 of 1970, judgment delivered on 11th December, 1974) [since reported in : 114ITR769(Cal) ], where we observed that in order to be business income within the meaning of Section 10 there must be the evidence of exploitation of commercial asset. It was further stated that theexploitation of commercial assets did not necessarily mean exploitation by the assessee himself at all material times. The assessee may temporarily cause the assets to be exploited by another person against payment of consideration and for this purpose might also execute a lease for a fixed period even with a clause of option to renew. But in order that the income derived from the lease may be taxable under Section 10 of the Indian I. T. Act, 1922, it must be shown that the lessor's intention was that during the period of the lease, the asset leased out must remain and be treated as a commercial asset and exploited as such. The intention of the lessor referred to above has to be ascertained from the cumulative effect of all the terms of the lease and other materials. It was noted in the said decision that no two deeds are alike and it was further reiterated that for determining whether an asset is a commercial asset or not it is necessary to find out the use to which the asset is put, because it is the use to which it is put that gives the asset its characteristic of being commercial or noncommercial. It appears that in the case of Seth Banarsi Das Gupta. v. CIT : 106ITR559(All) , the Division Bench of the Allahabad High Court has observed at page 567 of the report, that every asset, which was once used as a business asset or which was capable of being so used, could not be regarded as a commercial asset. The court was further of the view that in order that an asset might be regarded as a commercial asset, it must be the asset of a running business. If the business was stopped, then the assets employed in such business ceased to be commercial assets. In this case it is true that the company had temporarily stopped the business of running the mill because of the financial difficulties that it had to face. But the evidence on record, which the Tribunal has discussed, does not indicate that the company had ceased to carry on the business and had put the commercial asset into cold storage. The desire of the company was to exploit that commercial asset, if possible, by itself and if not possible with the aid of someone else by leasing it out to him. That desire is evidenced by the fact that the company tried to raise money by loan from the Government and also by settling its disputes with the workers. Therefore, the intention to exploit the asset of the company as commercial asset was, in our opinion, manifest. Furthermore, the different clauses, as we have indicated above, manifested an intention on the part of the assessee to ensure that the mill was to be maintained in such a condition that the assessee on the expiry of the lease would be in a position to take it over and operate the mill. The different clauses, which we have set out hereinbefore, indicate the intention of the lessor to ensure that the asset is maintained as a commercial asset available for exploitation as such after the expiry of the lease. It is true that the original lease was for 5 years. But the second new lease was only for the unexpired portion of the originallease. It has also to be borne in mind that all the assets had not been leased out nor even the entirety of the machinery in the said mill. These are significant pointers indicating that the assessee wanted the exploitation of the commercial asset by leasing it out. We are of the opinion that the different clauses indicate that the lessor wanted to maintain and to ensure that the asset retained its commercial character and was given in lease for exploitation and user as a commercial asset for facilitating the resumption of the asset by the lessor itself for the purpose of using it as a commercial asset. If that is the position, then, in our opinion, the Tribunal was right in its decision that the lease rent was assessable as business income under Section 28 of the I. T. Act, 1961.
13. As we have mentioned before, it was urged that there is nothing on record to show that there is in the memorandum of association of the company power to carry on the business of letting out. In this connection counsel for the revenue drew our attention to the decision of the Madras High Court in the case of Parry & Co. Ltd. v. CIT : 20ITR504(Mad) . It appears that the company was authorised to carry on business. That authority was wide enough to include the business of letting out. Secondly, the managing director was duly authorised by the company to negotiate the lease. In any event whether the transaction was illegal as such in view of the fact that it was not strictly in accordance with the memorandum of association, is not an issue but may be a factor to be taken into consideration in deciding the nature of the action taken by the assessee. In the background of all the factors the absence of a specific power to carry on business by leasing out would not be a pointer that the lease income was not business income.
14. If on the leasing out of the business of the company the income was business income, then the sum of Rs. 3,033 spent in connection with the lease agreement was an expenditure of revenue nature incidental to the assessee's activities under Section 37 of the Act. The question No. 1 is, therefore, answered by saying that the income of the assessee from lease rent was assessable as business income under Section 28 of the I. T. Act, 1961, and the question No. 2 is answered by saying that the sum of Rs. 3,033 spent is an expenditure of revenue nature incidental to the assessee's business. In the facts and circumstances of this case, parties will pay and bear their own costs.
Sudhindra Mohan Guha , J.
15. I agree.