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PETITIONER:

COMMISSIONER OF EXCESS PROFITS TAX,BOMBAY CITY

Vs.

RESPONDENT:

SRI LAKSHMI SILK MILLS LTD.

DATE OF JUDGMENT:

18/09/1951

BENCH:

MAHAJAN, MEHR CHAND

BENCH:

MAHAJAN, MEHR CHAND

FAZAL ALI, SAIYID

MUKHERJEA, B.K.

CITATION:

1951 AIR 454 1952 SCR 1

CITATOR INFO :

D 1955 SC 176 (14)

D 1965 SC1974 (5)

D 1969 SC1062 (7)

RF 1988 SC 460 (5,7)

ACT:

Excess Profits Tax Act (XV of 1940), s. 2 (5)--"Income

from business "--Manufacturing company--Rent of plant and

machinery let out to others--Whether income from business.

HEADNOTE:

The respondent, a company formed for the purpose of

manufacturing silk cloth, installed a plant for dyeing silk

yarn as a part of its Business. During the chargeable

accounting period (last January, 1943, to 31st December,

1943) owing to difficulty in obtaining silk yarn on account

of the war, it could make no use of this plant and it re-

mained idle for some time. In August, 1943, the plant was

let out to another company on a monthly rent. The question

being whether the income received by the respondent company

in the year 1948 by way of rent of this plant was income

from business and assessable to excess profits tax, the High

Court of Bombay held that, as the assessee was not able to

use the plant as a commercial asset, it had ceased to be a

commercial asset in the assessee's hands and the rent re-

ceived was not income from business. On appeal:

Held, that an asset which was acquired and used for the

purpose of the business by a company formed for carrying on

business and earning profits, does not cease to be a commer-

cial asset of that business as soon as it is temporarily put

out of use or let out to another person for use in his

business or trade; the income from the asset would be profit

of the business irrespective of the manner in which that

asset is exploited by the owner, and the rent in question

was therefore income from business and assessable to excess

profits tax. No general principle, however, can be laid down

which is applicable to all cases. Each ease has to be decid-

ed on its own circumstances.

Sutherland v. Commissioners of Inland Revenue [1918] 12

Tax Cas. 63 relied on.

Inland Revenue Commissioners v. lies [1947] 1 A.E.R.

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798, Croft v. Sywell Aerodrome Co., Ltd. [1942] 1 A.E.R.

110, Inland Revenue Commissioners v. Broadway Car Co., Ltd.

[1946] 2A.E.R. 609 distinguished.

Judgment of the Bombay High Court reversed.

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JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal

No. 46 of 1950.

Appeal by special leave from a judgment of the High Court

of Judicature at Bombay dated 23rd March, 1948, (Chagla C.J.

and Tendolkar J.) in Income Tax Reference No. 16 of 1947.

M.C. Setalvad, Attorney-General for India (Gopal Singh,

with him) for the appellant.

N.C. Chatterjee (B. Sen, with him)for the respondent.

1951. September 18. The Judgment of the Court was deliv-

ered by

MAHAJAN J.--The sole controversy in this appeal centres

round the point as to whether or not excess profits tax is

payable on the sum of Rs. 20,005 received by the respondent

from Messrs Parakh & Co. by way of rent for the dyeing plant

let out to them during the chargeable accounting period.

The respondent (Sri Lakshmi Silk Mills Ltd.) is a manu-

facturer of silk cloth, and as a part of its business it

installed a plant for dyeing silk yarn. During the charge-

able accounting period (1st January, 1943, to 31st December,

1943) owing to difficulty in obtaining silk yarn on account

of the war it could make no use of this plant and it re-

mained idle for some time. On the 20th August, 1943, it

was let out to Messrs E. Parakh & Co. on a rent of Rs. 4,001

per month. The Excess Profits Tax Officer by his assessment

order dated 11th June, 1945, included the sum of Rs. 20,005

realized as rent for five months, in the profits of the

business of the respondent and held that excess profits tax

was payable on this amount. This order was confirmed on

appeal by the Appellate Assistant Commissioner and on fur-

ther appeal by the Income-tax Tribunal. The Tribunal,

however, on being asked referred the following question of

law to the High Court for its opinion:

"Whether in the circumstances of the case, the asses-

see's income of Rs. 20,005 is profits from business

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within the meaning of section 2 (5) of the Excess Profits

Tax Act and therefore or otherwise liable to pay excess

profits tax ?"

The High Court answered the question in the negative.

This is an appeal by special leave from this decision.

It was contended on behalf of the Commissioner before

the High Court that the dyeing plant was a commercial asset

of the assessee's business for the purpose of earning profit

and if this commercial asset yielded income to him in any

particular manner, it was income from the assessee's busi-

ness for the purpose of the Excess Profits Tax Act. It was

said that it was immaterial whether a commercial asset

yields income by use of the assessee himself or its being

used by someone else. This contention was disposed of by

the learned Chief Justice in these words :-

"Mr. Joshi seems to be right but with this qualification

that the commercial asset must be at the time it was let out

in a condition to be used as a commercial asset by the

assessee. If it has ceased to be a commercial asset, if its

use as a commercial asset has been discontinued, then if the

assessee lets it out, he is not putting to use something

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which is a commercial asset at the time.

"Now, on the facts found by the Tribunal, it is clear

that when the assessee let out this dyeing plant, it had

remained idle for some time. He could not obtain silk yarn

on account of the war and therefore it was not possible to

make use of it as a commercial asset as far as the assessee

himself was concerned and it was only for that reason that

he let it out to Messrs E. Parakh & Co. I can understand

the principle for which Mr. Joshi is contending that it

makes no difference what an assessee does with a commercial

asset belonging to him. He may use it as he likes. So long

as it yields income it is the income of his business. Var-

ious cases have been cited at the Bar and I think that those

cases though apparently conflicting are reconcilable if we

accept this principle to be the correct principle

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and apply this ratio as the ratio emerging from these cases

and I will state the principle and the ratio again that if

an assessee derives income from a commercial asset which is

capable at the time of being used as a commercial asset,

then it is income from his business, whether he uses that

commercial asset himself or lets it out to somebody else to

be used. But if the commercial asset is not capable of

being used as such, then its being let out does not result

in an income which is the income of the business."

Mr. Justice Tendolkar concurred in this view and ob-

served as follows :--

"The ratio of all these cases to my mind is that if

there is a commercial asset which is capable of being worked

by the assessee himself for the purpose of earning profits

and the assessee instead of doing so, either voluntarily

allows someone else to use it on payment of a certain sum or

is compelled by law to allow it to be used in such manner,

then what he receives is income from business. But if the

commercial asset has ceased to be a commercial asset in the

hands of the assessee and thereafter he gets what he can out

of it by letting it out to be used by others, then the rent

he receives is not income from any business that he carries

on."

The learned Attorney-General pointed out that the

nature of a commercial asset is not changed because a par-

ticular person is unable to use it. The inability of the

assessee to make use of it in certain circumstances does not

in any way' affect the nature of the asset and cause an

infirmity in the asset itself. It was contended that when

the dyeing plant became idle for a short time during the

chargeable accounting period it did not cease to be a com-

mercial asset of the respondent for it had no other busi-

ness; that all the assets of the respondent including the

dyeing plant were the assets of the business, that whatever

income was derived by the use of these assets including the

income that an asset fetched by its being let out was the

business income of the assessee, and that there was no

warrant

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in law for the proposition that a commercial asset which

yields income must be used as an asset by the respondent

himself before its income becomes chargeable to tax.

The learned counsel for the respondent urged that as

soon as the assessee found difficulty in obtaining yarn the

dyeing plant became redundant for its business and ceased to

be an asset of its business and any income derived from the

rent by letting out this asset was income received by the

assessee from other sources and therefore was not charge-

able to excess profits tax.

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In our opinion, the contention raised by the learned

Attorney-General is sound. 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 commer-

cial asset of a business concern which yields income must at

the time it was let out be in a condition to be used as a

commercial asset by the assessee himself. 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 business, but we cannot

accept the view that an asset which was acquired and used

for the purpose of the business ceased to be a 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 manufac-

turing concern the use of its plant and machinery can advan-

tageously 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

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consideration for three hours; can it be said in such a

situation with any justification that' the amount realized

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 it 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 commer-

cial asset is not income from the business of the company

that has been solely incorporated for the purpose of doing

business and earning profits. There is no material whatever

for taking the view that the assessee company was incorpo-

rated with any other object than of carrying on business or

trade. Owning properties and letting them 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 other than section 10. Cases of

undertakings of this nature stand on an entirely different

footing and are distinguishable from cases of individuals or

companies acquiring lands or buildings and making income by

letting them on hire. These latter cases may legitimately

fall under the specific provisions of section 9 or section

12, though the High Courts in this country are by no means

unanimous on this subject; but for the purpose of this case

it is unnecessary to resolve that conflict.

It may be observed that no general principle can be laid

down which is applicable to all cases, and each case has to

be decided on its own circumstances. Decisions of the Eng-

lish courts given under the Finance Acts, the scheme of

which is different from the Indian Income-tax statutes, are

not always very helpful in dealing with matters arising

under the Indian law and analogies and inferences drawn from

those decisions are at times misleading. We, however, are in

respectful agreement with the observations of Lord

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President Strathclyde in Sutherland v. The Commissioners of

Inland Revenue(1) that if a commercial asset is susceptible

of being put to a variety of different uses in which gain

might be acquired, whichever of these uses it was put to by

the appellant, the profit earned was a user of the asset of

the same business. A mere substituted use of the commercial

asset does not change or alter the nature of that asset.

Whatever the commercial asset produces is income of the

business of which it is an asset, the process by which the

asset makes the income being immaterial.

Mr. Chatterjee for the respondent stressed the point

that as the dyeing plant in the present case could not be

made use of by the assessee in its manufacturing business

owing to the non-availability of yarn, it ceased to be a

commercial asset of the business of the assessee and became

redundant to that business and that being so, any income

earned by this asset which had ceased to be a commercial

asset was not an income of the business but must be held to

have been derived from a source other than business and fell

within the ambit of section 12 of the Indian Income tax Act,

and on this income excess profits tax was not payable. He

contended that the facts of this case were analogous to the

case of Inland Revenue Commissioners v. lies(2) and it

should be similarly decided. In that case the taxpayer

carried on the business of sand and gravel merchant on

certain land and at the same time he granted licences to

three firms to enter his land and win gravel for themselves

in return for which he received from them a royalty for

each cubic yard of gravel taken away. It was held that the

royalties were not part of the profits of the business

because, in granting the licences, the taxpayer was exploit-

ing his rights of ownership in the land and was not carrying

on his business of a sand and gravel merchant. The income

was held taxable as an income from an investment and did not

fall under Schedule D which concerns profits earned from a

trade. Mr. Chatterjee also laid emphasis on the observations

of Lord

(1) (1918) 12 Tax Cas. 63. (2) [1947] 1 A.E.R.

798.

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Greene M.R. in Croft v. Sywell Aerodrome Ltd. (1),

wherein the learned Master of the Rolls observed as fol-

lows:

"I cannot myself see that a person who leases the land

to others, or grants licences to others to come upon it,

is doing anything more than exploiting his own rights of

property, even if the tenant or licensee is, by the

terms of the lease or licence, entitled himself to carry

on a trade on the land."

It was urged that what the assessee was doing in this

case was exploiting his rights of property by letting the

dyeing plant to other persons precisely in the same manner

as the owner of land in the case cited above was exploiting

his own rights to property by granting a licence to another

to come on his land. The argument, in our opinion, though

attractive, is fallacious. The analogy between the case of

land and of a dyeing plant for the purpose of taxing stat-

utes is inappropriate. The distinction becomes apparent from

the following passage which occurs in Atkinson J.'s judgment

in I les's case(2) :--

"Then it was suggested by counsel for the Crown that

the case was like the Desoutter case(3), where it was held

that, if you make use of a patent in your business and also

receive royalties from the use of the patent by others

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licensed to use it, those royalties cannot be regarded as

receipts from an investment. In other words, the door has to

be either open or shut. A patent is either an investment or

it is not. The suggestion was that freehold land is in the

same position, and if you carry on business on part of it,

whatever you do with the rest by way of licensing or letting

cannot be regarded as producing income from investment.

That, however, is dead in the teeth of the judgment in the

Broadway Car Co. case(4). The same argument was tried there,

but Tucker L.J. said he thought the Desoutter case(3) had

very little to do with it, as there was a great difference

between land

(1) [1942] 1 A.E.R. 110. (3) [1946] 1

A.E.R. 58.

(2) [1947] 1 A.E.R. 798 (4) [1946] 2

A.E.R. 609.

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and a patent, and he did not think the Desoutter case(1)

threw any light on the matter ...... A patent is quite

different from freehold land."

These observations appositely apply to the case of a

company incorporated for the purpose of doing business and

earning profit by the process of manufacture. Letting out

a part of its machinery in a certain situation in order to

make the business advantageous as a whole does 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, as at present advised, in

our opinion, would fall under section 9 of the Indian In-

come-tax Act, as income earned, no matter by whatever meth-

od, from land, and specifically dealt with by that section.

The observations therefore made in I les's case(2) can have

no apposite application to the case of a manufacturing

concern letting out a part of its machinery temporarily

which it cannot advantageously use itself.

Mr. Chatterjee also laid stress on the decision of the

Court of Appeal in Inland Revenue Commissioners v. Broadway

Car Co. Ltd.(3). In this case the company carried on the

business of motor car agents and repairers on land held on

lease from 1935 to 1956 at an annual rent of pound 750. By

1940 the company's business had dwindled under war condi-

tions to such an extent that no more than one third of the

land was required. In those circumstances the remainder was

sublet for fourteen years at an annual rent of pound 1,150.

The general commissioners of income-tax decided that the

difference of pound 400 between the outgoing of pound 750

for the land retained and the incoming of pound 1,150 for

the land disposed of was "income received from an invest-

ment," and, the business not being one within the special

categories mentioned in the Finance Act, 1939, that pound

400 was not taxable. It was held that the word "investment"

must be construed in the ordinary, popular sense of the word

as used by businessmen and not as a

(1) [1946] 1 A.E.R.58. (3) [1946] 2 A.E.R.

609.

(2) [1947] 1 A.E.R. 798.

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term of art having a defined or technical meaning and that

it was impossible to say that the commissioners had erred in

law in coming to the conclusion that the transaction result-

ed in an investment. Scott L.J. in delivering his judgment

laid emphasis on the point that after the business of the

company had dwindled, it partitioned part of the land from

the rest and sublet it by installing a heating apparatus for

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the sub-lessee. It was found that war conditions had reduced

the company's business to very small proportions and they

cut their loss by going out of business in respect of the

major part of their land and put it out of their power for

14 years to resume business there. In this situation it was

observed that in that case they were dealing with part of

the property of the company which had come redundant and 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, as it could be,

according to ordinary commonsense principles.

The short question to decide in this case is whether on

the facts found, it could be said reasonably that the dyeing

plant had become redundant for its business as a silk manu-

facturing 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 is 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 (we are told), the assessee company

making income out of its use as a commercial asset. In this

situation it is not possible to hold that the 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

this commercial asset had become redundant to the company's

business of manufacture of silk. The analogy of Broadway Car

Co. Ltd. (1) therefore does not hold good for the decision

of the present matter,

(1) [1946] 2 A.E.R. 609.

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We are therefore of the opinion that it was 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

therefore was in error in holding 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, Messrs

Parakh & Co., was not chargeable to excess profits tax. The

result therefore is that we hold that the answer returned by

the High Court to the question referred to it by the Tribu-

nal was wrong and that the correct answer to the question

would be in the affirmative and not in the negative.

The appeal is allowed, but in the circumstances of the

case we make no order as to costs. We have not thought it

necessary to refer to all the cases cited at the Bar as

none of them really is in point on the short question that

we were called upon to decide and analogies drawn from them

would not be helpful in arriving at our decision.

Appeal allowed.

Agent for the appellant. P.A. Mehta.

Agent for the respondent: P.K. Chatterjee.