' GUL MUHAMMAD KHAN, J.-This tax reference made directly under section 66(1) of the Income-tax Act by the Income-tax Commissioner, arises out of the order dated the 17th June 1971, of the Income-tax Appellate Tribunal. It raises the following questions of law :- "(1) Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the income arising from leasing out of factories was assessable under section 12 and not under section 10 of the Income-tax Act?
(2) Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the surplus of Rs, 10,39,803 arising out of the sale of factories was not liable to income-tax under section 10(2) (vii) of the Income-tax Act?
' The brief facts and circumstances of the case are as follows :-
2. The respondent was the owner of machinery and equipment of cotton factories alongwith the lands and buildings in which they were installed. He leased them cut for a period of 5 years from 1st April 19:4 to 31st March 1959. They were ultimately disposed of vide agreement dated the 13th of May 1958 and 23rd of May 1959, leaving a surplus over the written down value in the sum of Rs, 10,39,833. Some of the terms of the lease, which are similar with respect to both the transactions, are as under :-
6. Clause (3).-If the lease money is not deposited with the lessor within the prescribed time and manner as stated above in item No, 2 the lessor will be entitled to charge an interest at the rate of 4% per annum and do all other acts to realize the lease money and safeguard his interests.
' Clause (4).-That the lessee will keep the building, machinery in excellent working order and the premises in good, neat and clean condition. The lessor will have the right to enter upon the premises, buildings and factories and will be entitled to inspect whenever he likes during the working hours, himself or through his duly authorised agent.
' Clause (5).-The lessee will be responsible for all the repairs of machinery and buildings and replacement of any machine or machines whichever becomes obsolete.
' Clause (6).-The lessor will have the option to change the Miller, Engineers and all technical staff appointed by the lessee, if in the opinion of the lessor the working of the above-mentioned hands is inefficient and unsatisfactory for maintaining the machinery etc. Etc. ' Clause (7).-The buildings and the machinery aforesaid will be duly insured against all risks in favour of the lessor by the lessee and the cost thereof will be borne by the lessee.
' Clause (8).-All taxes under the Factories Act, Municipal Act and all other Revenue taxes whatsoever will be paid by the lessee and the lessor will have no concern with this whatsoever.
3. While completing the income-tax return of the respondent for assessment year 1959-60 the Income-tax Officer brought this amount to tax under section 10(2) (vii) of the Income-tax Act. The respondent filed an appeal against the order of the Income-tax Officer, before the Appellate Assistant Commissioner, who after considering the views of the various Courts on the point, came to the conclusion that section 12 and not section 10(2)(vii) applied to the facts of the case. In second appeal brought by the Department, the Tribunal agreed with the Appellate Assistant Commissioner that the income of the respondent arising out of the letting-on-hire of the machinery and building was covered by section 12 and not by section 10. The Tribunal further held that the surplus arising from sale of assets would also he taxable under section 12(4) and not under section 10(2)(vil) of the Income-tax Act.
4. It is contended by the learned counsel for the petitioner that the Tribunal acted against law in holding that the income of the respondent was not covered by section 10 which pertains to profits and gains arising out of `business'. It was submitted that the respondent undoubtedly owned these factories for the purposes of the business. He instead of running them himself gave it on hire to the lessee ; a sister concern. Such a transaction, it was contended, would fall under the head 'business' and will not be covered by `income from other sources'. The learned counsel relied on a few judgments from Indian jurisdiction to plead that when factories with buildings had been let out on hire in running condition, the income derived was held to be income from business. In Shree Lakshmi Siik Mills, Bombay v. Commissioner of Excess Profits Tax (1). A Division Bench of Bombay High Court held 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. On the other hand if that commercial asset was not capable of being used as such then its being let out does n at result in business income. In C. P. Pictures Ltd. v. Commissioner of Income-tax (M. P.), Nagpur (2), the income from lease of cinema for 5 years renewable to 8 years was held to fall under section 10.
Again in Commissioner of Income-tax, Bombay v. National Storage Priv. Ltd. (3) the safe vaults built to store films were held to be yielding business income.
5. The implication of the first question is whether income derived by the respondent is covered by section 10 or 12. An owner of a property may lease it out as a part of business or as a land-owner.
The property may be a building, when it will be covered by section 9. It may have in it installed machinery or plant which may not be separable from it. In such a situation section 9 will not apply.
Whether section 10 or 12 applies, it must necessarily depend upon the object with which the act is done. Section 12 is the residuary section. Therefore if a particular source of income is not specifically covered by any other section only then it will be brought to tax under section 12. So it will be our endeavour to see if the income in the present case fall under section 10. A company formed with the specific object of acquiring properties, not with a view to lending them as property but to selling them or turning them to account, even by way of leasing them out as integral part of its business, cannot be treated as a land-owner ; but as trader. Therefore, in deciding, whether a company dealt with its properties as a business transaction or otherwise, one must see not to the form which it gave to the transaction but to the substance of the matter.
(1) (1948) 16 I T R 98 (2) (1963) 7 Taxation 37
(3) (1963) 48 I T R 577
6. The term 'business' has been defined in section 2(4) of the Act. 'Business' includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. It has been repeatedly observed that 'business' with the aid of meaning given in dictionaries be deprecated. Judicial pronouncements on the meaning and import of the words "business" and "trade", statements of principles contained in the judgments, and the manner in which these principles have been applied to concrete instances are the only safe-guides to the interpretation of the definition. It was held in Mazagaon Dock Ltd. v. Commissioner of Income-tax (1) by the Supreme Court of India that the word used in the definition of business in section 2(4) is of wide import and in fiscal statutes it must be construed in a broad rather than a restricted sense. It connotes "some real substantial and systematic or organized course of activity or conduct with a set purpose" as held by the same Court in Narain Swadeshi Weaving Mills' case (1). The Judicial Committee of the Privy Council in C. I. T. v. Shaw Wallace & Co. (3), observed that the central idea underlying each of sections 2(4), 10 and 12 is the continuous exercise of activity, signifying that what is taxable is the profit earned by process of production, and not a receipt of any kind. The Supreme Court of India in another case of Lakshminarayan Ram Gopal & Sons Ltd. v. Government of Hyderabad (4), held that the activities which constitute carrying on business need not necessarily consist of activities by way of trade, commerce or manufacture or activities in the exercise of a profession or vocation. They may even consist of rendering services to others which services may be of a varigated character. It is the nature and scope of these activities and not the extent of the operation which are relevant for this purpose. The Supreme Court of India in Karanpura Development Co. Ltd. v. Commissioner of Income-tax (5), held that where a company acquires properties which it sells or leases out with a view to acquiring other properties to be dealt with in the same manner, the company is not treating them as properties to be enjoyed in the shape of rents which they yield but as a kind of circulating capital leading to profits of business, which profits may be either enjoyed or put back into the business to acquire more properties for further profitable exploitation.
7. In East India Housing and Land Development T ust Ltd. v. Commissioner of Income-tax (6), the same Supreme Court held that income derived by the company from shops and stalls was income received from property and falling under the specific head described in section 9 and that character of that income was not altered because it was received by a company formed with the object of development and setting up markets, nor because of the fact that the company was required to obtain a licence from the Calcutta Municipality to maintain sanitary and other services and for that purpose had to maintain a staff and to incur expenditure. The character of the income, it was further held would not be altered merely because some stalls were occupied by the same occupants and the remaining stalls were occupied by a shifting class of occupants. It was held in Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. (7), that the view that in order to constitute business income the commercial asset must, at the time it was let out by in a condition to be used as a commercial asset by the assessee himself is not correct, that it was a part of the normal activities cf the
(1) (1958) 34 I T R 368 (SC) (2) (1954) 26 I T R 765
(3) AIR 1932 P C 138 (4) (1954) 25 I T R 449 (SC)
(5) (1962) 44 I T R 362 (S (,) (6) (1961) 42 1 T R 49 (SC)
(7) (1951) 20 I R 451 (S 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 for the time being it could not itself run it, and that the dying plant of the assessee had not ceased to be a commercial asset with the result the sum representing the rent for five months received from the lessee by the assessee was income from business and was chargeable to the excess profits tax.
The Bombay case referred to by the learned counsel for the petitioner in para. 4 above is, therefore, no longer a good law as having been reversed. In Commissioner of Income-tax, Delhi v. S. B. Ranjit Singh (1) a Division Bench of Dehli High Court held that income from the lease of a hotel complete with furnishings and fittings at an annual rent of Rs, 50,000 for 20 years falls under section 12. A similar view was taken by the Indian Supreme Court in Sultan Brothers Private Ltd. v. C. I. T., Bonbay (2), on the ground that the object of the assessee in acquiring land was to letting and selling and he neither intended nor did he carry on the hotel business in the premises let out or otherwise at all.
It was held that income was not assessable under section 10. By this order, the Supreme Court of India set aside an order of the Bombay High Court whereby the income from lease of hotel was assessed separately under section 9 for the building and under section 12 for the fittings and furnishings.
8. The principle that emerges from the above judgments is that it is the nature of the property and the intention of the owner that will spell out the nature of the income in any given case. We agree that no hard and fast rule can be laid down for its determination. If the property was let out just after making it, the intention of the owner will be clear that it was not commercial asset and would be governed by section 9. If the owner make the property to be used as a commercial asset, the subsequent letting out will not bring it under section 9 unless it was clear that the assessee had abandoned his intention to use it as commercial asset. But it cannot be said 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 past and present business of the assessee seen in the light of the lease deed can also be of great help to gather that intention. The accrual 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 the best advantage and he may do so either by using it himself personally or by letting it out to somebody else. A. C. Sampath Iyangar in his book on Indian Income-tax Act, 4th Edn Vcl. II, p. 568 opined as follows :- "If the plant, machinery or furniture was used by the lessor himself, there is no question that the income would have been business income in his hands chargeable under section 10. The fact that instead of using the plant, machinery or furniture himself, he permits another person to use it, would not change the character of the income. The yield or income through the plant, machinery or furniture is profit of the business, irrespective of the manner in which the plant, machinery or furniture is exploited by the owner. He may do so by either using they plant, machinery, or furniture himself or by letting it out to somebody else. But there in this qualification. If the plant, machinery oc
(1) (1955) 28 I T R 14 (2) (1964) 9 Taxation 207 furniture ceases to be a commercial asset, then the hire income would not constitute business income, it would only constitute income under the head "other sources". The non-user of a commercial asset might be due to a change in the condition of the plant, machinery or furniture or by its obsoleteness."
9. The admitted facts of this case are that the respondent is an assessee since 1927-28. He then owned two cotton factories and one ice factory which were being run by himself. In the years to come he made a number of additions with the result that he owned seven factories in 1942-43. All those were being operated by the assessee directly till 1953 except three factories at Jaranwala, Tandlianwala and Multan which he leased out after 1943-44. The factories in question were leased out in 1953 and 1954 for five years. Before the two leases expired on 31st August 1958, and 31st August 1959, the respondent sold those factories vide two agreements dated 13th May 1958, and 23rd May 1958. The history of the case shows that the assessee had for quite some time been running the various factories himself. He later thought of getting the best out of his business and gave over the cotton factories to be run by allied concerns, as was found by the Income-tax Officer in para. 10 of his order, on comparison of profits earned by these factories before and after the arrangements of lease. Thus the apparent intention of lease of the factories was not to use the factories for a fixed income but was in fact to increase the profits from business in this manner. The terms of the lease also show that the asssessee had every intention of preserving his commercial assets, fit to be taken over to be worked by himself. He had the right to get them well maintained in good condition. The lessee was obliged to repair and replace machinery. The assessee could change the miller, engineer and other technical staff if their working was unsatisfactory or inefficient. The factories which started as commercial asset continued in that state throughout. The fact whether the assessee was running them himself or had let out to the others will not make much difference. The books of assessee had been found to include the income in its 'business account'. We are, therefore, of the opinion that the g view taken by the Tribunal was against the facts on record and in violatio of the spirit of law. Our answer to the first question is in the negative.
10. As regards the second question it was submitted that the respondent having sold his assets could not claim the benefit under section 10(2(vii) read with section 12(4). We have already held above that letting on hire of machinery, plant or furniture belonging to the assessee alongwith the building which was inseparable from the machinery etc., yielded business incom governed by section 10. The surplus over the written down value will therefore, be treated as the fictional profit under second proviso to section 10(2) (vii). The respondent relied on Commissioner of Income-tax, Madhya Pradesh v. Nandlal Bhandari & Sons (1), to plead that the 2nd proviso would not be attracted as it will deprive the assessee of all the benefits lawfully gained in the form of depreciation allowance. The apprehension of the assessee is correct though the legal position taken by him is not valid. Section 10 deals with the computation of income of an assessee when his income arises out of "business profession or vocation". The above case does deals with such cases as may be governed by section 12. There may be some doubt about the applicability or otherwise of 2nd Proviso to section 10(2) (vfi) in a case governed by section 12(3) or 12(4) but no such
(1) (1963) 47 I T R 803 doubt can be entertained in a case falling under section 10. The second proviso is the integral part of section 10(2) (vii) and must apply with full force. In fact the second question was dependent on the 1st.
' As we have come to the conclusion that section 12(4) does not apply to this case, it will be no use considering this aspect further. Our answer to the 2nd question is therefore, in the negative. The respondent shall pay the costs.