New Savan Sugar & Gur Refining Co.
Ltd. Vs. Commissioner of Income-Tax, Calcutta [1969] INSC 51 (19 February 1969)
19/02/1969 RAMASWAMI, V.
RAMASWAMI, V.
SHAH, J.C.
GROVER, A.N.
CITATION: 1969 AIR 1062 1969 SCR (3) 761 1969
SCC (1) 621
CITATOR INFO:
D 1988 SC 460 (12)
ACT:
Income-tax Act (11 of 1922), ss. 10(2)(vi-a)
and (vi-b) and 12(3) and (4)-Scope of s. 10-If cls. (vi-a) and (vi-b) of s.
10(2) could be read by implication into s.
12.
HEADNOTE:
The assessee-company, carrying on the
business of crushing sugar cane and gur refining, apprehending loss, entered
into a lease with another company. Under cl. (7) of the indentures the
consideration of the lease. was royalty payable on the manufacture of sugar and
molasses and was, subject to a minimum payment of Rs. 65,000 per annum. The
lease was. for a term of 5 years commencing from 1st June 1945 with an option
to continue for a further term of 5 years and thereafter with two further
options of 5 years on the same terms and conditions subject to payment of
higher rates of royalty. Clauses 2 to 5 provided that the existing machinery
which was owned by the lessor could not be removed and that the lessee would be
entitled to set up additional machinery without interference from the lessor
and that on the termination of the lease the lessee would be entitled to remove
the same without causing any damage to the property demised. The effect of cls.
11 to 14 was that the lessor would have no concern with the production of the
factory which was the principal part of the business previously carried on by
the lessor. In assessment proceedings for the assessment year 1955-56, the
assessee contended that the lease was a lease of a commercial asset and
therefore the income arising from it should be assessed under s. 10 of the
Income-tax Act, 1922, and hence, the assessee should be allowed depreciation
and development rebate in accordance with cls. (vi-a) and (vi-b) of s. 10(2).
The department and the High Court rejected the assessee's contention and held
that the income was liable to be assessed under s. 12 as 'income from other
sources' and that no additional depreciation and development rebate could be
allowed.
In appeal to this Court it was contended that
: (1) the income of the assessee was liable to be assessed under s. 10 of the
Income-tax Act and, not under s. 12; and (2) Since the benefit under cl. (vi)
of s. 10(2) is allowed to the assessee under s. 12(3), the assessee should be
held to be entitled to additional depreciation and development rebate under cls.
(vi-a) and (vi-b) even if the assessment was under s. 12, on the ground that
those two clauses are ancillary to cl. (vi) and should be taken to have been
included in s. 12(3) along with cl. (vi).
HELD : (1) The income of the assessee could
not be characterised' as income from the activity of the assessee carrying on
any business and' was therefore, liable to be assessed under s. 12 and not
under s. 10 of the, income-tax Act. [769 F-G] The primary condition for the
application of s. 10 is that the tax is payable by an assessee under the head
'profits and gains of business' in respect of business carried on by him. When
an assessee does not carry on business at all, s. 10 cannot be applicable and
the income that he receives cannot bear the character of profits of business.
[769 D-E] 762 In the present case, a scrutiny of all the clauses of the
indenture of lease, shows that the intention of the assessee was to go out of
the business altogether, so far as the factory and machinery were concerned
with effect from 1st June 1945, to part with the entire machinery of the
factory and the premises with the purpose of earning rental income, and to use
the income arising from the royalty in its capacity as owner of the factory. It
was not the intention of the assessee to treat the factory and machinery as a
commercial concern or asset during the subsistence of the lease. The provision
for payment of minimum royalty indicates that the assessee had no direct
interest in the production of the factory. The royalty was not paid for the
production in the factory. There was no direct nexus between the income of the
assessee and the production of the factory. The production was only a measure
of the royalty to be paid and had nothing to do with the character of the
payment as a receipt from business or from other sources.
[769 C-D, E-F] Commissioner of Excess Profit
Tax, Bombay City v. Shri Lakshmi Silk Mills Ltd. 20 I.T.R. 451 (S.C.) and
Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax, 26 I.T.R.
765 (S.C.), distinguished.
(2)Clause (vi-a), which was inserted in the
Act in 1949, gives additional depreciation allowance over and above the initial
allowance which was previously available under cl. (vi) in respect of buildings
newly erected and new machinery and plant but not furniture installed after
31st March 1948.
The additional allowance is confined to not
more than 5 successive assessments falling within the period from 1st April
1949 and 31st March 1959. It is deductible in determining the written down value,
unlike the initial allowance granted under cl. (vi). Clause (vi-b) was inserted
by the Finance Act, 1955. It grants development rebate in respect of machinery
and plant provided that the machinery or plant is new and has been installed
after 31st March 1954, and provided further that it is used wholly for the
purpose of the assessee's business and the particulars prescribed for the
purpose of cl. (vi) have been furnished.
Clauses (Vi-a) and (vi-b) thus introduce a
new scheme and cannot be treated as an integral part of cl. (vi) by
implication. Further, it is not permissible for the Court to read the-clauses
by implication into s. 12(3) and (4), because, the clauses were not
specifically engrafted by Parliament into s. 12 while amending s. 10(2). [771 E-H;
772 A-B] Kumar Kamalaranjan Roy v. Secretary
of State, L.R.
66 I.A. 110, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1593 of 1968.
Appeal from the judgment and order dated,
September 20, 1963 of the Calcutta High Court in Income-tax Reference' No. 23
of 1960.
Sachin Chaudhari, T. A. Ramachandran and D.
N. Gupta, for the appellant.
D.Narsaraju, R. N. Sachthey and B. D. Sharma,
for the respondent.
The Judgment of the Court was delivered by
Ramaswami, J This appeal is brought by certificate from the judgment of the
Calcutta High Court dated 20th September, 1963 in Income Tax Reference No. 23
of 1960.
763 The appellant (hereinafter referred to as
the assessee was carrying on the business of crushing sugar-cane and gur
refining. M/s. Andrew Yule & Co. were acting as the managing agents of the
assessee. In a letter dated 5th February, 1946 addressed to the share-holders
of the assessee the managing agents referred, to the alarming increase of
Government interference in the affairs of the sugar industry in Bihar and the
increase of wages of the workers, as well as the levy of a cess of Government
and deterioration in the cane crops. In view of this state of affairs, the
managing agents apprehended a loss and suggested that the company's affairs
should be put on a "less discouraging basis" by accepting the offer
of a lease of the company as a running concern from the Standard Refinery &
Distillery Ltd. At an extra-ordinary general meeting of the share-holders of
the assessee company held on 5th March, 1946 it was decided to authorise the
directors to enter into a lease with the said Standard Refinery &
Distillery Ltd. By an indenture of 15th March, 1948 the lease was executed to
come into effect retrospectively from 1st June, 1945. The term of the lease was
originally for 5 years commencing from 1st June 1945 with an option to the
lessee to continue for further five years and thereafter two further options to
the lessee, each for five years, on the same terms and conditions, but subject
to the payment of higher rates of royalties and also subject to the option on
the part of the assessee company to terminate the lease by a resolution of the
shareholders of the company to be held before 30th November in any year after
the first two years.
This option of termination of the lease was
not exercised by the assessee company. The consideration of the lease as
described in clause 7 of the indenture was royalty payable on the manufacture
of sugar and molasses. The royalty on sugar was to be at the rate of Rs. 75 per
hundred maunds of sugar manufactured for the first and second term of five
years, at the rate of Rs. 82.50 per hundred maunds of sugar manufactured for
the third five year period and at Rs. 90 for the fourth five year period. The
royalty on molasses was to be calculated at 3 pies per maund on all molasses
sold during each year of the original period or the renewed period of the
lease. The computation of the royalty was subject to a minimum payment of Rs.
65,000 per annum.
For the assessment year 1955-56 the relevant
accounting year of the assessee ended on 31st May, 1954. In the assessment
proceedings for 1955-56 the assessee's main contention was that the lease
granted under the indenture of 15th March, 1948 was a lease of a commercial asset
and therefore the income arising from the lease should be assessed under S. 10
of the Income Tax Act and the assessee should be allowed depreciation and
development rebate in accordance with clause (vi-a) and clause (vi-b) of
sub-section (2) of section 10 of the Income 764 Tax Act. The Income Tax Officer
assessed the income under S. 12 of the Act as being income under the head
"other sources" and held that no additional depreciation or
development rebate could be allowed as claimed by the assessee. According to
the assessee, the, income derived from the lease of the sugar factory was
income from business because the factory was leased as a going concern and the
rent of the building, machinery, plant and spare parts was fixed at a certain
rate per maund of sugar produced, and at a certain rate per maund of molasses
sold. On appeal, the Appellate Assistant Commissioner found that it was a
simple lease of the building and machinery in a sugar factory, and as such the
method of payment based on production could not affect the character and nature
of the income derived under the said lease. In further appeal the Appellate
Tribunal came to the conclusion that on the facts stated the case fell under
section 12 and not under section 10 and that since sub-section (3) of section
12 did not include clauses (vi-a) and (vi-b) of section 10(2) the claim of
additional depreciation and development rebate could not be allowed.
At the instance of the assessee the Appellate
Tribunal stated a case to the High Court on the following questions of law
under section 66(1) of the Income Tax Act, 1922 (hereinafter referred to as the
Act) :
"(1) Whether on the facts and in the
circumstances of the case, the income of the assessee company was liable to be
assessed under section 12 of the Indian Income Tax Act and not under section 10
of the said Act ? (2)Whether on the facts and in the circumstances of the case,
additional depreciation and development rebate can be allowed as a deduction
?" The High Court answered both the, questions against the assessee
holding that the income was liable to be assessed under section 12 and that no
additional depreciation and development rebate could be allowed.
Section 10 of the Act stood as follows at the
material time "10. (1) The tax shall be payable by an assessee under the
head 'profit sand gains of business, profession or vocation' in respect of the
profit or gain of any business, profession or vocation carried on by him.
(2)Such profits or gains shall be computed
after making the following allowances, namely (vi)in respect of depreciation of
such buildings, machinery, plant or furniture being the property of the
assessee, a sum equivalent, where the assets are ships 765 other than ships
ordinarily plying on inland waters, to such percentage on the original cost
thereof to the assessee as may in any case or class of cases be prescribed and
in any other case, to such percentage on the written down value thereof as may
in any case or class of cases be prescribed :
and where the buildings have been newly
erected, of the machinery or plant being new, not being machinery or plant
entitled to the development rebate under, clause (vi-b), has been installed,
after the 31st day of March, 1945, a further sum (which shall however not be
deductible in determining the written down value for the purposes of this
clause) in respect of the year of erection or installation equivalent-- (a) in
the case of buildings the erection of which is begun and completed between the
1st day of April 1946 and the 31st day of March 1956 (both days inclusive), to
fifteen per cent of the cost thereof to the assessee;
(b) in the case of other buildings, to ten
per cent of the cost thereof to the. assessee;
(c) in the case of machinery or plant, to
twenty per cent of the cost thereof to the assessee;
Provided that- 765 (c)the aggregate of all
allowances in respect of depreciation made under this clause and clause (vi-a)
or under any Act repealed hereby, or under the Indian Income Tax Act, 1886 (II
of 1886), shall, in no case, exceed the original cost to the assessee of the
buildings, machinery, plant or furniture, as the case may be;
(vi-a) in respect of depreciation of
buildings newly erected, or of machinery or plant being new which has been
installed, after the 31st day of March, 1948, a further sum (which shall be
deductible in determining the written down value) equal to the amount
admissible under clause (vi) (exclusive of the extra allowance for double or
multiple shift working of the machinery or plant and the initial depreciation
allowance admissible under that clause for the first year of erection of the
building or the installation of the machinery or Plant) in not more than five
successive assessments for the financial years next following the previous year
Sup/69-14 766 in which such buildings are erected and such machinery and plant
installed and falling within the period commencing on the 1st day of April 1949
and ending on the 31st day of March, 1959;
(vi-b) in respect of machinery or plant being
new, which has been installed after the 31st day of March, 1954, and which is
wholly used for the purposes of the business carried on by the assessee, a sum
by way of development rebate in respect of the year of installation equivalent
to twenty-five per cent of the actual cost of such machinery or plant to the
assessee;
Provided that no allowance under this clause
shall be made unless the particulars prescribed for the purpose of clause (vi)
have been furnished by the assessee in respect of such machinery or plant;
Section 12 was to the following effect
12. (1). The tax shall be payable by an
assessee under the head 'Income from other sources' in respect of income,
profits and gains of every kind which may be included in his total income (if
not included under any of the preceding heads).
(2)Such income, profits and gains shall be
computed after making allowance for any expenditure (not being in the nature of
capital expenditure) incurred solely for the purpose of making or earning such
income, profits or gains.
(3)Where an assessee lets on hire machinery,
plant or furniture belonging to him, he shall be entitled to allowances in
accordance with the provisions of clauses (iv), (v), (vi) and (vii) of
sub-section (2) of section 10.
(4)Where an assessee lets on hire machinery,
plant or furniture belonging to him and also buildings, and the letting of the
buildings is inseparable from the letting of the said machinery, plant or
furniture, he shall be entitled to allowances in accordance with the 767
provisions of clauses (iv), (v), (vi) and (vii) of subsection (2) of section 10
in respect of such buildings".
The main contention of the assessee was that
the lease as contemplated in the indenture dated 15th March, 1948 was a lease
of a commercial asset, and, therefore, the income arising from the lease should
be assessed under section 10(1) of the Act and not under section 12(1). In
order to examine the validity of this argument it is necessary to set out the
relevant clauses of the indenture of lease. Clause ( 1) of the lease provided
that the lease was for a term of five years commencing from 1st June 1945 with
an option to continue for a further term of five years and thereafter two
further options of five years in each case on the same terms and conditions
subject to higher payment of rates of royalties.
Clause 2:
The lessee shall be entitled to run the said
sugar factory and all other machinery annexed to the same and use all the tools
and implements, buildings and premises, offices, and erections and utensils and
all other things which are now in or upon the said premises and which may be
added from time to time thereto provided always that the lessees shall not at
any time remove the plant and/or machinery etc. hereby demised or any part
thereof from the said premises elsewhere for the purpose of or in connection
with the lessees' other interests.
Clause 3 :
The lessees shall at the time of taking over
possession of the factory from the lessors be entitled free of payment to the
goods already manufactured during the current crushing season, i.e. 1945-46 or
in the process of manufacture and/or to be hereafter manufactured by the
lessees and the lessees shall have absolute discretion to sell and deal with
the same in such manner as they think fit and proper.
Clause 5:
The lessees shall also be entitled to erect,
construct and maintain any other machinery as the lessees may think fit and
proper. All machinery brought in and erected by the lessees would remain the
lessees' property and after the termination of the lease the lessees shall be
entitled to remove the same provided always that the lessees shall forthwith
repair and make good all damage caused to the demised premises by such removal
of the lessees' machinery.
768 Clause 7 Clause 7 provides for the
payment of royalty.
The royalty on sugar was to be computed at
the rate of Rupees Seventy-five per 100 maunds of sugar manufactured for the
first five years as well as next five years then at the rate of Rupees eighty
two and annas eight per 100 maunds of sugar manufactured for the third five
years and Rs. 90/- for the fourth five years. The royalty on molasses was
computed at three pies per maund on all molasses sold during each year of the
original lease period and any renewals thereof subject to the payment of a
minimum royalty of Rs. 6,500/per annum.
Clause 8 :
This clause provides that the lessee shall in
addition to the royalty reserved be responsible for all the running expenses of
the factory including salaries and wages and all factory staff and labour and
shall pay all sugar excise duty etc. excepting the ground rents payable to the
landlords and taxes on income chargeable to the lessors and shall fully
reimburse the lessors in respect of such expenses which have already been
incurred by the lessors since the first day of One thou- sand nine hundred and
forty five and property tax.
Clause 17 :
(a)The lessors will keep the demised premises
insured to the full value thereof and shall pay all expenses which will be
incurred for insuring the demised premises.
(b)The lessors shall pay all expenses of
running the lessors' company e.g. Directors fees, Audit fees, Ground rents etc.
but not the running expenses of the factory and premises hereby demised and
shall also pay for all the expenditure for additions, alterations breakdown
and/or renewals and replacement of capital nature (i.e. dubitable to block
account) to buildings and machineries etc. and other similar expenses of a
capital nature on the demised premises.
It appears from clauses 2 and 5 that the
existing machinery which was. owned by the lessor could not be removed and that
the lessee would be entitled to set up additional machinery without
interference from the lessor and that on the termination of the lease the
lessee would be entitled to remove the same without causing any damage to the
property demised. Clause 3 con- 769 templates that if during the period 1945-46
the lessors sell the commodity manufactured the price thereof should go back,
to the lessee. Mr. Choudhury referred to clause 6 which entitled the lessee to
use the railway siding during the period of the lease. But the right of use of
railway siding by the lessee under this clause cannot in any way be construed
as the exercise of control over the business of the assessee. The provision for
minimum royalty of Rs. 65,000/- per annum indicates that the assessee had no
direct interest in the production of the factory. The cumulative effect of
clauses 11, 12, 13 and 14 is that the lessor will have no concern with the
production of the factory which is the principal part of the business,
previously carried on by the lessor. The provisions in clause 17 are that the
lessors shall keep the demised premises insured to the full value and to repair
and replace the machines which are of capital nature. On a scrutiny of all the
clauses of the indenture of lease, our conclusion is that the intention of the
assessee was to part with the entire machinery of the factory and the premises
with the obvious purpose of earning rental income. It was not the intention of
the assessee to treat the factory and machinery etc. as a commercial concern
during the subsistence of the lease. The primary condition for the application
of S. 10 of the Act is that the tax is payable by an assessee under the head
"profits and gains of business" in respect of business carried on by
him. When an assessee does not carry on business at all, section 10 cannot be
applicable and the income that he receives cannot bear the character of profits
of business. As we have already shown there is no direct nexus between the
income of the assessee and the production of the factory. The royalty payable
to the assessee was not paid under clause 7 of the indenture of lease for the
production in the factory. The production was only a measure of the royalty to
be paid and, in any event, the measure of payment had nothing to do with the
character of the payment as a receipt from business or from other sources. It
follows that in the circumstances of this case the income of the assessee
cannot be characterised as income from the activity of the assessee carrying on
any business. The High Court was therefore right in holding that the income of
the assessee was liable to be assessed under section 12 and not under section 1
0 of the Act.
On behalf of the assessee reference was made
to the decision of this Court in Commissioner of Excess Profit Tax, Bombay City
v. Shri Lakshmi Silk Mills Ltd.(1) in which the respondent company which was
formed for the purpose of manufacturing silk cloth installed a plant for dying
silk yarn as a part of its business during the relevant charging accounting
period. Owing to the difficulty in obtaining silk yam on account of the war it
(1) 20 I.T.R. 451.
770 could not make use of this plant which
had remained idle for some time. In August, 1943, the plant was let out to
another company on a monthly rent. The question arose whether the income
received by the, respondent company in the chargeable accounting period by way
of rent was income from business and assessable to excess profit tax. It was
held by this Court 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. But this Court clearly indicated that no general
principle could be laid down which would be applicable to all cases and that
each case must be decided on its own circumstances according to ordinary
commonsense principles. The material facts of Lakshmi Silk Mills Ltd. (1) are
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. There was also no letting out of the premises of
the factory by the assessee. The ratio of the decision in Lakshmi Silk Mills
Ltd.(1) is therefore not applicable to the present case.
Reference was made on behalf of the assessee
to the decision in Narain Swadeshi Weaving Mills v. Commissioner of Excess
Profits Tax(2) in which the assessee firm carrying on a manufacturing business
consisted of three partners, N and his two sons R & G. In April, 1940, a
public limited company was incorporated with the object of taking over the
business of the assessee firm. This company was director-controlled and the
directors were N, his three sons R, G & S and a brother-in-law of G. The
company purchased only the building and leasehold rights from the assessee firm
but took over from it on lease at an annual rent the plant and machinery.
The assessee firm did not thereafter
manufacture anything and it bad accordingly no further trading or commercial
activity. In the circumstances, it was held that letting out of the plant and
the machinery by the assessee to the company could not fall within the
definition of "business" under section 2(5) and as the assessee firm
had, no business during the relevant period to which the Act applied, section
10A could not be invoked by the Excess Profit Tax Authorities. It was however
pointed out that whether a particular activity amounts to any trade, commerce
or manufacture or any adventure in the nature of trade, commerce,- or
manufacture is always a difficult question to answer and no general principle
ran be laid down which would be applicable to all cases and each case must be
decided in the setting and background 'of its own facts. It is evident that the
material facts in- the present case are somewhat different from those of Narain
Swadeshi (1) 20 I.T.R. 451.
(2) 26 I.T.R. 765.
771 Weaving Mills' case(1) for there is no
out-right sale of the building of the factory but only a lease of the factory
premises together with the machinery for a long period of years.
For the reasons already expressed our
conclusion is that the intention of the assessee was not to treat the factory
etc.
as a commercial asset during the subsistence
of the lease.
In other words, the intention of the assessee
was to go out of the business altogether so far as the factory and the
machinery was concerned with effect from 1st June, 1945 and the intention was
to use the income arising from the royalty in its capacity as the owner of the
factory. it follows therefore that the first question was rightly answered by
the High Court in favour of the Commissioner of Income Tax.
As regards the second question the argument
was stressed by Mr. Choudhury that clauses (vi-a) and (vi-b) of section 10(2)
are ancillary to clause (vi) and should be taken to be included within clause.
(vi) as mentioned in sub-section (3) of section 12. It appears that clause
(vi-a) was inserted by section 11 of the Taxation Laws (Extension to Merged
States and Amendment Act, 1949). Clause (vi-b) was inserted by s. 8 of the
Finance Act, 1955 with effect from 1st April, 1955. At the time of making the
amendment under the said Acts, no amendment was made to section 12(3) of the
Act. It was argued by Mr. Choudhury that although this was not done
specifically it followed by implication that additional depreciation allowance
in respect of new assets and development rebate would cornsern within the ambit
of section 12(3). It appears to us that clauses (vi-a) and (vi-b) are not
ancillary to clause (vi) because the scheme of clauses (vi-a) and (vi-b) is
somewhat different. Clause (vi-a) which was inserted in 1949 gives additional
depreciation allowance over and above the initial allowance which was formerly
available under 'the second paragraph of clause (vi) in respect of buildings newly
erected and new machinery and plant but not furniture installed after the 31st
March, 1948. The additional allowance under this clause is confined to not more
than five successive assessments falling within the period from 1st April 1949
and 31st March 1959. Further it is deductible in deter- mining the written down
value, unlike the initial allowance granted under the second paragraph of
clause (vi). Clause (vi-b) was inserted by the Finance Act, 1955. It grants
development rebate in respect of machinery and plant provided that the
machinery or plant is new and has been installed after the 31st March, 1954;
and provided further that it is used wholly for the purpose of the assessee's
business and the particulars prescribed for the purpose of clause (vi) have
been furnished. It is manifest that clauses (vi-a) and (vi-b) introduce a new
scheme (1)26 I.T.R. 765.
772 and cannot be treated as an integral part
of clause (vi) by implication. Apart from this consideration it appears to us
that these clauses were not specifically engrafted by Parliament in section
12(3) and section 12(4) while amending section 10(2) of the Act. It is
therefore not permissible for the Court to read these same clauses by
implication in section 12(3) and section 12(4) of the Act. The duty of the
Court is to interpret the words that Parliament has used, it cannot supply the
gap disclosed in an Act or to make up the deficiencies. "If", said
Lord Brougham, in Gwynne v. Burnell,(1) "we depart from the plain and
obvious meaning on account of such views (as those pressed in argument on 43.
Geo. 3, c. 99) we do not in truth construe
the Act, but alter it. We add words to it or vary the words in which its
provisions are couched. We supply a defect which the legislature could easily
have supplied, and are making the law, not interpreting it" (Cf. Kumar
Kamalaranian Roy v. Secretary of State(2). Accordingly, we are of opinion that
the assessee is not entitled to additional depreciation and development rebate
and the second question was rightly answered by the High Court in the negative.
For these reasons we hold that the judgment
of the High Court dated 20th September, 1963 is correct and this appeal must be
dismissed with costs.
V.P.S. Appeal dismissed.
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