JUDGMENT
K. Shivashankar Bhat, J.
1. At the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following questions to this court under section 256(1) of the Income-tax Act, 1961, in a proceeding for the assessment year 1971-72 :
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the lease money of Rs. 8,80,000 received by the assessed during the assessment year 1971-72 was assessable under section 28 of the Income-tax Act, 1961, as ‘income from business’?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in holding that the assessed-company was entitled to development rebate on new machinery installed during the accounting period relevant to the assessment year 1971-72 which was leased out?”
2. The assessed company owned a factory in Faridabad; wherein it had installed machinery, etc., for manufacturing various items of iron and steel including heavy castings. The accounting year of the assessed-company ends every year on March 31. It started manufacturing operations for the first time on December 28, 1968. The manufacturing was done by the company up to May 31, 1970. Thereafter, it was decided by the aforesaid company that it should lease out the factory building, machinery, etc., to a sister concern to begin with for a period of one year. The circumstances under which and the terms and conditions on which the aforesaid properties were leased were contained in the lease deed dated June 1, 1970. In terms of the said lease deed, the company had mortgaged its building and plant, etc., to Messrs. Haryana State Financial Corporation for a sum of Rs. 12 lakhs whereon it had to pay interest at 9 1/2 per cent., besides it had various other creditors to whom it had to pay interest at 10 to 15 per cent. The assessed also needed more finance to the tune of Rs. 15 lakhs to meet the cost of furnace and rolling mills already ordered for being set up in the existing premises. Messrs. Northern India Finance Co., a partnership firm, agreed to advance to the assessed the aforesaid finance. For these “economic reasons, and for the betterment of the company’s prospects”, it was decided by the shareholders of the company in the meeting held on March 30, 1970, that instead of running the above mills itself, it should give on lease the furnace and the rolling mills presently installed and the furnace and rolling mills to be installed to the lessee firm on, inter alia, the following terms and conditions stated in the lease deed dated June 1, 1970 :
(i) That the original lease of the deed would be for one year. But the option was given to the lessees to seek extension of the period by exercising such option through a communication before the expiry of the original terms of the lease.
(ii) That the lease money, payable from 1st day of June, 1970, to 30th day of September, 1970, would be Rs. 40,000 and thereafter it would be increased to Rs. 1,20,000 per month with effect from October 1, 1970, on the second furnace and rolling mills being set up.
(iii) That the stock-in-trade, raw material and semi-finished goods would be delivered by the Lesser to the lessee on such price as may be agreed upon between the parties.
(iv) That the Lesser had entered into certain contracts with the Railways in respect of which the lessees would undertake to manufacture and supply the same to the Railways at rates agreed upon by the lessees and the Railways and on such supplies by the Lesser to the Railways, the Lesser would be entitled to a commission at the rate of ten per cent. only on the amount of the bills.
(v) The Lesser company had placed certain orders for the purchase of the raw material. It was agreed between the Lesser and the lessee that all such supplies from today, i.e., June 1, 1970, will be accepted by the lessees on the same terms and conditions as if these were orders placed by the lessees.
3. The aforesaid lease was continued from year to year and the last date up to which the lease was agreed to be extended was December 31, 1975. On October 6, 1975, the lessees again wrote to the Lesser to extend the lease up to August 31, 1976, and, accordingly, the following resolution was passed on October 29, 1975, by the assessed-company :
“Resolved that the lease period of the factory building, plant and machinery be and is hereby extended by another term of eight months, i.e., from January 1, 1976, to August 31, 1976, on the existing terms and conditions and the lessee, Messrs. Northern India Finance Company, be informed accordingly.”
4. It was further resolved that :
“In no case any further extensions will be allowed as, time to time, extension was allowed only in view of the pendency of execution of contract of Beas Purchase Organisation.”
5. The assessed had tendered for supplying heavy castings and other machinery to Beas Project Works some time in 1973 and the tender of the assessed-company was accepted in October, 1973. The assessed placed an order for manufacturing the said heavy castings with the lessee firm which manufactured the same in the factory premises of the assessed-company and it was in this connection that the lease was being extended after 1973 in favor of the lessees with a view to enable them to manufacture the aforesaid heavy castings so that the Lesser could supply them to the Beas Project Authorities.
6. In terms of the lease deed, the assessed received the sum of Rs. 8,80,000 during the accounting period relevant to the assessment year 1971-72 from the lessees as lease rent. Before the Income-tax Officer, the assessed claimed that the said rent was assessable as business income and not as income from other sources. In addition, the assessed’s further claim was that it should be allowed development rebate on the new machinery valued at Rs. 19,92,365 which was installed during the previous year and leased out to Messrs. Northern India Finance Co. P. Ltd. The Income-tax Officer did not accept the assessed’s claim and treated the income from lease rent as income from other sources. As a consequence of his above finding, he declined to allow development rebate to the assessed.
7. The Appellate Assistant Commissioner held that the income of the assessed was business income falling under section 28 of the Act and not to be assessed under section 56 as “from other sources”. For the same reason, he granted the assessed relief of development rebate also.
8. The Appellate Tribunal also upheld the assessed’s claim on both counts. It held that the commercial assets of the company were temporarily let out to the lessee and, therefore, the income derived by the assessed from this lease was its business income. The development rebate was also held as allowable :
Learned counsel for the Revenue contended that the circumstances of the lease in question, read with its terms, clearly show that the Lesser had given up the intention of continuing the business and the facts of the case are similar to the one involved in the decision of the Supreme Court in New Savan Sugar and Gur Refining Co. Ltd. v. CIT [1969] 74 ITR 7.
9. Learned counsel pointed out that even the stock-in-trade, raw material and semi-finished goods as on the date of the lease were sold to the lessee, that the lease continued for several years till August 31, 1976; even the tender for supply of heavy castings and other machinery to Beas Project Works, made by the assessed, was supplied after getting them manufactured by placing orders with the lessee.
10. The Appellate Tribunal has given a finding (which is prima facie a finding of fact) that the assessed cannot be held as having ceased its business of manufacturing iron and steel goods, heavy castings, etc., and of selling the same; it had temporarily suspended its activity of manufacturing the goods directly, in view of its financial situation; the supply made by the assessed to Beas Project itself shows that it continued in its business; temporarily it had changed its mode of doing the business. The commercial assets of the assessed continued to belong to it, which were leased to earn income.
11. While we are in agreement with this conclusion, it is also necessary to point out that the stock-in-trade, etc., sold to the lessee, as on the date of the lease deed was an inevitable consequence of the lease and from that it cannot be inferred that the assessed had decided to close its business. The fact that the machineries were installed even after the lease, is a factor indicative of the assessed’s intention to take up manufacturing activity in the near future.
12. The decision of the Supreme Court in New Savan Sugar and Gur Refining Co. Ltd.’s case [1969] 74 ITR 7 is based on the particular facts of the said case. The lessee in the said case was permitted to set up additional machinery without interference from the Lesser (vide page 14). The cumulative effect of the several clauses of the lease deed, was that the Lesser had no intention to treat the factory and machinery, etc., as a commercial concern during the subsistence of the lease. The Lesser (assessed) ceased to carry on any business, and it seems the assessed’s only income was the royalty received by it under the lease. However, after referring to an earlier decision in CEPT v. Shri Lakshmi Silk Mills Ltd. , the court held, at page 15 :
“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 common sense principles.”
13. In a subsequent decision of the Supreme Court in CIT v. Vikram Cotton Mills Ltd. [1988] 169 ITR 597, the above decision was confined to the special facts of the said case. The business assets of the assessed were let out for ten years, in the said case. The management of the company was transferred to a board of trustees appointed by the High Court. The question was whether the rental income was business income of the company. At page 606, the court held :
“In each case, the intention has to be gathered as to whether the commercial asset was intended to be exploited by the assessed or whether it was intended to be used by letting it out for a temporary period. It depends upon the facts and circumstances of each case.”
14. After referring to the facts, the court held, at page 607 :
“In the context of these facts, it appears that it was a possible conclusion that the assessed intended that there should be a temporary suspension of the business for the purpose of reconstruction of the company and for that matter, there must be stoppage of the user of the machinery by the assessed. It was a temporary lease though for ten years or 19 years on renewal and after the expiry of the period, the property reverted back to the assessed.
It is predominantly a matter of intention. Intention is an inference to be drawn from the relevant facts. All the relevant facts, it appears, have been considered by the Tribunal from the correct standpoint, i.e., from that of an ordinary prudent businessman or as in England, it used to be ‘man on the top of the platform omnibus’ or ‘director’s arm chair’. If, on that test, a plausible conclusion has been drawn, no objection can be taken.
On that basis, applying the correct principle, the Tribunal found that the intention was not to part with the machinery but to lease it out for a temporary period as a part of exploitation. In such a circumstance, it cannot be said that no business was carried on and the income derived from the machine letting was only a rental income. There was a temporary suspension of business for a temporary period with the object of tiding over the crisis condition. There was never any act indicating that the assessed never intended to carry on the business.
In the background of these principles and in the facts and circumstances of the case so found, we cannot say such a finding was either perverse or not sustainable.”
15. In the instant case, initially the lease was only for one year. Subsequently, it was renewed in view of the assessed’s financial requirements. The total period of the lease was about six years. The assets were commercial assets and when the assessed had to supply articles to the Beas Project, it got them manufactured in the very factory. From this it is also clear that the assessed continued in business. The suspension of the manufacturing activity was only for a temporary duration, extended from time to time, which in all was for about six years. The Appellate Tribunal has, by applying the correct principles, come to the conclusion that the assessed continued in business and the activity in the factory by the assessed was suspended as a temporary measure.
16. Necessarily, the answer to the first question shall have to be in the affirmative and against the Revenue. It is answered accordingly.
Re : Second question :
17. Admittedly, the machinery in respect of which the rebate is claimed under section 33 of the Act, was purchased by the assessed and installed in the leased factory, after the grant of the lease. Learned counsel for the assessed contended that if the income derived by the assessed after the lease, is its business income, it follows that the said income was derived by using the machinery owned by the assessed. This was also the view taken by the Appellate Tribunal.
18. We cannot agree. To attract section 33 of the Income-tax Act, 1961, at least two conditions should be satisfied – (i) the machinery or plant in question should be owned by the assessed; and (ii) it is wholly used for the purposes of the business carried on by him.
19. In the instant case, the machinery was leased; the lessee had control over the use of the machinery; the assessed had no control over its user. The machinery, as a fact, was used by the lessee. By the mere lease of the machinery; even if it is to be assumed as a mode of “using” the machinery to derive the business income, it cannot be held that the machinery was wholly used for the business of the lessee. The machinery was also used for the business of the assessed. It may be that the concept of wholly used is not the same as “exclusively used”. But it conveys the meaning of “exhaustive user” of the machinery, as by the assessed. This is possible only when the assessed has control over the user. The term “wholly used for the business” is referable to the manner of its user. The meaning of the word “user” cannot be continued to the actual derivation of a financial benefit; it includes a proper control over the machinery in the matter of its utilisation, running, repairing, replacement, etc.
20. The question need not detain us longer, in view of the observations of the Supreme Court in Mahabir Cold Storage v. CIT [1991] 188 ITR 91. At page 96, the court held :
“The capital asset, namely, the ship, plant or machinery, should be owned by the assessed during the relevant accounting year and wholly used in the business carried on by the assessed during the previous year in question. There must exist unity of ownership and user in the business. The emphasis for entitlement to rebate accrues from the use of the machinery or the plant by the owner for the purpose of its business resulting in the manufacture of the goods or services. It is not the ownership of the goods or the resultant end-product of the raw materials used that is relevant. The only relevant consideration is that, during the previous year or part of the relevant period, ownership of the asset shall remain with the assessed. Only the successor in interest of the business, in accordance with the provisions of the Act, so long as the twin requirements under section 33(1) are fulfillled, is entitled to the benefit. But, when the unity of ownership and use of the asset in the business are disrupted or a branch of an earlier business is taken over by a new firm which exists simultaneously with the other branches of the old business, the benefit of development rebate under section 33(1) does not extend to either firm. Take, for instance, a case where an assessed leases the asset to another person during the previous accounting year, the use of the plant and machinery is not for the business of the assessed for which the development allowances were accorded under section 33(1) since the machinery was not wholly used by the assessed for his/its business during the previous accounting year. Suppose the plant or machinery was used for a purpose other than the business of the assessed, then also the assessed is not eligible for development rebate, obviously for the reason that the plant or machinery was not used for the purpose of the business of the assessed in the previous accounting year or a portion thereof.”
21. The idea is neatly summed up (if we can say so with respect to the learned judges) when the court said, “There must exist unity of ownership and user in the business”.
22. The answer to the second question, therefore, is in the negative and in favor of the Revenue.
23. Reference answered accordingly.