JUDGMENT
P.S. Sahay, J.
1. This is a reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as ” the Act “), and in the statement of case submitted by the Tribunal the following questions have been referred for the opinion of the court :
” (1) Whether, on the facts and in the circumstances of the case, the income received by the assessee-company in terms of the amalgamation agreement was income from business ?
(2) If the answer to the above question is in the affirmative, whether the assessee is entitled to deduction for the expenses ? ”
2. In order to appreciate the points involved in this application it is necessary to state some facts. The assessee, M/s. Selected Jharia Colliery Co, is a private limited company and derives income from colliery. Another private limited company, namely, M/s. East Bhugatdih Colliery (P.) Ltd. is situated contiguous to the assessee-company. By a deed dated March 5, 1963, the assessee-company and Bhugatdih Colliery were amalgamated for the sake of convenience and economic working and development of both the collieries. The amalgamated unit was to be known under the name and style of East Bhugatdih Colliery, and it was to carry on business operations in both the collieries. According to the agreement, the assessee was to get commission at the rate of Rs. 1.69 per ton of all coal raised from the collieries and an additional commission at the rate of 25 p. per ton of hard coke manufactured and despatched. During the assessment year 1968-69, the assessee received commission of Rs. 74,475. The ITO allowed deduction of Rs. 9,835 and assessed on the total income of Rs. 64,640.
3. On appeal, it was contended on behalf of the assessee-company that the income earned was business income and consequently all the deductions claimed by the company should have been allowed, but it was not accepted. Against the aforesaid order another appeal was taken before the Tribunal, which, by its order dated May 30, 1972, accepted the contention raised on behalf of the assessee and allowed the appeal on the basis of the earlier order of assessment passed by the Tribunal. On a consideration of the materials and after perusing the agreement it held that the amalgamation agreement did not create a relationship of lessor and lessee between the two companies. It further held that the sole purpose for executing the document was for good day-to-day working of the two units, and the assessee-company had appointed Bhugatdih Colliery as their agent and thus the relationship between them was that of principal and agent and it could not be treated as a lease, and the income was to be assessed as income from business. In that view of the matter, the case was remanded to the ITO for a fresh assessment in accordance with law, and the assessee-company was given full opportunity to file their papers in support of their case, relying on certain decisions which I will refer to later.
4. At the instance of the department, the Tribunal has stated a case which has been stated above.
5. Mr. B. P. Rajgarhia, learned counsel appearing on behalf of the department, has submitted that on reading the agreement it appears that it was a clear case of lease, because the entire management, control and administration of the company was transferred to Bhugatdih Colliery, and the Tribunal has, therefore, erred in law in accepting the case of the assessee. In support of his contention, reliance has been placed on the decision in New Savan Sugar and Gur Refining Co. Ltd. v. CIT [1969] 74 ITR 7 (SC), where a similar question arose for consideration under the provisions of the old Act of 1922. In order to appreciate the points it will be necessary to refer to some of the terms of the agreement :
” As a result of the amalgamation agreement, East Bhugatdih Colliery Co. is empowered-
(Clause 4 of the agreement :)–to carry on the colliery operations and be responsible for all costs, maintenance and repairs of the collieries of the assessee-company,
(Clause 6) :–it has to bear all the expenditure on account of coal cutting, surface tramming and unloading, despatching, general surface machine maintenance, etc.,
(Clause 7) :–it is responsible for collection of provident fund subscription and for the proper accounting and disposal of employees’ and employers’ subscriptions and contributions thereto,
(Clause 9) :–it is responsible for the proper maintenance of all railway siding and approach lines, wharf walls and carry out all directions of the railway administration,
(Clause 11) :–it is in charge of the day-to-day management of the amalgamated unit and shall be responsible for compliance with the provisions of the Mines Act and Rules and regulations framed thereunder,
(Clause 15):–it has to pay Rs. 1.69 per ton of all coal raised from the coal lands of the assessee-company and an additional 25p. per ton to all hard coke manufactured and despatched out of the coal raised from the coal land of the assessee-company subject to a minimum guaranteed profit of Rs. 7,000 per month. ”
6. Reading the aforesaid terms and conditions of the agreement it is clear that the intention of the assessee was to part with the entire machinery and other units of the concern with the sole purpose of earning rental income, and it was never the intention of the assessee to treat the concern as a commercial concern during the period of the agreement. Thus, there was no direct nexus between the income of the assessee and the production of the colliery. The intention of the assessee, therefore, was clearly to go out of the business for a fixed term of years altogether so far as the colliery and its machinery were concerned and to use the income as the owner of the colliery. The Tribunal, while deciding the matter in favour of the assessee, relied on the case of G. R. Narasimier & Co, v. CIT [1969] 73 ITR 257 (Mad), where the assessee who was the owner of power-looms gave the premises under an agreement for payment of a fixed sum per month and he had absolutely no share in the profits. In that view of the matter, it was held that the document created a relationship of principal and agent and was not a lease. But in the instant case, as I have stated, there was a complete letting out of the premises along with the control and management and the assessee used to get commission on raisings and despatchings, with the sole intention of earning rental income.
7. A similar case came up for consideration before the Supreme Court iu CEPT v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC) and Narain Swadeshi Weaving Mills v. CEPT [1954] 26 ITR 765 (SC). In both the cases, the premises were let out for a fixed period and a part of the machinery had been kept under the control of the assessee himself. Both the cases were considered in the case of New Savan Sugar & Gur Refining Co. Ltd. [1969] 74 ITR 7 (SC) and have been distinguished. The instant case is also clearly distinguishable from the aforesaid two cases, reported in [1951] 20 ITR 451 (SC) and [1954] 26 ITR 765 (SC) and also the Madras case. In the case of CIT v. S. K. Sakana and Sons Ltd. [1976] 102 ITR 437 (Pat) which was a case of a managing contractor, it was held by this court that the receipts thereof were business income, because there was a relationship of principal and agent between the assessee and the managing contractor, which is also clearly distinguished from the facts of this case because of the fact that when it was given for management to a third person the sole object was to have better management to earn more income.
8. Thus, on a careful consideration, I am of the opinion that the Tribunal has committed an error of law in accepting the contention of the assessee. The answer to the first question is in the negative, and, in view of this finding, the second question does not arise. The reference is, therefore, answered in favour of the department ; but since there is no appearance on behalf of the assessee, there will be no order as to costs.
Sarwar Ali, J.
9. I agree.