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.
The appellant (hereinafter referred to as "the
assessee" was carrying on the business of crushing sugarcane 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 shareholders 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 extraordinary general meeting of the shareholders 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 section 10 of the
Income-tax Act and the assessee should be allowed depreciation and development
rebate in accordance with clause (via) and /clause (vib) of sub-section (2) of
section 10 of the Income-tax Act. The Income-tax Officer assessed the income
under section 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 (via) and (vib) 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 'profits and gains of business, profession or vocation' in
respect of the profits or gains 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 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, or the
machinery or plant being new, not being machinery or plant entitled to the
development rebate under clause (vib), 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 --........
(c) the aggregate of all allowances in respect of
depreciation made under this clause and clause (via) 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 ;
(via) 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 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 ;
(vib) 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 provisions of clauses
(iv), (v), (vi) and (vii) of sub-section (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 erecte d 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.
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 thousand 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., debatable 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
contemplates 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 section 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 10 of the Act.
On behalf of the assessee reference was made to the
decision of this court in Commissioner of Excess Profits Tax v. Shri Laxmi Silk
Mills Ltd. in which the respondent company which was formed for the purpose of
manufacturing silk cloth installed a plant for dyeing silk yarn as a part of its
business during the relevant chargeable accounting period. Owing to the
difficulty in obtaining silk yarn on account of the war it 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 profits 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 common
sense principles. The material facts of Laxmi Silk Mills Ltd. 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. is therefore
not applicable to the present case. Reference was made on behalf of the assessee
to the decision in Nayain Swadeshi Weaving Mills v. Commissioner of Excess
Profits Tax, in which the assessee-firm carrying on a manufacturing business
consisted of three partners, N and his two sons, R and 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 and 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 had 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 profits tax authorities.
It was however pointed out that whether at 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
can 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 Weaving Mills' case for there is no outright 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 (via) and (vib) 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 (via) was inserted by
section 11 of the Taxation Laws (Extension to Merged States and Amendment) Act,
1949. Clause (vib) was inserted by section 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 come within the ambit of section 12(3). It appears to
us that clauses (via) and (vib) are not ancillary to clause (vi) because the
scheme of clauses (via) and (vib) is somewhat different. Clause (via) 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 determining the written down value, unlike the initial
allowance granted under the second paragraph of clause (vi). Clause (vib) 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
(via) and (vib) introduce a new scheme 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 make up the deficiencies. "If", said Lord Brougham, in
Guynne v. Burnell, "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 " [Kumar
Kamalaranjan Roy v. Secretary of State]. 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.
Appeal dismissed
