Damodar Mangalji and Co. Pvt. Ltd. vs Commissioner of Income Tax

Dr. B.P. Saraf, J.—By this reference u/s 256(1) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal has referred the following question to this court for its opinion :

"Whether, on the facts and in the circumstances of the case, the hire charges received from Messrs. Sesa Goa (P.) Ltd. was assessable u/s 28 under the head ''Profits and gains of business'' and not u/s 56 under the head ''Income from other sources'' ?"

The assessee is a company engaged in the business of mining, hiring of barges and other retail business. It has been carrying on the above business during the last fifteen years. In the year 1950, it had acquired six barges which were used for the purpose of carrying ore belonging to it from its plot to the ships. These barges were deployed by the assessee on voyage and/or time charter to others as and when it did not have sufficient cargo of its own.

For the purpose of deployment of these barges on hire, the assessee had engaged a staff of about 51 people and set up a workshop of its own for repairs and maintenance thereof. During the last six years, the deployment of barges on voyage charter and time charter consistently resulted in a loss or in a very meagre profit. The assessee, therefore, decided to change the mode of operation of the business of the barges from the business of use of barges for voyage charter to deployment on bare-boat charter, i.e., giving the barges on hire without crew and staff. As a consequence of this change, the staff, i.e., crew became surplus and was retrenched. The repairs workshop owned by the assessee was also handed over to the charterers. The dispute out of retrenchment of staff engaged in business of deployment of the barges on voyage charter and/or time charter by the assessee went up to the Industrial Tribunal which gave its award in July, 1970. It was held that the 51 barges-crew retrenched for which they were entitled to retrenchment compensation as per the provisions of section 25F of the Industrial Disputes Act, 1947.

There is no dispute in this case that until the year of change in the mode of deployment of these barges, the income therefrom was treated as income from the business and assessed as such. The controversy arose only after the change of user of these barges by the assessee in the assessment years 1971-72 and 1972-73. As stated earlier, during these years, the assessee let our these barges on hire to Messrs. Sesa Goa (P.) Ltd. with effect from July 1, 1970. The repairs workshop was also transferred to the said Sesa Goa (P.) Ltd. Company. The assessee, as in the past, treated the income from "bare-boat charter" as business income as, according to it, it was merely a change in the method of development of barges and not discontinuance of the business of running barges. The Income Tax Officer rejected this contention of the assessee and assessed the income from "bare-boat charter" of barges as "income from other sources".

Against the order of the Income Tax Officer, the assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner accept the contention of the assessee and held that the income from hire of barges was assessable u/s 28 of the Act under the head "Profits and gains of business". The Revenue appealed to the Income Tax Appellate Tribunal. The Tribunal, on consideration of the facts and circumstances of the case, held that the income derived by the assessee by way of hire charges on charter terms constituted "income from other sources :" and not "income from business". The Tribunal accordingly allowed the appeal of the Revenue, set aside the order of the Appellate Assistant Commissioner and restored that of the Income Tax Officer. Hence, this reference at the instance of the assessee.

We have heard counsel for the assessee at length. According to the assessee, there was no discontinuance of business of running the barges and what was changed was only the method of deployment. Despite this change, the business remained the same. Hence, the character of the income also continued to be "income from business".

We have carefully considered the above submission. We find that the Tribunal has carefully examined the entire facts and circumstances of the case and the terms of the agreement dated July 1, 1970, between the assessee and charterers, Messrs. Sesa Goa (P.) Ltd. On a careful consideration of the same it has come to a finding that all the barges were made over to the characters with full responsibility of the charterers to maintain them. Even the workshop was handed over by the assessee to the characters. The maintenance and repairs of the barges was also not looked after by the assessee. It was the responsibility of the charterers to maintain and repair the same. The charterers had to bear the entire responsibility even of the continuance of validity of the survey certificate, etc. The crew was engaged by the charterers. Insurance was also the responsibility of the characters. All fees, duties, taxes, etc., payable to the port trust or to the Government or to such other authorities were all on the charterer''s account and not on the assessee''s account.

On a consideration of the totality of the facts and circumstances of the case, the Tribunal arrived at a finding that the intention of the assessee was to part with the barges and the workshop with the obvious purpose of earning rental income and not to treat the barges as a commercial asset during the subsistence of the lease or the charter agreement. The Tribunal, therefore, the income from hire charges had to be "income from other sources". In such a factual situation, we do not find any legal infirmity in the finding arrived at by the Tribunal. The ratio of the decision of the Supreme Court in Commissioner of Excess Profit Tax, Bombay City Vs. Sri Lakshmi Silk Mills Ltd., on which reliance is placed by counsel for the assessee, has no application to the facts of the present case. In that case the assessee-company which was formed for the purpose of manufacturing silk yarn installed a plant for dyeing silk yarn during the relevant accounting period. As owing to the difficulty of obtaining silk yearn 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 assessee by way of rent was income from business and assessable to excess profits tax. It was held by the Supreme Court that a part of the assets did not cease to be commercial assets of that company merely because it was temporarily put to a different use or let out to another and accordingly the income from such assets would be profit of business, irrespective of the manner in which they were exploited by the company. While saying so, it was clearly indicated by the Supreme Court 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 circumstance according to ordinary commonsense principle. The material facts of the present case are totally different from the facts of the above case. In the case before the Supreme Court, 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 no letting out of the premises or the factory by the assessee. It was on a consideration of also these factors that the Supreme Court held that the assets did not cease to be commercial assets of the business of the assessee. The ration of the above decision, therefore, has no application to the present case, where the assessee formally and finally discontinued its business of deployment of the barges on voyage charter and time charter and let out the barges on permanent basis. The staff engaged in this business were retrenched and the workshop set up for maintenance and repairs of the barges handed over to the charterers of the barges. In the instant case, the intention of the assessee not to treat these barges as a commercial asset is evident from the setting and background of the facts of this case. The object of letting our the barges in the instant case was clearly to discontinue the business of deployment of barges on voyage charter and time charter. The income from letting out of the same was, therefore, not in its capacity as owner of the barges. Such income cannot be assessed u/s 28 as income from business. It was rightly assessed as income from other sources.

The above conclusion of ours gets full support from the decision of the Supreme Court in New Savan Sugar and Gur Refining Co., Ltd. Vs. Commissioner of Income Tax, Calcutta, . In that case, the assessee was carrying on the business of crushing sugarcane and gur refining. Its managing agents wrote a letter addressed to its shareholders referring to the alarming increase of Government interference in the affairs of the sugar industry in Bihar, the increase of wages of the workers, the levy of a cess and deterioration in cane crops, and advising the acceptance of an offer of lease of the company as a running concern. At an extraordinary general meeting held on March 5, 1946, the directors were authorised to enter into a lease; and the lease was given with effect from June 1, 1945. The lease was originally for a period of five years with three options of renew for similar periods on the part of the lessee and an option to the assessee-company to terminate it in any year after the first two years. The assessee''s option was not exercised. The consideration of the lease was a royalty payable on the manufacture of sugar and gur at rates specified therein, subject to a minimum royalty of Rs. 65,000 per annum. The lease deed provided that the existing machinery could not be removed by the lessee and that the lessee would be entitled to set up additional machinery without interference from the lessor and to remove them on the termination of the lease. The lessee was entitled to use the railway siding during the period of the lease. The lessee was responsible for all the running expenses of the factory and excise duty on sugar, etc. The cumulative effect of the various clauses of the deed was that the assessee would have no concern with the production of the factory. Under one of the clause of the deed the lessor had to insure the premises for their full value, pay all expenses of sunning the company and also for all expenditure for additions, alterations, breakdown and/or renewals or placement of a capital nature. The question was whether the income which which arose to the assessee for the assessment year from the lease should be assessed u/s 10 of the Indian Income Tax Act, 1922 as "profits and gains of business" or u/s 12 of the Act as "income from other sources". On a consideration of the terms of the lease deed, it was held by the Supreme Court 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 and not to treat the factory and the machinery as a commercial asset during the subsistence of the lease. 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 June 1, 1945. The income from the lease could not be assessed u/s 10 as "income from business" but was liable to be assessed u/s 12 of the Indian Income Tax Act, 1922, as "income from other sources".

This decision of the Supreme Court squarely applies to the facts of the present case.

We are, therefore, of the clear opinion that the Tribunal was justified in holding that the hire charges received by the assessee constituted "income from other sources" and not "income from business" as contended by the assessee. Accordingly, we answer the question referred to us in the negative, i.e., in favour of the Revenue and against the assessee.

We make no order as to costs.