Guntur Merchants Cotton Press Co. Ltd. vs Commissioner of Income Tax

Raghuvir J.

The Guntur Merchants Cotton Press Co. Ltd., Guntur, is a public limited company (company). The head office of the company is at Guntur. The branch office is at Narasaraopeta. At both the places, the company runs its factories. At the head office, the factory is called as ''tin plate factory'' and the factory at the branch office is known as ''cotton pressing factory''. There are godowns at both the places. The company owns a vacant site at the branch office. The company stopped its business from 1-1-1965. On their representation, the ITO assessed the income of the company derived from business up to the assessment year 1971-72, though no business was conducted between 1-1-1965 and 1-1-1973. In the order of assessment years 1972-73 to 1975-76, the ITO, however, rejected their assertion that they are running any business. The Assistant Commissioner, on appeal, reversed the decision of the ITO. On a further appeal to the Tribunal, the decision of the ITO was restored. Thereupon, two questions are referred to this Court. One out of the two questions referred to this Court and relevant to the subject reads as under:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the letting of godowns at Guntur and Narasaraopeta and the letting of the factory with machinery at Narasaraopeta and Guntur did constitute business of the assessee ?"

When a business concern in any particular period has not carried on business is a question intermittently dealt by the Courts under the income tax Act, 1961 (''the Act''). In considering this question, whether the concern is quiescent at times, is a difficult question for determination. It is in this area the Parliament did not think fit to lay down any principle. The Courts are left to evolve one theory or the other to grapple with the question. There is, however, necessity to lay down a general principle for determination under the Act. In the absence of a general test, we certainly do not attempt to lay down any general principle which can apply in all contingencies. Before the Supreme Court, not less than four times by this date, the question arose and yet no general principles are laid down. What is more, repeatedly the Supreme Court held that it is not possible to lay down a formula which can be applied to all cases. Thus, the Parliament has not prescribed general tests and the Courts have not laid down any specific tests. The subject is hedged in such difficulties. Now in this regard, we may refer to the four cases dealt by the Supreme Court.

In Commissioner of Excess Profit Tax, Bombay City Vs. Sri Lakshmi Silk Mills Ltd., (SO, it was held at page 456, ''no general principle can be laid down''. The question, however, was considered from the stand when a concern ''ceased to be a commercial asset''. The question was put in the alternative form-when an assessee derived income from a commercial unit to state ''whether a concern is capable of being used for profit''. The question again was considered in Narain Swadeshi Weaving Mills Vs. The Commissioner of Excess Profits Tax, and broadly the question was considered from the standpoint of when a concern ceased to be a commercial asset and the referred question was returned. In the third case in New Savan Sugar and Gur Refining Co., Ltd. Vs. Commissioner of Income Tax, Calcutta, it was repeated that no general principle can be laid down. The fourth occasion arose in Karanpura Development Co. Ltd. Vs. The Commissioner of Income Tax, West Bengal, In this case, the concept of ''commercial asset'' was not proffered, but the facts were considered at page 377 from the standpoint of ''trading receipts in business''. What activity of a concern is considered as cessation of trading operation, it was observed :

"... The dividing line is difficult to find, but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned."

This Court in Commissioner of Income Tax, Andhra Pradesh Vs. Aryan Industries (P.) Ltd., observed, ''the totality of circumstances are to be considered to hold whether an asset ceased to be a commercial asset''. Thus, it would be seen there is no consensus though there is an attempt to lay down a general principle. There is discussion in some cases of the State High Court whether it is from the standpoint of full in activity of the business or what is the nature of trading receipts or whether as a fact the commercial asset ceased to do business, etc.

In Whiteman and Wheatcroft on income tax and Surtax, 1971 edition, p. 238, the authors propounded two theories-one relevant to the ''the nature of any change in the trading activities'', secondly, ''any change in ownership of the trade terminating the existing trade and commencing a new trade''. The two questions merely spread out the issue in general terms. On a subject which is so much defused, we do not wish to rush into an area where the Parliament, the Supreme Court and the other State High Courts have not laid down any rule. However, we may, for the purpose of this case, state that the instant case can be discussed from the standpoint of ''intention'' and that intention can be culled out from the following documents and ''conduct'' of the company.

The company stopped, in the instant case, its business in 1964 due to non-availability of cotton in the market. Till the assessment year 1972-73, their income was assessed as ''business'' income obtained from the rents of the factories and godowns. The machinery of the cotton pressing factory was renovated in the relevant accounting year of 1973-74 by expending a sum of Rs. 16,191. A further sum of Rs. 6,639 was expended for repairs in the accounting year relevant to the assessment year 1974-75. The factory at the branch office, thus, was idle between 1-1-1965 and 1-1-1973, and was leased out to Dechiraju Rama Rao Sons Cotton Mills Co. under a lease deed on 1-1-1973 for five years along with the factory at the head office. The lease amount was Rs. 24,000 per annum. Rs. 16,000 was referable to the lease of the machinery and Rs. 8,000 was for godowns and vacant site. On expiry of lease, the factory was to be delivered back to the lessor in a working condition. The machinery, the equipment, the fixtures and the building were all agreed to be delivered in an undamaged state. The staff of the company consisting of a clerk, a peon, a mechanic and a watchman were continued and under the lease agreement, their services were lent to the lessee who was to pay salary and allowances to them with the usual conditions relevant to good conduct and behaviour.

The company by a resolution on 22-8-1966, appointed N. Rama Rao as Director-in-charge of the machinery equipment, boiler engine, boiler lathe and oil engine for three years, i.e., till 28-10-1969. The company in its letter on 1-3-1968, addressed to the Registrar of Companies, explained the necessity for incurring expenditure on establishments. It was represented, that the staff continued to attend to the correspondence of the company, the Court work and miscellaneous work. As to their continuance, it was represented that they require the experience of the personnel for, as and when they revive the business, their services may not be lost to them. In another letter on 17-2-1970 addressed to the Company Law Board, the company furnished particulars of their machinery both at the head office and at the branch office and stated due to scarcity of cotton, they are not able to carry on the business of ginning and pressing of cotton. They expressed their desire to revive the business of pressing the bales of cotton soon after the adverse circumstances are got over by them. In this letter, the lease agreement executed by them on 1-1-1973 was referred to revive the business.

The learned counsel for the company in this regard, apart from referring to the above documents, stated four circumstances as indicating the ''conduct'' of the company to show that the ''asset'' has not ceased to be a commercial asset. The counsel recounted (a) the business of the company was not wound up, (b) the staff of the company were not terminated; (c) the machinery was renovated from time to time; and (d) expenditure was incurred by the company periodically. It was argued, the company had not ceased to function especially as it was as pointed the executive director was looking after the machineries (sic). The working personnel were retained. These circum stances are pressed to hold that the factories at two places have not ceased to be commercial assets.

From the above facts we see between 1964 to 24-10-1973, the factory at the branch office was idle. The machinery was allowed to remain idle. In the accounting year 1972-73 a sum of Rs. 16,191 was incurred for the renovation of the factory. This expenditure was incurred before the execution of the lease deed and that the tenant may be delivered machinery in a working condition. Another sum of Rs. 6,639 was incurred for repairs in the period relevant to the assessment year 1974-75. These two items of expenditure cannot be understood as periodical renovation of factories. Further, the godowns at the branch office was Jet out to the National Tobacco Company. The godown at the head office also was let out where the tenants stocked tobacco. In this connection, the Tribunal observed when tobacco has been stocked, that circumstance is a factor against the contention of the company. It is possible to explain that circumstance on vacation of the premises by the tenant it is possible to conceive again cotton can be stored in the godowns (sic).

The question to be considered is, whether there was any intention on the part of the company to revive its business when their godowns were let out to tenants and their factories were leased. The contention of the company is that the business was stopped due to non-availability of cotton. The stoppage was for the time being to tide over the difficulty of non-availability of cotton. The fact that the machinery was let out to the tenants for pressing cotton is a factor which can be enumerated against the contention that the cotton is available to the tenants. In the course of the debate, the learned counsel for the company repeatedly reminded us that in considering the question of intention on the part of the company, this Court may not take into consideration as to what had transpired subsequent to the orders passed by the ITO. We may broadly assent to such a restriction but that circumstance is not decisive here on the facts. On the evidence available on record and on consideration of circumstances relevant to the four assessment years, we are in agreement with the conclusion reached by the Tribunal to hold that the company exhibited no intention to revive the business. Therefore, we return the question with the answer in the negative in favour of the revenue and against the assessee.

The second question referred reads as under:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in holding that the Appellate Assistant Commissioner was correct in disallowing any part of the legal expenses ?"

The above question arose when the company claimed a deduction of (a) Rs. 9,142 for the assessment year 1972-73; (b) Rs. 750 for the assessment year 1974-75; and (c) Rs. 2,300 for the assessment year 1975-76. The ITO rejected claims in (a), (b) and (c). The AAC as respects (a) allowed Rs. 4,400 and in full the amounts claimed in (b) and (c). The revenue did not appeal to assail the allowance of Rs. 4,400 or Rs. 750 and Rs. 2,300. The Tribunal nevertheless held, ''the order of the ITO was sustained''. Thus, in the background of these facts the second question is capable of a narrower connotation and wider connotation to include the entire sum set out in (a), (b) and (c). Having regard to the background of facts, the narrower connotation of the question is to be returned in answer.

The company, faintly it is argued, can claim under clause (iii) of section 57 of the Act. On the facts per se it cannot be said that expenditure incurred was wholly or exclusively for the purpose of earning income. There is no material to hold that clause (iii) of section 57 has any application. Therefore, the expenditure is not a business expenditure. It is not suggested under any of the provisions of the Act that the legal expenditure is deductible. We, therefore, return the question to answer in the affirmative, in favour of the revenue and against the assessee. The two questions are answered accordingly. No costs.