COMMISSIONER OF INCOME TAX Vs. UNIVERSAL PLAST LTD

JUDGEMENT

(1.) In this reference under Section 256(2) of the Income-tax Act, 1961, the following question of law has been referred to this court :

(2.) Shortly stated, the facts are that the assessee is a limited company. The assessment year involved is 1977-78. The assessee, for the purpose of carrying on its business, set up a factory known as UPL Factory and installed plant and machinery and other equipment. But the assessee company was not running the business well for the past two years, and, consequently, the factory was leased out on leave and licence basis to Messrs Leatherite Industries Ltd., under an agreement dated March 30, 1977. The agreement was effective from January 1, 1977. The lease under the agreement was for seven years with an option for a further three years. The leave and licence money was determined at Rs. 24 lakhs and 25 per cent. of the net profit of the UPL Factory with effect from April 1, 1977. The leave and licence for the relevant assessment year was in operation only for three months. The UPL Factory did not earn any profit and, consequently, the assessee was paid the leave and licence fees of Rs. 6 lakhs. The assessee included this licence fee as part of its business income, obviously on the ground that the lease was also one mode of exploitation of its commercial assets. The Income-tax Officer, however, treated the said licence fee as income from other sources. He did not assign any reasons for the classification of the income under the head "Other sources "instead of business income. Thus, the facts relating to the question as to the nature of the leave and licence had not been discussed by the Income-tax Officer in the assessment order. The Commissioner of Intome-tax (Appeals), however, held that the leave and licence fee received by the assessee was its income from "business and the Income-tax Officer was wrong in classifying the income under the head "Other sources". Against the said finding of the Commissioner of Income-tax (Appeals), the Department came in appeal before the Tribunal and canvassed that the Income-tax Officer was correct in treating the income as income assess able under the head "Other sources" and not under the head "Profits and gains of business". The Tribunal, however, affirmed the order of the Commissioner of Income-tax (Appeals). The Tribunal found that the assessee, after having set up the factory situated in Ghaziabad, commenced manufacturing business. The business ran for two years resulting in losses. The assessee was facing financial difficulties and was hardpressed with the urgency of the need to repay the loans taken by it from the various financial institutions. Thus, the assessee ran into financial stringency with respect to its factory. Under the compelling circumstances of consecutive losses for two years, it had to lease out the factory to Messrs. Leatherite Industries Ltd. on leave and licence fee with effect from April 1, 1977, by an agreement dated March 30, 1977, as aforesaid. The Tribunal analysed the various covenants of the agreement. First, the leave and licence fee was determined on the basis of Clause 2(i) of the agreement at Rs. 24 lakhs per annum. The assessee was also entitled to 25 per cent. of the net profit from the said factory from April 1, 1977. According to the Tribunal, this covenant shows that the assessee was interested not only in leave and licence fee but also in the net profit from the factory. The said covenant also included the mode of determination of the net profit for the purpose of calculating 25 per cent. payable to the assessee as part of the profit to be appropriated to the assessee's account as part of the consideration for that leave and licence agreement. Thus, the assessee maintained a commercial interest in the profit of the factory as well as in the determination of the net profit. In Clause 3(ii), it was indicated that the licensee was to bear the burden to pay the creditors as indicated in Clause 2(ii)(a) directly out of the leave and licence fee. It also indicated the intention of the assessee to liquidate its debts to the various creditors so that a condition is created for the assessee to take over the factory at the opportune time. The Tribunal further laid special stress on the fact that the agreement required the licensee to look after and maintain the said factory in a proper state and condition and, in Clause 3(v), the assessee reserved to itself the right to enter the factory premises and inspect the premises, plant and machinery with or without their agent, inspector, engineer or other personnel. This also, according to the Tribunal, indicates that the assessee was interested in the preservation of the assets for future exploitation by it as commercial assets. From this factual backdrop, the Tribunal drew the inference that its earning through the leave and licence fee was a temporary and an alternative mode of exploiting the commercial asset, and it had an intention to restart the factory. In short, the Tribunal's finding was that the leasing out of the factory was not a sequel to the assessee's decision to go out of the business in respect of the subject factory. It was just a make-shift transient alternative means of commercial exploitation of the commercial assets and the income from such leasing cannot be treated as the fruits of ownership simplicitcr of the assets.

(3.) The narrative of the lease arrangement as set out by the Tribunal in its order were all meant to point out the fact that the leave and licence arrangement was only a temporary stop-gap arrangement in contra distinction to and different from the decision to go out of business and to give up the idea of direct exploitation of the factory as a commercial asset as was the case in New Savan Sugar and Gur Refining Co. Ltd. v. CIT.