Ita/756/2008 Of M/S Always New v. The Income Tax Officer

IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE: DAY OF JULY 2014 PRESENT THE HON’BLE MR.JUSTICEK N.KUMAR ANT) THE HON’BLE MR.JUSTICE B. MANOHAR mINCOME TAX APPEAL NO.756 OF 2008(TIT) BRIWEHEN M/S ALWAYS NEWREPRESENIED BY ITS PARINERNASEHEEBR. FAZNO.181, COMMERCIAL STREET,BANGALORE — 560 OO1. |_.APPBLLANT (BY SRI A. SHANKAR AND SRI M. LAVA, ADVS.) AND: THE INCOME TAX OFFICERWARD 1(2), HMT BHAVAN,BELLARY ROAD,BANGALORE - 560 032 _ RESPONDENT (BY SRI K.V. ARAVIND, ADV.) THIS ITA FILED UNDER SECTION 260-A OF I.T. ACT, 1961.ARISING OUT OF ORDER DATED 14-03-2008 PASSED IN ITANO.419/BANG/2006 FOR THE ASSESSMENT YEAR 2002-2003,PRAYING THAT THIS HON’BLE COURT MAY BRB PLEASED TO: 1.FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED THEREIN, 11.SET ASIDB THR ORDEBR OF THR TRIBUNAL IN ITANO.419/BANG/2006DATHD14-03-2008|VIDE:ANNBXURE-A. THIS APPEAL COMING ON FOR ADMISSION THIS DAY,|N. KUMAR J., DELIVERED THE FOLLOWING:| JU DBiGMENT Thisappeal1Spreferredby theASSESSCE,challenging the order passed by the authorities, which.has treated the disputed income as the income from.other sources. 2. The assessee is a partnership firm carrying on the business under the name and style “M/s.Always_New’. It is in the business of garments. To carry on.thisbusiness, the propertybearingNo.181,|Commercial Street, Bangalore, was taken on lease fromits owner. The said premises was taken on lease for a)period of five years commencing from 1.4.2000. The.entire premises could not have been used for his.business and had suffered loss; the assessee entered| 2. The assessee is a partnership firm carrying on into an agreement dated 10.10.2000 under which the.assessee sublet the portion of the building to M/s.Java_Coffee Company Limited, to carry on the business of.coffee shop on a rent of Rs.27,500/- per month. The.terms of the agreement show that it is the minimum he.is entitled to, otherwise he is entitled to 7.5% of the net.sales. Therefore, it was contended that it is in the.nature of licence. The said arrangement wasterminated with effect from 31.10.2001. During therelevant accounting period, the assessee had received a.sum of Rs.19,25,000/-. The assessee treated the said)income as income from business. Now all the.authorities have held that it is to be treated as income.from other sources and not from business. 3. This appeal was admitted on 13.11.2008 to|consider the following substantial questions of law: 1) Whether the Tribunal was justified in law|in holding that the income arising from the| agreement with Messrs.Java Coffee Company|is to be assessed as income from other source|and not as income from business on the facts|and circumstances of the case? 2) Whether the Tribunal was justified in law|in not holding that alternatively the receiptwas assessable as income from house|property on the facts and circumstances of.the case?| 4 We have heard the learned Counsel for theparties. oO. The Apex Court had an occasion to considerthis question elaborately in more than one judgment. In the case otfCEPT -vs- Shri Lakshmi Silk Mills| Limitedreported in(1951) 20 ITR 451, 1t was heldthat, “if a commercial asset was not capable of beingused as such, then its being let out to others did notresult in an income which was the income otf thebusiness, but it could not be said that an asset which|was acquired and used for the purpose of the business 2) Whether the Tribunal was justified in law|in not holding that alternatively the receiptwas assessable as income from house|property on the facts and circumstances of.the case?| 4 We have heard the learned Counsel for theparties. oO. The Apex Court had an occasion to considerthis question elaborately in more than one judgment. In the case otfCEPT -vs- Shri Lakshmi Silk Mills| Limitedreported in(1951) 20 ITR 451, 1t was heldthat, “if a commercial asset was not capable of beingused as such, then its being let out to others did notresult in an income which was the income otf thebusiness, but it could not be said that an asset which|was acquired and used for the purpose of the business ceased to be a commercial asset of that business as!soon as it was temporarily put out of use or let out toanother person for use in his business or trade. Theyield of income by a commercial asset was the profit ofthe business irrespective of the manner in which thatasset was exploited by the owner of the business. Hewas entitled to exploit it to the best advantage and hemight do so either by using it himself personally or byletting it out to somebody else. The view that in order toconstitute business income, the commercial asset must)at the time it was let out be in a condition to be used asa commercial asset by the assessee himself was notcorrect.” In.thatCase,theasse€sse€c-Compa Wa Samanufacturer of silk cloth and as a part of its business, it installed a plant for dyeing silk yarn. During the chargeableaccounting period, January 1, 1943, to 3lst December,1943, owing to difficulty in obtaining silk yarn on account of the war, it could not make use of this plant and it remainedidle for some time. In August 1943, it was let out to aperson on a monthly rent. The question was whether suchsum representing the rent for five months realised by theassessee was chargeable to excess profits tax as profits of business or was income from other sources and was,.therefore, not chargeable to excess profits tax. It was heldby the Apex Court that it was a part of the normal activitiesof the assessee's business to earn money by making use ofitsmachineryby|eitheremployingit|1n itsOWT)manufacturing concern or temporarily letting it to others formaking profit for that business when for the time being itcould not itself run it and that the dyeing plant had notceased to be a commercial asset of the business and the sumrepresenting the rent for five months received from the lesseeby the assessee was, therefore, income from business andwas chargeable to excess profits tax. 6. Following the aforesaid judgment, the ApexCourt in the case otCommissioner of Income-Tax, Lucknow -—vs- Vikram Cotton Mills Limitedreported 1n 1988 Vol.169 ITR 597held that, in each case, the)intention has to be gathered as to whether thecommercial asset was intended to be exploited by theassessee or whether it was intended to be used byletting it out for a temporary period. It depends uponthe facts and circumstances of each case. When the’intention was not to part with the assets, but to lease itout for a temporary period as a part of exploitation, itcould not be said that no business was carried on and|the income derived by the Company from letting out themachinery was only rental income. There was atemporary suspension of business for a temporaryperiod with the object of tiding over the crisis condition.There was never any act indicating that the companynever intended to carry on the business in the future. In such circumstances, the income derived by wayof lease rent from the letting out of its assets was.assessable to tax under the head “Profits and gains ofbusiness”. Whether a particular income is income frombusiness or from investment must be decided accordingto the general commonsense view of those who deal withthose matters in the particular circumstances and theconduct of the parties concerned. 7/7. The Apex Court in the case oS.G.MercantileCorporation P.Ltd. -vs- Commissioner of Income- In such circumstances, the income derived by wayof lease rent from the letting out of its assets was.assessable to tax under the head “Profits and gains ofbusiness”. Whether a particular income is income frombusiness or from investment must be decided accordingto the general commonsense view of those who deal withthose matters in the particular circumstances and theconduct of the parties concerned. 7/7. The Apex Court in the case oS.G.MercantileCorporation P.Ltd. -vs- Commissioner of Income- Tax, Calcuttareported in1972 Vol.83 ITR 7VOOheld|that, “the residuary head of income can be resorted toonly if none of the specific heads is applicable to theincome in question; it comes into operation only aiterthe preceding heads are excluded”. 8. In this background, when we look into facts otf this case, the assessee took the premises on lease to carry on its business in garments. The lease premises—is a commercial asset. In the course of carrying on.business, they sustained losses. They did not need the.entire commercial asset. Therefore, they entered into.an agreement to make available a portion of thecommercial asset for carrying on coffee business under.an agreement. The agreement stipulates that theassessee is entitled to 7.5% of the net sales of that.business subject to the condition that they should get aminimum of Rs.2,75,000/- per month. 9. It is also not in dispute, nine months thereafter|the said agreement came to be terminated; the totalamountreceived by theaSSCSSEFEunderthat|arrangement is Rs.19,25,000/- for the relevant period.That amount represents the consideration received bythe assessee for permitting the agreement holder to.exploit the commercial asset. It is left to the discretionof the assessee to exploit a commercial asset in the) manner in which he may exploit the commercial asset.by personally carrying on the business or by permittingothers to carry on the business. He is not the owner ofthe said commercial asset. Therefore, the incomederived from exploitation of that commercial asset is a)part of his business income and therefore, it has to be)assessed under the heading “profits or gains from.business or profession” and not “from other sources ofincome” as done by the authorities. 10. In that view of the matter, the impugned,orders cannot be sustained. The first substantialquestion of law is answered in favour of the assessee|and against the Revenue. Consequently, it is notnecessary to answer the second substantial question oflaw. Hence, we pass the following order: The appeal is allowed. 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