Ratnesh Enterprises Pvt v. Commissioner Of Income Tax

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 22 / 2005 Ratnesh Enterprises Pvt. ----Appellant Versus Commissioner Of Income Tax ----Respondent _____________________________________________________ For Appellant(s) : Mr. Sanjay JhanwarFor Respondent(s) : Mr. R.B. Mathur _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VINIT KUMAR MATHURJudgment 25/01/2017 1.By way of this appeal, the appellant has challenged thejudgment and order of the Tribunal whereby Tribunal has partlyallowed the appeal of the assessee and modified the order ofCIT(A) which has partly allowed the appeal preferred by theassessee. 2.This court while admitting the appeal on 13.2.2006 hadframed following substantial question of law. “Whether under the facts and circumstances of thecase and considering the objects of the company, ld.ITAT was correct in law in treating the income fromletting out of cars as “income from other sources’instead of “income from business as claimed by theappellant and accepted by the First AppellateAuthority?” 3.The facts of the case are that the assessee company isregistered under the Companies Act. The main objects of the assessee company reads as under:- Clause (i) (ii) & (iii) “(i) “To built construct, reconstruct, alter, add, buytaken on lease, sell, to give on lease, hire and to letbuilding houses hotels, motels, guests houses,holiday homes cinema halls, theatre, picture places,flats, multistoried buildings, colonies and commercialmarkets and for that purpose to acquire by purchaseor lease land of any tenure and to provide suchfacilities to the occupants and tenants as arecommonly provided in residential flats and in otherbuildings.” (ii) “To carry on the business of manufacturing,buying, selling, importing, exporting and otherwisedealing in all types of building material such as stonesof every description, sand, lime brick, cement and itsproducts and by products and also to act ascontractors for government, Semi governmentautonomous bodies, persons, firms and companies.(iii) “To carry on the business of producing/trading ofalcohol, spirit, IMFL (Indian made foreign liquor)sugar or khandsari.” 4.Counsel for the appellant has contended that in view of thedecision of Supreme Court in Commissioner of Excess Profits Taxvs. Shri Lakshmi Silk Mills Ltd. Reported in (1951) 20 ITR 451(SC) holding as under:- “The short question to decide in this case is whetheron the facts found, it could be said reasonably that thedyeing plant had become redundant for its business asa silk manu- facturing concern, simply by thecircumstance that for the time being it could not beused by it personally for the purpose of dyeing silkyarn owing to the non-availability of yarn. It is difficultto conceive that the company would not haveimmediately started dyeing yarn as soon as it becameavailable. Instead of dyeing yarn, another person wasallowed to dye jute (we are told), the assesseecompany making income out of its use as acommercial asset. In this situation it is not possible tohold that the income thus earned was not a part of theincome of the business and was not earned for thebusiness by its commercial asset or that thiscommercial asset had become redundant to thecompany's business of manufacture of silk. Theanalogy of Broadway Car Co. Ltd. (1) therefore does not hold good for the decision of the present matter.” 4.1In Commissioner of Income Tax vs. Vikram Cotton Mills Ltd. reported in (1988) 169 ITR 0597 wherein it has been held asunder:- not hold good for the decision of the present matter.” 4.1In Commissioner of Income Tax vs. Vikram Cotton Mills Ltd. reported in (1988) 169 ITR 0597 wherein it has been held asunder:- “In the context of these facts, it appears that it was apossible conclusion that the assessee intended thatthere should be a temporary suspension of thebusiness for the purpose of reconstruction of thecompany and for that matter there must be stoppageof the user of the machinery by the assessee. It wastemporary lease though for 10 or 19 years on renewalyears and after the expiry of the period the propertyreverted back to the assessee. It is pre-dominantly a matter of intention. Intention is aninference to be drawn from the relevant facts. All therelevant facts, it appears have been considered by theTribunal from the correct standpoint, i.e. Ordinaryprudent businessman or as in England it used to be "manon the top of the platform omnibus.", or "director's armchair". If on that test a plausible conclusion has beendrawn-no objection can be taken. On that basis applying the correct principle the Tribunalfound that the intention was not to part with the machinebut to lease it out for a temporary period as a part ofexploitation. In such a circumstance, it cannot be saidthat no business was carried on and their income derivedfrom the machine letting was only a rent income.There was a temporary suspension of business for atemporary period for an object to tide over the crisiscondition. There was never any act indicating that theassessee never intended to carry on the business. In the aforesaid view of the matter, the High Court wasright in the view it took and the appeals must accordinglyfail and are dismissed with costs.” 5.He contended that the resolution of Board of Directors dt. 3.6.1991 which has been specifically called upon by this court vide order dated 14.12.2016, reads as under:- “Ratnesh Enterprises Private Limited A meeting of Directors held on 3[rd] day of June, 1991 atSneh Bhawan. Rani Road. Udaipur. QUORUM 1. Sh. Arun Dhandhania 2. Smt. Neena Dhandhania 1- Shri Arun Dhandhania was unanimously elected theChairman of the meeting. The minutes of last boardmeeting were read and confirmed. 2- Smt. Neena Dhandhania informed the board thatthe company is actively involved in negotiation withthe person/parties for Real Estate Development of thelanded property/ies located at various places inRajasthan and Banglore/Karnataka. 3- Shri Arun Dhandhania Placed before the board theletter of agreement in respect of leasing of hire CarNo-RPH-4320 to Mewar Sugar Mills Ltd. Bupalsagar @9000/- per month plus actual salary payable to driverplus maintenance charges etc. which are to be born bythe said company with effect from 01.04.1991. Theboard noted the transaction and ratified the some witheffect from 01.04.1991. 4- Shri Arun Dhandhania placed before the board thestatement of account for the year ended 31st March,1991 showing a net loss of Rs. 694617.60 afterproviding the depreciation Rs.36718.00 The samewere approved for sending to the auditors for theirreport thereon. 5- The following matters were considered andratified/confirmed:- (1) Travelling expenses incurred by the director Rs.1966.20 (2) Preliminary expenses written off Rs. 1202.00 It was then:- “Resolved that the Balance Sheet as on 31[st] March,1991 and the profit and loss account for the yearended on that date be and are hereby approved andsame be signed by Shri Arun Dhandhania and Smt.Neena Dhandhania, the directors of the company andthe said accounts be submitted to auditors of thecompany for report thereon. There being no other business the meeting terminatedwith a vote of thanks to the chair.” 5- The following matters were considered andratified/confirmed:- (1) Travelling expenses incurred by the director Rs.1966.20 (2) Preliminary expenses written off Rs. 1202.00 It was then:- “Resolved that the Balance Sheet as on 31[st] March,1991 and the profit and loss account for the yearended on that date be and are hereby approved andsame be signed by Shri Arun Dhandhania and Smt.Neena Dhandhania, the directors of the company andthe said accounts be submitted to auditors of thecompany for report thereon. There being no other business the meeting terminatedwith a vote of thanks to the chair.” 6.In that view of the matter, the business has been shownpursuant to the resolution of the Board of Directors, andtherefore, it was the income arising out of the immovable propertyassets of the company assessee which was connected with thehotel and hotel business. 7.Counsel for the respondent has contended that resolutionwas passed on business clause and in view of the observationsmade by the Supreme Court in:Universal Plast Limited Etc.Vs.Commissioner of Income Tax, Calcutta reported in (1999) 237ITR 454 (SC) wherein it has been held as under: “18. In the light of the above discussion, the propositionsmay be summarised as follow: (1) no precise test can be laid down to ascertainwhether income (referred to by whatevernomenclature, lease amount, rents licence fee)received by an assessee from leasing or letting out ofassets would fall under the head 'Profits and Gains ofbusiness or profession'; (2) it is a mixed question of law and fact and has to bedetermined from the point of view of a businessman inthat business on the facts and in the circumstances ofeach case including true interpretation of theagreement under which the assets are let out; (3) where all the assets of the business are let out, theperiod for which the assets are let out is a relevantfactor to find out whether the intention of the assesseeis to go out of business altogether or to come back andrestart the same. (4) if only or a few of the business assets are let outtemporarily while the assessee is carrying out his otherbusiness activities then it is a case of exploiting thebusiness assets otherwise than employing them for hisown use for making profit for that business; but if thebusiness never started or has started but ceased withno intention to be resumed, the assets also will ceaseto be business assets and the transaction will only beexploitation of property by an owner thereof, but notexploitation of business assets. 19. Now adverting to the facts of UPL case, the HighCourt referred to the findings of the Tribunal that theleasing out of the factory was not a sequel to theassessee's decision to go out of the business in respectof the subject factory and that it was just a make-shifttransient alternative means of commercial exploitationof the commercial assets, so income from such lettingcould not be treated as the fruits of ownershipsimplicitor of the asset. The High Court also referred tovarious clauses in the Agreement, particularly Clauses 1, 2, 4, 7, 19, 20, 21 and 22 and concluded that"licensee exercising its vested right of option topurchase the licenced premises, the assessee standscompletely out in the cold". The High Court recorded thefollowing findings : Therefore, it can very well be presumed that at thetime the licence agreement was entered into, theintention of the ultimate outright sell out was alreadythere. The assessee was already committed to thelicensee for such a sell-out at licensee's pleasure andthere is no means of the assessee falling back fromthat commitment. Therefore, it can very reasonably beinferred that the assessee in the case decided to go outof business as far as this particular factory wasconcerned.. 1, 2, 4, 7, 19, 20, 21 and 22 and concluded that"licensee exercising its vested right of option topurchase the licenced premises, the assessee standscompletely out in the cold". The High Court recorded thefollowing findings : Therefore, it can very well be presumed that at thetime the licence agreement was entered into, theintention of the ultimate outright sell out was alreadythere. The assessee was already committed to thelicensee for such a sell-out at licensee's pleasure andthere is no means of the assessee falling back fromthat commitment. Therefore, it can very reasonably beinferred that the assessee in the case decided to go outof business as far as this particular factory wasconcerned.. The lease agreement is in fact a veiled agreement forlease-cum-sale....We are of the opinion that thelicensing is not meant to be a temporary stop gapexploitation of commercial assets. It could not be in thecontemplation of the assessee at the time it enteredinto the licence agreement, to retain the assets anymore as a commercial asset. 21. From a plain reading of the clauses noted above,what is clear is that they deal with a situation arisingout of the breach of the terms of the Agreemententitling the Licensor to terminate the Agreement onthe expiry of the period of one month from the serviceof the notice to the Licensee. Clause 16 deals with asituation of the Licensee being wound up in whichsituation the Licensor reserved his right to determinethe Agreement and retake the possession of thefactory. These clauses do not whittle down theconclusion arrived at by the High Court with referenceto the rights of the assessee-lessor coming to an endon the exercise of option by the lessee under Clause 19of the Agreement. Applying the afore-mentioned tests,we are clear in our mind that the High Court hasreached the correct conclusion which does not warrantinterference. 23. On considering these findings, the High Courtanswered the question referred to it in favour of theRevenue, On the face of these findings, it cannot but beconcluded that the assessee had dismantled itsbusiness never to return back to it. Applying theaforesaid principles, it has to be held that the answerrecorded by the High Court to the question referred toit is correct in law. 24. In the result, we hold that both the High Courtswere right in answering the questions referred to them,in favour of the Revenue and against the assessee.These appeals are, therefore, dismissed with costs.” 8.Taking into consideration the aforesaid, it is contended thatthe income will fall in the other source of income and appealdeserves to be dismissed. 9.This court while considering the matter, whether the incomewhich has been derived from the renting of car of the company isbusiness income or the income from other source also consideredthe observations which are made by the Supreme Court in case ofShri Lakshmi Silk Mills (supra) and the other judgments. 10.We are of the opinion that in view of the resolution of theBoard of Directors, the income which has been shown will amountto business income and not income from other sources. 11.The issue is answered in favour of the assesee and againstthe department. 12.The appeal stands allowed. (VINIT KUMAR MATHUR)J. (K.S. JHAVERI)J. Brijesh 108.