Vibhuti Glass Works v. Commissioner Of Income Tax, Lucknow

VIBHUTI GLASS WORKS v. COMMISSIONER OF INCOME TAX, LUCKNOW APRIL 28, 1989 [R.S. PATHAK, CJ AND RANGANATH MISRA, J.] Income Tax ;I.ct, 1961: Section 28-Income-Accrual of-Factory owned by assessee-State Government allowed to manage for 20 years as condition for grant of loan-Profits earned-Applied by managing State Government for paying assessee's debts-Whether assessee assessable. The assessee Company had a glass factory besides other bnsiness. Since the glass factory business had, been suffering losses for several years, resulting in increasing debt, the assessee took loans from the State Government and mortgaged the land, buildings and machinery. Later, under a deed executed by it the assessee allowed the State Government to take over running of the glass factory for a period of 20 years and permitted it to have a share of the business, if and when they exceeded a prescribed limit, as conditions for guaranteeing repayment of a loan of Rs.20 lakhs granted by the Industrial Finance Corporation. During assessment proceedings for the assessment year 1962-63, the assessee contended that the profits earned by the glass factory business during that period were not assessable in its hands, but in the hands of the State Government, which had taken over the factory and was running the business, and that, in any event, only half of the profit could be included in its assessment as the State Government was en-titled to SO per cent of profits under the deed. Rejecting the contentions, the Income-tax officer held that the assessee was liable to be assessed in respect of the entire profits earned by the glass factory. The assessee's appeals were dismissed hy both the Appellate Assistant Commissioner and the Appellate Tribunal. On a reference made at assessee's instance, the High Court affirmed the Tribunal's G finding that the entire profits of the factory, and not half of them accrued to the assessee. It also rejected assessee's contention that the income was diverted through an overriding title before it reached the assessee. Dismissing the appeal of the assessee, this Court, HELD: The present case is one where the income accrued to th~ }. assessee directly and was merely, upon such accrual, applied to dis-charge an obligation of the assessee. [80IB] Although the Deed executed by the assessee is described as a lease-deed and provides that the glass factory is demised to the State B Government, in substance possession of the factory was transferred ta {. -the State Government only for the purpose of enabling it to manage a5' . run the business. (800 F] . \ The entire income earned during the year under consideration was the income of the assesee and was merely applied hy the managing State Government for the payment of the assessee's debt, and there was c no over-riding title. The profits earned during the year under consid-eration were not sufficient for the State Government to enjoy a share in the profits in accordance with t~e terms of the Deed, and therefore, no part of the profits could be regarded as assessable in the hands of the State Government. In point of fact, no part of the profits was actually D taken by the State Government. [801C-D] no over-riding title. The profits earned during the year under consid-• eration were not sufficient for the State Government to enjoy a share in r Commissioner of Income-tax, Bombay City II v. Sitaldas Tirath-das, (1961] 41ITR367, relied on. CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1442 (NT) of 1975. From the Judgment and Order dated 14.3.1974 of the Allahabad High Court in I.T.R. No. 437of1971. E.C. Agarwala for the Appellant. S.C. Manchanda, Ms. A Subhashini and M.B. Rao for the ;.. Respondent. · - The Judgment of the Court was delivered by PATHAK, CJ. This appeal by certificate granted by the Allaha-bad High Court is directed against a judgment of the.High Court answering the following questions in favour of the Revenue and against the assessee in an income tax reference: 1990] LGHe Fo 0270—fagfavara aaa (aaa)aei:a a|ATTSTR,BETZ:a28 ata, 1989 a Oo |FRU MATaAs azo Tero gaR ae roreata Ua fa : te amet afafraa, 1961 (1961 et 43)—erer 28—araax & fae faahtara afe ara ate Freifest at haya get Bait BA awa oe feifedt ataremar Bt ger wea & feng Sant sate ars feat Tra B, aT og SEMTTART BH aTaraat aet Arar aga ate feared ad & ches gainer agel are Fraffedat aa art are att ag arse & fag fate ariee ®RAAT SHAT TTA STU AAT TAIT aU aeail BeaATTA facta % frag area at 7g z, fad arer cawaraHz fader ¥ farafataa peatar used fant & car Fate faaifedt & fase. sae fear qar at—(1) zatwrrat %& teat ate ofefeafaat wt Baz ga, ae ade 22 ares, 19603 qgT-fae wr aa fraaa we Ty, afeneT aT gaat Aerated vara dad% aral #) fraifedl-aoat at Maye arrar ag ar ?, (2) afe setVATeo 1 wTagTHT UAg, Th earahaa Hr ag afafaaitea wear at ar fs GAIT TATeeF ahera tara Gard & quer ard, 7 fe are ary, fratfedl-aodt atMaya ? adler arfea wee au, atafafraticn—ae atta wr frrerer artre22 aT, 1960 & fate & faster&faare fay ort F oearga fear sera afer. sae eeaaarA saafra wat aftatert & ag swe Garé fe usa acart Aga ada a, fae sat wearfaar, 20 ad ay wafer & fare vata Gard wr arzare qaraferq afaa atrg |mate saa fata cerfare & er F afar fear va 8 ate gait sata deedusa acart at ogiafea fay ot ar sade fear vat 8 aearft area: TAA HASTBT HSA UST ATH BY RAT THR TAT HLA aT BTA watt & setter &fag a feataar at) gaa famed frarat & fae geq eared da serfat (a6)| fare & FU 2% ae(a) Hag sade fear 2 fe afe ga gad|RAT BAS TF TATA TT ag TTT STAT & fe MTLETA Bandar A, Kaltat aati Faaed aifaeat at ge BTA H Rag, aa afwa ack, a Re ara uss azareSIT SITT TA ray ate Tare Ht Far BF F Ga BTA ae esaqray ¥ sazTat agra F fafa He fag Trg (FzMe Bee ata tag afafaaifca ee gu ste A saa seta aedtart weat fa Ble Heal saw Tel ar AIK aega: ag ara > STaTT ATT BT gt ATAATay CS are F ary at aT aret agfaa Haldl seqae eararay srt wa aTwaa FT afsafya al 7g zt L aaara ara der area g, frat ara ata fratfeatBTMET Fe A Va Manaa ax faatfeal at areqar at ger He % fw saa~ Beate ars fear aan feared ag % aera safaa eget ara faaifead at araa ay agstaat % fay frafa seit (Fer 8)_ |grecafar [1961]_—|.aae[1961] 41 ago eo exo 367:ae- AAR AAA, Hat AT-2. TATA MaaeraOC8 ferfaer arettert arfirerfeat : 1975 at fafaer ater go 1442 (aa at). NTL araart faded 4378 zagiare geq rararay & athe«14 ard, 1974S fore at area S eg aay|attarétatteaSo ato amare|meaay at atzATaet To Mo AAMT BIT THO ao|ar gear (gett) wo garfaot earaTaa at factr Ger eqrayia axe Tao qsH a feat I. attaJo Ao NST— AAMT FI FaTTTAT FUT FATT TAIT grepuzHsea eararaa % faola % Paez grea at 73 8, fAAHFre TH araHr Frssz farafafaa seit er cored fara & get H ate fraffedt % face saz fearTat AT—os' (1) Far arae % aval ate afefeafeat at eat gg, att arte|22 mared, 1960 % ogr-faere at adt frtaa wea Te, afarcOT aT TATEMaraethet ware hard F ara atfratfectaaat a Maye arrarwel ar?|||.= (2) ae ser dearar sae aarti & at eat afratoy aragAAT afatratfca Stal aelarfe gana Farad ¥ dhaa vara HIE F AA, TPH ATT ATH, fratfedt-saat a Myr Ee?. _.2, freifect-taet-fafa vara aad ardafire afina sat 81 gare aarreOST SREaleag am areare at wedt1 rare deed ® Aer sfaag31 me al aa at fad ora &, safe Pratheat azar |@rar sfaag 30 fadazayae wet Fea dae Prateoay 1962-63881| Jor 03. a8 aat ae wae daed B area F ahr Peat et at. raeSRUTARTSTFEN. ASAT TAT | SAA aaTTT ete Fe, arena Faraeu fax, fara eeSeada#wdiiewe 272 SeaTH rare Fria afaet [1990] 1 so fo Go · "(l) Whether on the facts and in the circumstances of the •• case, and on a correct interpretation of the leasedeed VIBHUTI GLASS WORKS v. C.I.T. [PATHAK, CJ.) . dated 22.8.1960, the Tribunal was right in holding the profits of the Glass factory during the relevant A accounting year accrued to the assessee-company? (2) If the answer to the question no. 1 is in the affirmative, whether the Tribunal was right in holding that the en-tire profits and not one half of the profits of the glass l B factory during the relevant accounting year accrued to the assessee-company?" The assessee, Messrs. Vibhuti Glass Works is a public limited company. It has a glass factory and also cames on other business. The accounts of the glass factory are closed on 31 March each year, while the assessee closes its accounts on 30 September each year. We are concerned with the assessment year 1962-63. For several years the glass factory business had been suffering losses resulting in ir.creasing debt. It took heavy loans from ·the Banaras State Bank, Varanasi, for which purpose its stocks and stores were hypothecated to the Bank. It also took loans from the Uttar Pradesh Government and the land, buildings and machinery were mortgaged accordingly. The assessee found it difficult to emerge out of -+-its financial embarrassment. It discovered also that it needed certain equipment in order to produce better quality goods and also required funds for its working capital and for repaying loans to other creditors. E It approached the Industrial Finance Corporation, New Delhi, and the State Finance Corporation for financial assistance and the Industrial Finance Corporation agreed to grant a loan of Rs.20 lakhs on condi-tion (a) that the State Gov.emment guaranteed repayment and (b) that · the State Government postponed their charge under the mortgage \ deeds and the Industrial Financial Corporation was allowed to have F 1· the first charge. The State Government agreed to those conditions ~ provided the assessee allowed the State Government to take over the running of the glass factory for a period of 20 years. The State Govern-ment also stipulated that if and when the profits of the business exceeded a prescribed limit, a share of those profits would go .to the State Government. The assessee agreed to this arrangement and G --{ executed a document dated 22 August, 1960_ incorporating the requisite conditions. For the relevant accounting period the glass factory business disclosed a profit of Rs.92,960 while the assessee suffered a loss of Rs.3,47,656"according to its separate profit and loss account. During H SUPREME COURT REPORTS gata & far sak ein att cate ga BY arearfaa far TT 1 Tar GAT Teaaware Bots far ale aagare yfa, wat ate aallae saw cal TE Ifratfedt a aract facia ceenat (art dae)& fray wfor Gar sae ag aT TATfr 3a Seat zatfardt F ret Hr seater Her H fae Blass sTeHT Hl TATTFToh ate aaa BrAsIT (HTT) GAR faq Tat ga aaa wl eat Hrsfadara at % fa fafaal at arasanar atsaa atenfaa fad fra, agfzeat ate usa fae fare & facia agrsar F fw aoe fear aa atealfrs faafaaa ga ad 9% 20 Area BIE aT EMT aged (AAT) HW H fac aga a vafe (wm) cise aeate sfaeiare at meet 2; ate (a) Use azar Fae fate &altar TTA TAIT BT Borat He, Tar statics far Frey BY TTT ATT TT HT& fae agate fear srg i tsa aware a ea adl we aeafa omar stand fefagifead usa azart HY 20 ad at aafe aH tara Hate F AAT ATA H HTTBt rat era Far Shae agraHr 1 tsaaH TTA ay aga Al fawar fHale atewa aTTat w ara fafer Aart a afas at are, sa aval Bl TH AA UST TTHTTar area| fratfedt aqdt ga saqear Te aes | Te ate Gad atfert Tat aTafenfaat Ba BC, Tea 22 area, 1960 BCH ETAT fastifaa faa Getter Fear-arafrfry, sara Hart Breas F 92,960 Vag HT ATAsae gat, wa fis freifedt ay art gaa are ae gift MET AGATE 3,47, 656 VIEat eifa gi frater-ad 1962-63 % far fratwr-aadarigat & ater, fratfeata aaat afanrey B rae agecdta a fe ware Had Fears are yufad92,960 sae ar ara faaifed’ & ora fata vet at afer TAT Tat ALHTT Fgra freta or, fat areert ay art are HS fear ar aTAT HIATT Fa aTati ag celta dt we fr, feed ah card, arat ar dae arar art a faatfedtfant & afeafaa Rar ar asa ar, aalfe ge arr ust aTHTT SH oa fratat, Mt atcie 22 ane, 1960 ¥ fate & aett aval F 50 sfaaa wir F fareamare at| mae aferenrey A erat xt aaike ects He zt ate ag afafraifeafeat fr fraifedt era gaed ara sofsa amet aval at aad frateor fagoma & far erat atsaa fratfedt are aifen aft faes ATA BT ATT BTfaut atc 2,54,785 SIU Ht Ts at Ht Aaa Ht I 5. faatfedt A agram sant agar BY atta al fag sa aHear agfire | araet attr afrazor & aver fralfedt arer area ay 7g facie arcter vtafer ax dyae) fratfedd at seo ge ada afsacn 4 garerare gq- sqyarera ay fafer & at wea fae faa Pau, st cae at srafora Faw oT BHF 1 Tea-eararaa X artre 22 amea, 1960 % fare & fafer soaat ot franz fear ateait seat ar uses frat } ger Fate fraifeddfares sere fear 6. ag eqse & fe ca atte ar froera arta 22 ane, 1960 % fata fadaatgrata rat & ofeaitera & ag wae slat f Pe isa TCH FY Ga ATM A, fraea|ox fare far ore ceara at Pear araT aifge y sat seaTaAT F EEEEEEEELS” fergie ware Tea (Ao Ao AMAT AYA, TAS [go rato Tem] 273 gay meat fast, 20ad at aafe s fag tae Gaett ar tare TearsF fae |afra a ngs vata saa faa oerfaa % FT H afora fear tar & ate Taesare HATA UST ATHTTHY TEtaAFeA feo ara ar state feat TAT & aatte area:sara Gare HT HEAT VST ALHIT FY HAT FATT gat HU ATE BITATT TATAqatar & fae et fearat at 1 sat asa Faaraa far sea rarateaote HITT fay | 7. fede eau 2 ees (a) H ag soa Feat Ta 2 “fs afe ga qe ah aarita Tt Ar BAS TS THAT TT AZ TAT AAT & fa BITETT F HART F, -agaanes arfaeal BY IT BLAH TANT ATH afaa gu g, at TT ATM, TSFATHIT GIA STAT TAY SAAT ATT GATT HT AA BAH IANA, aaa ae TSA. |& ata atraz agra F faratfsrt FT faa saat 1” g. fauifedd X Sea ealataa F TAT TE adla at fe ara, Fae faaifeat assessment proceedings tor the assessment year 1962-63 it was con-~ A tended by the assessee before the Income Tax Officer that the profit of Rs.92,960 earned by the glass factory business was not assessable in . the hands of the assessee but in the hands of the Uttar Pradesh Government which had taken over the factory and was running the business. It was contended that in any event only half of the profits B could be included in the assessment of the assessee, the remaining profit being assessable in the hands of the State Government whi~ t was entitled to 50 per cent of the profits under the Deed dated " August, 1960. Both contentions were rejected by the Income Tax Officer, who held that the assessee was liable to be assessed in respect -of the entire profits earned by the glass factory. He set off the profit l' c [against the loss declared ][by ][the assessee and computed a net loss of ]Rs.2,54,785. / The assessee appealed to the Appellate Assistant Commissioner of Income Tax, but without success. A second appeal by the assessee filed before the Income Tax Appellate Tribunal was also dismissed. At D the instance of the assessee the Appellate Tribunal referred the two questions of law set forth earlier to the High Court of Allahabad. The High Court considered the various provisions of the Deed dated 22 August, 1960 and answered both the questions in favour of the Revenue and against the assessee. E It is apparent that this appeal must be disposed of on a considera-tion of the terms of the Deed dated 22 August, 1960. A perusal of the conditions set forth in that document discloses that the State Govern-men! was given the power to manage the glass factory business for a period of 20 years from the date it assumed possession. Although the Deed is described as a lease-deed and it provides that the glass factory F is demised to the State Government, in substance possession of the glass factory was transferred to the State Government only for the )...._ purpose of enabling it to manage and run the business. The High Court has given good reason for reaching that conclusion. Clause ( c) of paragraph 7 of the Deed provides "that if upon the G [expiration ][or ][sooner determination of this demise it ][is ][found that the ]working of the factory has shown profits after meeting the entire liabilities of the company the balance profits, after accounting for all charges and expenses incurred by the State Government, shall be divided between the company and the Governor in equal proportion." H It was contended by the assessee before the High Court that the -~ income was diverted through an overriding title before it reached the A assessee. The High Court, in our opinion, has rightly rejected the contention, holding that there was no overriding title and in fact it was a case of mere application of the income. The proper test to be applied in such a case has been laid down by this Court in Commissioner of .Income-tax, Bombay City II v. Sita/das Tirathdas, [1961) 41 ITR 367 B and we are satisfied that the present case is one where the income . accrued to the assessee directly and was merely applied upon such )accrual to discharge an obligation of the assessee. The entire income ' earned during the year under consideration was the income of the assessee and was merely applied by the managing State Government for the payment of the assessee's debts. Vasu GuptaAdvocate Bora aaa 8 9a Hema gH A aha, TATCT FT A weet sare we A,gua armiaa 3 7g afatraifer Sta ge StF Ay gaa caf aedtenre He a FFareeI SF AVl A At aeqa: AS WTF gaat Ata ht et ATAAT at.RS aaa F ATT BY ATA aralt aafad BAA ga ATALTT SIT AVTHT aged, TaeANZ TATAMATT atara! aa aaa FH afeafat al 7E f AT FATT AQaarara at war & fe adara ATA var araar g fart aa aa aifert ar |gaatn feat wat | feared ad & ate gaifaa dqut ara faatfedd at ara a|aire faaitedt B set Beara % fare TATHTL TST ACH SIT GATTsqm ara|Hfateya TA aT geAE VA MGAaT IeFratfedt A areaaTALE| BAFafrySa |Q, ga GeaIATA A BA ATI agnta saad FUTfafase Te> dha Sule ATA UST ATHIT F fan fate % frdaat &ATA art a waat orarrA H fae gater aa A ale safae arat & frat ATT H UWST ALHT> gra fasta AIA TIA TIHE IAA SEAT aet slat gt ATE: Dar TAIT SAT & fs LIST ATHTT J ATAT HT BTS ATT qieafan STF AIA ett F Ae faat att 10. afemaa: atta eaHe Teal g ac artes a aret 31 Fag aaa at afefeafaat at eat Bu, adt ® daa H Mg Mee AUl HAT TT VET FI eater ST Ht TE | We are also in agreement with the High Court that the profits earned during the year under consideration were not sufficient for the State Government to enjoy a share in the profits in accordance with the terms of the Deed, and no question, therefore, arises of any part of the profits being regarded as assessable in the hands of the State Government. In point of fact, it appears that no part of the profits was D actually taken by the State Government. In the result, the appeal fails and is dismissed but in the circum- -t [stances there ][is ][no order ][as ][to costs. ] Appeal dismissed . N.P.V.