THE COMMISSIONER OF INCOME TAX V. M/S MYSORE WINE PRODUCTS LTD

ITA/408/2008

AI Insights

The case involves three Income Tax Appeals (ITAs) filed by the Commissioner of Income Tax and the Deputy Commissioner of Income Tax against M/s. Mysore Wine Products Ltd., concerning the assessment of income derived from leasing out business assets. The core issue was whether the income from leasing out the factory, including the excise license and certain plant and machinery, should be classified under 'profits and gains of business' or 'income from other sources'. The Tribunal had previously ruled in favor of the assessee, stating that the reopening of the assessment was unjustified as there was no change in facts and the income had been consistently assessed as business income in prior years. The High Court upheld the Tribunal's decision, emphasizing that the income should be classified under 'profits and gains of business' as per the provisions of Section 56(2)(iii) of the Income Tax Act, 1961, and supported by various Supreme Court judgments.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 729008 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 04-07-2014
• Assessment Year: misc
• Other Referred Cases: CEPT vs. Shri Lakshmi Silk Mills Limited, Commissioner of Income-Tax, Lucknow vs. Vikram Cotton Mills Limited, S.G.Mercantile Corporation P.Ltd. vs. Commissioner of Income-Tax, Calcutta
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: S PARTHASARATHI
• Assessee Lawyers: K V ARAVIND
• Keywords: Income from other sources; Lease rental income; Profits and gains of business; Reopening of assessment
• Section: 260A; 56(2)(iii)

Judgement Text

" IN THE HIGH COURT OF KARNATAKA AT BANGALORE Dated this the 4th day of July, 2014 PRESENT THE HON’BLE MR. JUSTICE N KUMAR AND THE HON’BLE MR. JUSTICE B MANOHAR ITA NO.408 OF 2008 C/W ITA NO.409 OF 2008 ITA NO. 410 OF 2008 ITA NO.408 OF 2008 BETWEEN: 1. The Commissioner of Income Tax C.R. Building Queens Road Bangalore 2. The Deputy Commissioner of Income Tax Central Circle 2(3) C.R. Building Queens Road Bangalore …Appellants (By Sri K.V. Aravind, Advocate) 2 AND: M/s. Mysore Wine Products Ltd., (since amalgamated with Mc. Dowell Spirits Ltd., & Later renamed as Mc. Dowell & Company Ltd.,) No.51, Richmond Road Bangalore – 560 025 …Respondent (By Sri S. Parthasarathi, Advocate) This ITA filed under Section 260A of I.T. Act, 1961 arising out of order dated 02-11-2007 passed in ITA No.1162/Bng/2005, for the Assessment year 2000-2001, praying to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.1162/BNG/2005, dated 02-11- 2007 confirm the orders of the Appellate Commissioner and Deputy Commissioner of Income Tax, Central Circle 2(3), Bangalore. ITA NO.409 OF 2008 BETWEEN: 1. The Commissioner of Income Tax C.R. Building Queens Road Bangalore 2. The Deputy Commissioner of Income Tax Central Circle 2(3) C.R. Building Queens Road Bangalore …Appellants 3 (By Sri K.V. Aravind, Advocate) AND: M/s. Mysore Wine Products Ltd., (since amalgamated with Mc. Dowell Spirits Ltd., & Later renamed as Mc. Dowell & Company Ltd.,) No.51, Richmond Road Bangalore – 560 025 …Respondent (By Sri S. Parthasarathi, Advocate) This ITA filed under Section 260A of I.T. Act, 1961 arising out of order dated 02-11-2007 passed in ITA No.1161/Bng/2005, for the Assessment year 1998-1999, praying to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.1161/BNG/2005, dated 02-11- 2007 confirm the orders of the Appellate Commissioner and Deputy Commissioner of Income Tax, Central Circle 2(3), Bangalore. ITA NO. 410 OF 2008 BETWEEN: 1. The Commissioner of Income Tax C.R. Building Queens Road Bangalore 2. The Deputy Commissioner of Income Tax Central Circle 2(3) C.R. Building 4 Queens Road Bangalore …Appellants (By Sri K.V. Aravind, Advocate) AND: M/s. Mysore Wine Products Ltd., (since amalgamated with Mc. Dowell Spirits Ltd., & Later renamed as Mc. Dowell & Company Ltd.,) No.51, Richmond Road Bangalore – 560 025 …Respondent (By Sri S. Parthasarathi, Advocate) This ITA filed under Section 260A of I.T. Act, 1961 arising out of order dated 02-11-2007 passed in ITA No.1160/Bng/2005, for the assessment year 1997-1998, praying to: (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.1160/BNG/2005, dated 02-11- 2007 confirm the orders of the Appellate Commissioner and Deputy Commissioner of Income Tax, Central Circle 2(3), Bangalore. These ITAs coming on for hearing this day, N. KUMAR J delivered the following: J U D G M E N T These three appeals are preferred by the revenue challenging the order passed by the Tribunal holding that the 5 income derived by the assessee from letting out the plant, machinery, furniture and building including the excise licence is to be treated as income under the head ‘profits and gains of the business’. 2. The facts are not in dispute. The assessee was engaged in the manufacture and sale of IMFL products. In the early 1980’s in order to get rid of militant labour, the assessee let out the entire factory along with excise licence and certain plant and machineries to the lessee, M/s McDowell and Company. The assessee filed his returns showing the said income under the heading ‘profits and gains of business or profession’. Assessment orders were passed on that basis for the assessment years 1997-98 and 1998-99. The assessee was assessed accordingly. However, proceedings were initiated for re-opening of the assessment on the ground that the said income should have been assessed as ‘income from other sources’. The assessee objected to the same. Objections were 6 over-ruled and the income was assessed as ‘income from other sources’, thus denying the benefit of deductions. 3. Aggrieved by the said order, he preferred an appeal before the Commissioner of Income Tax (Appeals) who upheld the said order. It is against the said order, the assessee preferred an appeal to the Tribunal. 4. The Tribunal held that, up to 1997, the lease rental was assessed as business income. There is no change of facts so far as the years in question are concerned and, therefore, the reopening of the assessment on the basis of change of opinion is not permissible under law. No facts of the case were suppressed by the assessee so far as the relevant years are concerned and, therefore, it was held that the reopening is bad. After referring to the several judgments relied on, the Tribunal also held that the lease rentals from the letting out the assets was assessable to tax under the head ‘profits and gains of the business’ and, therefore, it held that there was no justification 7 for reopening of the assessment. Aggrieved by the said order, the present three appeals are filed. 5. The substantial questions of law that arise for our consideration in these appeals are as under:- 1. Whether the Tribunal was correct in holding that reopening of assessments was not justified when during the current assessment year Assessing Officer had passed the order only regular assessment by bringing to tax the rental income received by the assessee for letting out the business with the assets (building, plant and machinery, furniture and fitting) to M/s. Mc. Dowell & Co., Ltd., under the head “income from other sources” based on the Apex Court judgment reported in 26 ITR 765 (SC)? 2. Whether the Tribunal was correct in not taking into consideration the fact that M/s. Mysore Wine Products Ltd., (assessee) which was let out to M/s. Mc. Dowell Spirits 8 Ltd., was later amalgamated and was renamed as M/s. Mc. Dowell & Co. Ltd.,? 6. We have heard the learned counsel appearing for the parties. 7. Section 56(2) (iii) of the Income Tax Act, 1961 reads as under:- “56. Income from other sources. (1) xxx xxx xxx (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income- tax under the head “Income from other sources”, namely :— (i) xxx xxx xxx (ii) xxx xxx xxx (iii) where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the 9 buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income- tax under the head “Profits and gains of business or profession” 8. From the aforesaid provision it is very clear that, where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, is chargeable to income-tax under the head “Profits and gains of business or profession”. If for any reason it is not so assessed, then it should be assessed under the head ‘income from other sources’. 9. The Apex Court had an occasion to consider this question elaborately in more than one judgment. In the case of CEPT –vs- Shri Lakshmi Silk Mills Limited reported in (1951) 20 ITR 451, it was held that, 10 “if a commercial asset was not capable of being used as such, then its being let out to others did not result in an income which was the income of the business, 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 to another person for use in his business or trade. The yield of income by a commercial asset was the profit of the business irrespective of the manner in which that asset was exploited by the owner of the business. He was entitled to exploit it to the best advantage and he might do so either by using it himself personally or by letting it out to somebody else. The view that in order to constitute business income, the commercial asset must at the time it was let out be in a condition to be used as a commercial asset by the assessee himself was not correct.” 10. In that case, the assessee-company was a manufacturer of silk cloth and as a part of its business, it 11 installed a plant for dyeing silk yarn. During the chargeable accounting period, January 1, 1943, to 31st December, 1943, owing to difficulty in obtaining silk yarn on account of the war, it could not make use of this plant and it remained idle for some time. In August 1943, it was let out to a person on a monthly rent. The question was whether such sum representing the rent for five months realised by the assessee 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 held by the Apex Court that it was a part of the normal activities of the assessee's business to earn money by making use of its machinery by either employing it in its own manufacturing concern or temporarily letting it to others for making profit for that business when for the time being it could not itself run it and that the dyeing plant had not ceased to be a commercial asset of the business and the sum representing the rent for five months received from the lessee by the assessee was, therefore, income from business and was chargeable to excess profits tax. 12 11. Following the aforesaid judgment, the Apex Court in the case of Commissioner of Income-Tax, Lucknow –vs- Vikram Cotton Mills Limited reported in 1988 Vol.169 ITR 597 held that, in each case, the intention has to be gathered as to whether the commercial asset was intended to be exploited by the assessee or whether it was intended to be used by letting it out for a temporary period. It depends upon the facts and circumstances of each case. When the intention was not to part with the assets, but to lease it out for a temporary period as a part of exploitation, it could not be said that no business was carried on and the income derived by the Company from letting out the machinery was only rental income. There was a temporary suspension of business for a temporary period with the object of tiding over the crisis condition. There was never any act indicating that the company never intended to carry on the business in the future. 13 12. In such circumstances, the income derived by way of lease rent from the letting out of its assets was assessable to tax under the head “Profits and gains of business”. Whether a particular income is income from business or from investment must be decided according to the general commonsense view of those who deal with those matters in the particular circumstances and the conduct of the parties concerned. 13. The Apex Court in the case of S.G.Mercantile Corporation P.Ltd. –vs- Commissioner of Income-Tax, Calcutta reported in 1972 Vol.83 ITR 700 held that, “the residuary head of income can be resorted to only if none of the specific heads is applicable to the income in question; it comes into operation only after the preceding heads are excluded”. 14. In the instant case, the assessee commenced his business. At the inception he had no intention of letting out the building, machinery and licence to anyone. He set up the business for carrying on the business. He was expecting 14 income. In 1980’s because of the labour problem, as the assessee found it difficult to carry on the business, he leased this entire business as a going concern with the licence in favour of the lessee M/s McDowell and Company and thus was deriving income from such lease and treated the said lease under the head ‘profits and gains of business or profession’. The assessee was so assessed. Without any justification whatsoever, notice was issued for reopening of the assessment for the assessment years 1997-98 and 1998-99. As rightly held by the Tribunal, mere change of opinion would not be a ground for reopening of the assessment especially when from 1980 onwards the assessment was made on the very same basis and, therefore, no fault could be found with that portion of the order. 15. Similarly, what is leased is the commercial assets of the assessee. Earlier he was personally exploiting the commercial asset. Subsequently, he allowed the lessee to exploit that commercial asset. When he gave the commercial 15 asset to the lessee, the intention was not to lease. The intention was to exploit the commercial asset through his expertise and derive income. Therefore, in view of Section 56(2)(iii) coupled with the judgments of the Apex Court as aforesaid, the income should fall under the head ‘profits and gains of business’ and not from ‘income from other sources’. Therefore, the order passed by the Tribunal is in accordance with law. Accordingly, the substantial questions are answered in favour of the assesee and against the revenue. Hence, the appeals are dismissed. Sd/- JUDGE Sd/- JUDGE ckl/- "