1. The questions referred in both these referred cases are the same, namely, "whether in the facts and circumstances of the case and on a proper interpretation of the terms of the lease agreements, the Appellate Tribunal was justified in holding that the income from the lease was assessable under the head 'Business' for the assessment year 1970-71, 1971-72, 1972-73 and 1973-74 ?" The assessee is the Aryan Industries Ltd., Secunderabad, incorporated in 1951, in the former State of Hyderabad. The first object in its memorandum of association is to establish oil mills and carry on in the Hyderabad State or any other State in the Indian Union or elsewhere, the trade and business of manufacturing, crushing, refining and hardening oils, crude, refined, high power lubrication fuel and all other oils, their combinations and by-products either by chemicals or any other processes as the company may from time to time think fit. Having established a factory for that purpose, the assessee carried on the business until about 1962 by which year it ran into certain financial difficulties and was unable to meet its obligations. The assessee entered into an agreement dated December 7, 1962, with the Tungabhadra Industries Ltd., Kurnool (hereinafter referred to as "the licensee"), whereunder the licensee was allowed to carry on the business of the said factory on certain terms and conditions, for a period of one year. It provided for an extension of the agreement for one more year, which option was availed of by the licensee. On March 18, 1964, a fresh agreement was entered into for a period of three years with effect from October 1, 1963. (The godown, which was not the subject-matter of the earlier agreement, was also added by another agreement). This agreement too contained a clause for a renewal of the agreement for another period of three years and the licensee availed of this option. During this period, yet another agreement was entered into between the assessee and licensee on January 4, 1969, whereunder the period of the agreement was extended to 18 years, expiring on September 30, 1987. The terms and conditions of these agreements we shall presently refer to.

2. Until the agreement dated January 4, 1969,(which we shall hereinafter refer to as "the last agreement") was entered into, the Department was assessing the income derived by the assessee under and in pursuance of the aforesaid agreements as income from business. But once the last agreement was entered into, the Department proposed to assess the income therefrom as income from other sources under s. 56 of the i.t. act (hereinafter referred to as "the act"). This change in the head of income was questioned by the assessee in an appeal before the AAC, unsuccessfully. On a further appeal to the Income-tax Appellate Tribunal, however, the Tribunal took a different view. Following the decisions of the Supreme Court and certain High Courts, the Tribunal was of the opinion that the assessee had never ceased to exploit the asset (factory) as a commercial asset and that the leasing out of the factory premises was only one form of doing business on the part of the assessee. It considered the several clauses in the agreements and came to the conclusion that the assessee cannot be said to have gone out of business or ceased to exploit the factory as a commercial asset and that, therefore, the income therefrom must be assessed only under s. 28 of the Act and not under s. 56 of the Act. Thereupon the Revenue asked for a reference to this court under s. 256(1) of the Act, which was made. The question referred to us is whether this finding of the Tribunal is justified in the facts and circumstances of this case.

3. The contention of Mr. M. S. N. Murthy, the learned standing counsel for the Department, is that having regard to the duration of the last agreement, namely 18 years, and also having regard to the several clauses in the lease agreements, it must be held that the assessee had abandoned its intention of doing business altogether and that it had commenced exploiting the factory only as an income-yielding property. At any rate, the counsel submitted, the last agreement must lead to this inevitable conclusion. Counsel mainly relied upon the decision of the Supreme Court in New Savan Sugar and Gur Refining Co. Ltd. v. CIT .

4. For properly answering the question referred to us it is necessary to notice the terms and conditions of the lease agreements. (The Tribunal has referred to these agreements as lease deeds and no exception has been taken to the said expression. We too shall, therefore, employ the same expression). The last lease deed dated January 4, 1969, expressly recites in clause 9 that :

"All other conditions of the previous agreements dated 7-12-1962, 25-1-1963, 15-2-1963, 18-3-1964, and 20-3-1964, which are not inconsistent with the conditions set out hereinabove will remain unchanged and in force till the expiry of the period of licence, i.e., 30-9-1987."

5. Indeed, the main terms of the lease are to be found only in the first agreement. The first agreement recites that the assessee has agreed to allow the licensee to crush V.N.E. Oil and to manufacture hydrogenated groundnut oil, etc., at the company's premises on the consideration and on the terms and conditions thereafter mentioned. It is called an agreement of licence whereunder the licensee is permitted to enter upon the demarcated premises and to use the same for the aforesaid purpose. It is recited that the said agreement shall not be construed as creating any rights, interests or tenancy in favour of the licensee in respect of the plant, machinery and premises concerned. The licence fee is fixed at Rs. 1,25,000, which, of course, has been raised, under the last agreement, to Rs. 1,65,000 per annum. The agreement further provided that the licensee is entitled to manufacture and market any brand of products as per their choice. Clause 10 provided that the licensee shall employ the workers and supervisory staff except the office staff mentioned in annex. 3 to the agreement who were in the employment of the assessee on the date of the agreement. It is, however, clarified that any claim between the company and the said workers subsisting on the date of the agreement was to be the responsibility of the assessee only. If the licensee proposed not to continue the services of any worker or any other member of the supervisory staff for misconduct, inefficiency or allied reasons the licensee was to report to the assessee and the assessee must take the necessary action in that behalf. It is clarified that the licensee will not be responsible for continuing the services of such persons. From the date of the agreement all wages and other financial liabilities due to the workers and the staff were to be borne by the licensee. Under clause 11 the assessee undertook and bound itself to supply the chemicals and coal which it gets under the quotas allocated to it, and also to make efforts to get additional quotas whenever required at the cost of the licensee. The assessee further undertook to purchase the raw materials, manufactured products, chemicals, four gallon tin containers, etc., items up to a value of rupees one lakh, remaining with the licensee at the termination of the agreement and pay the amount in cash. Clause 16 provided that all government taxes such as factory licence fee, electric inspection fee, property tax, boiler tax, etc., shall be paid by the assessee only. The electricity consumption charges, however, were to be borne by the licensee. The wear and tear of the machinery and plant were also made the responsibility of the assessee except of course the expellers which were subject to speedy wear and tear. The licensee was obliged to keep and maintain the plant and machinery in good working condition. The assessee is expressly made entitled to keep its representative at its own cost and expenses to satisfy itself that the plant and machinery is being properly maintained.

6. The last lease agreement entered into on January 4, 1969, while confirming and reiterating the terms and conditions of the earlier agreements, in so far as they are not inconsistent with the terms and conditions of the last deed, extended the period of agreement to 18 years. Further, it empowered the licensee to install a new machinery for manufacturing 25 tonnes of hydrogenated oil per day. The licence fee was increased to Rs. 1,65,000 per year. Clauses 4 to 7 of this agreement are relevant. Clause 4 provides that the value of the machinery, plant, etc., to be set up by the licensee to achieve the higher capacity will be debited to the assessee as and when the same is installed or erected. The assessee agreed that the value of the said machinery shall be recovered by the licensee by adjusting Rs. 35,000, every year, from out of the licence fee payable to the assessee with effect from January 1, 1975, and in the event of the entire value of the additional machinery not being recovered in this manner by the last date of the agreement, i.e., September, 30, 1977, the licensee was entitled to recover the balance amount from the assessee. Clause 5 provided that any additional machinery, plant, etc., over and above that mentioned in clause 4 as may be installed or erected by the licensee shall be the sole property of the licensee and can be removed and taken away by it at the expiry of the period of agreement.

7. It is on the basis of the above material that we have to determine the issue whether the assessee was exploiting the asset (factory) as a commercial asset or as an income-yielding property. Under s. 28 of the Act, the profits and gains of any business or profession carried on by the assessee at any time during the previous year is chargeable to tax under the head "Profits and gains of business or profession". In such a case, a large number of deductions, rebates and benefits are available as mentioned in s. 30 onwards. Section 56 provides that chargeable income of every king not included under other heads shall be charged under the head "Income from other sources". Sub-section 2 of s. 56, in so far as it is relevant, reads as follows :

"(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 :-....

(iii) 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, if it is not chargeable to income-tax under the head 'Profits and gains of business or profession'".

8. The question when a particular factory, mill or plant is used as a commercial asset and when it is used otherwise than as a commercial asset, i.e., as property, has become a vexed question which would be evident from a reference to the decided cases on the subject. The first decision to be noted is that of the Supreme Court in CEPT v. Shri Lakshmi Silk Mills Ltd. . The assessee was a manufacturer of silk cloth and for that purpose it had installed a plant. During the relevant accounting period, owing to difficulty in obtaining silk yarn, it could not make use of its plant which remained idle for some time. Thereafter, it was leased out. The rent realised by the assessee for five months was treated as business income and excess profits tax was levied thereon. The assessee questioned the same contending that the rent realised cannot be treated as income from business and, therefore, not chargeable to excess profits tax. At the instance of the assessee, the question whether the said income was profits from the business and liable to excess profits tax was referred to the Bombay High Court which held that it was not. Thereupon the Revenue took the matter up to the Supreme Court. The Supreme Court, while substantially agreeing with the principles evolved by the High Court, disagreed with, in so far as it held (p. 455) :

"....that a commercial asset of a business concern which yields income must at the time it was let out be in a condition to be used as a commercial asset by the assessee himself."

9. The Supreme Court observed that there was no reason to provide the qualification that it should be in a condition to be used as a commercial asset "by the assessee himself". Then the court observed (p. 455) :

"We respectfully concur in the opinion of the learned Chief Justice that if the commercial asset is not capable of being used as such, then its being let out to others does not result in an income which is the income of the business, but we cannot accept the view 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 is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business. He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else. Suppose, for instance, in a manufacturing concern the use of its plant and machinery can advantageously be made owing to paucity of raw materials only for six hours in a working day, and in order to get the best yield out of it, another person who has got the requisite raw materials is allowed to use it as a licensee on payment of certain consideration for three hours; can it be said in such a situation with any justification that the amount realised from the licensee is not a part of the business income of the licenor."

10. The court proceeded to observed (p. 456) :

"It may be observed that no general principle can be laid down which is applicable to all cases, and each case has to be decided on its own circumstances. Decisions of the English Courts given under the Finance Act, the scheme of which is different from the Indian Income-tax Statutes, are not always very helpful in dealing with matters arising under the Indian law and analogies and inferences drawn from those decisions are at times misleading. We, however, are in respectful agreement with the observations of Lord President Strathclyde in Sutherland v. Commissioners of Inland Revenue [ 1918] 12 TC 63 (C Sess) that a commercial asset susceptible of being put to a variety of different uses in which gain might be acquired, and whichever of these uses it was put to by the appellant, the profit earned was a user of the asset of the same business. A mere substituted use of the commercial asset does not change or alter the nature of that asset. Whatever the commercial asset produces is income of the business of which it is an asset, the process by which the asset makes the income being immaterial."

11. On a consideration of the facts of the case the court observed that in that case the plant was let out temporarily because of the non-availability of the yarn and that it was difficult to conceive that the company would not have immediately started dyeing yarn as soon as it became available. It was accordingly held that the assessee had not stopped using it as a commercial asset and, therefore, the income derived by leasing it out should be treated as profit from business and liable to excess profits tax.

12. If the broad and liberal test evolved by this decision is to be applied there would hardly be case where the income from a factory or plant can be taxed under any other head than "Income from business". Naturally, therefore, Mr. Anjaneyulu, the learned counsel for the assessee, relied upon the above observations, and particularly on the following (p. 455) :

"The yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business and he is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else."

13. and also the subsequent observation (p. 456) that :

"....a commercial asset susceptible of being put to a variety of different uses in which gain might be acquired, and whichever of these uses it was put to by the appellant, the profit earned was a user of the asset of the same business. A mere substituted use of the commercial asset does not change or alter the nature of that asset. Whatever the commercial asset produces is income of the business of which it is an asset, the process by which the asset makes the income being immaterial."

14. If this test were to be applied, there can be title doubt that the income of the assessee herein derived from leasing out the factory must be assessed as business income only. It is also brought to out notice that several High Courts in this country applied this broad test in holding that income derived from leasing out a part or the whole of the plant or machinery was still business income, vide : CIT v. National Mills Co. Ltd. [1958] 34 ITR 155 (Bom), C. P. Pictures Ltd. v. CIT [1962] 46 ITR 1181 (Bom), Dal Chand & Sons v. CIT [1968] 69 ITR 247 (P & H), Lakshmi Industries (P.) Ltd. v. CIT [1961] 41 ITR 645 (Mad) and so on. Then came the decision of the Supreme court in New Savan Sugar and Gur Refining Co. Ltd. v. CIT . It would be appropriate to notice the facts and principles of this case. The appellant, New Savan Sugar & Gur Refining Company Limited, was carrying on the business of crushing sugarcane and gur refining. The managing agents of the company wrote a letter dated 5th February, 1946, addressed to the shareholders of the company referring to the alarming increase in Government interference in the affairs of sugar industry in Bihar and other problems arising from the demands made by the workers and expressed their apprehension that the company may suffer losses. They, accordingly, suggested that the company would be well advised to accept the offer of lease of the company as a running concern from the Standard Refinery and Distillery Ltd. The general body of the shareholders of the company accepted the suggestion, and accordingly a lease deed was entered into on March 15, 1948. The term of the lease was for five years with an option to the lessee to continue it for a further period of five years and thereafter two further options to the lessee, each for five years, subject, of course, to payment of a higher royalty. The question arose, under what head the income derived by the company under the said lease should be assessed. The Revenue sought to assess it under the head "Income from other sources", i.e., within the meaning of s. 12 of the 1922 Act, while the assessee contended that it should be taxed as income from business. On a consideration of the several clauses in the lease deed, the Supreme Court came to the conclusion that (P. 14 of 74 ITR) :

"....the intention of the assessee was to part with the entire machinery of the factory and the premises with the obvious purpose of earning rental income. It was not the intention of the assessee to treat the factory and machinery, etc., as a commercial concern during the subsistence of the lease....... When an assessee does not carry on business at all, section 10 cannot be applicable and the income that he business at all, section 10 cannot be applicable and the income that the receives cannot bear the character of profits of business. As we have already shown, there is no direct nexus between the income of the assessee and the production of the factory."

15. When the decision of the Supreme Court in CEPT v. Shri Lakshmi Silk Mills Ltd. , was brought to the notice of the court, it distinguished the same on the ground that that was a case where only a part of the machinery was let out on lease and the rest of the machinery was worked by the assessee himself. The letting out of the machinery was for a short period of five months. It was pointed out that that was not a case of letting out of the factory as such. Finally, the Supreme Court held that the intention of the assessee was not to treat the factory, etc., as a commercial asset during the subsistence of the lease and the intention of the assessee was to go out of the business so far as the factory and the machinery was concerned with effect from the date of the commencement of the lease and that the intention was to use the income arising from the royalty in its capacity as the owner of the factory. Prima facie, it would appear that the principle of this decision of the Supreme Court is not consistent with the principle of the earlier decision. But on a closer scrutiny we find that there is no such irreconcilability between both the decisions. Even in the earlier case the Supreme Court repeatedly emphasized that in whatever manner of "commercial asset" is used, the income arising therefrom is business income. The words to be noticed are "commercial asset". While in the latter case the Supreme Court, in the facts and circumstances of that case, held that the assessee had stopped using the factory as a commercial asset during the subsistence of the lease, in the former case, it held that it did not. In both the cases it was emphasized that the question whether in a given case an asset is being used as a commercial asset or as an income-yielding property is a question of fact to be determined in the given facts and circumstances of each case. The latter decision of the High Courts in CIT v. Vania Silk Mills P. Ltd. , CIT v. Prem Chand Jute Mills Ltd. , CIT v. Katihar Jute Mills (P.) Ltd. , have all understood the subsequent decision of the Supreme Court as holding, in the particular facts and circumstances of that case, that the assessee had clearly indicated its intention of getting out of the business altogether, which showed that it was no longer using the company as a commercial asset.

16. We shall now consider the facts of this case in the light of the principles emerging from the above decisions, to determine whether the finding arrived at by the Tribunal is justified or not ? Undoubtedly, the length of the period of lease is a relevant circumstance in determining the intention of the assessee. We cannot agree with Mr. Anjaneyulu that it is not. Stray observations made in a decision or two that the length of the period of lease is not a relevant circumstances, must be understood and confined to the facts of those particular cases. We have to apply a commonsense approach in determining the relevance and, in our opinion, the length of the period in this case is certainly relevant and is a factor in favour of the Revenue. We cannot deny the force in the arguments of Mr. M. S. Murthy that there are several indications in this case which go to support the view taken by Department and that each of the clauses upon which the Tribunal has relied upon is equally capable of being explained on a hypothesis consistent with the intention of the assessee to use the factory as an income-yielding asset. But, the question which we have to answer in this case is

"whether, on the facts and in the circumstances of the case and on a proper interpretation of the terms of the agreements, the Appellate Tribunal was justified in holding that the income from the lease was assessable under the head 'Business'...."

and we are unable to say that it was not. We find that two views are possible in this case - indeed, a borderline case - and the Tribunal has adopted one such view.

17. We shall now refer to the main clauses in the agreements which have been relied upon by the Tribunal in support of its conclusion :

(a) The assessee had continued its workers and supervisory staff in its employment obliging the lessee to employ them during the subsistence of the lease. The disciplinary jurisdiction was also reserved by the assessee to itself : vide clause 10 of the first agreement. The Tribunal says that if the intention was to cease doing business altogether in the said factory, the assessee would not have continued the employees in its service. Mr. Anjaneyulu says that this clause is indicative of the assessee's intention of re-commencing business after the expiry of the lease period. The counsel for the Department, however explains this clause only as a convenient way of avoiding the monetary liability arising form the retrenchment of the workers and staff. He submits that the interval between 1962 and 1987 is so long that the alleged intention to re-commence business in 1987 is, at best, illusory. He says, there is no guarantee that the factory will not again be leased out in 1987.

(b) All the industrial licences were agreed to be continued in the name of the assessee itself. The drawal of raw material was also to be in the name of the assessee which were to be made over to the licensee. There was also a provision that the assessee shall make efforts to get additional quotas of chemicals, coal, etc., and supply the same to the licensee (vide clause 11 of the first agreement). Again, while the assessee relied upon this clause as supporting his intention to continue to use the factory as a commercial asset and his intention to re-commence business in 1987, the Department says, firstly, that this was a clause in the first agreement which was for a period of one year only and that much of its validity was lost when a long-term agreement was entered into and, secondly, that this stipulation was merely a convenient arrangement arrived at between the assessee and the lessee, consistent with their interest as lessor and lessee.

(c) Under clause 12, the assessee agreed that all the raw materials, manufactured products, chemicals, etc., remaining with the lessee at the expiry of the period of lease shall be purchased by the assessee subject to a maximum value of Rs. one lakh. This too is said to be indicative of the assessee's intention to do business after the expiry of the lease. The Department says that this clause found in the first agreement has become illusory and is of little relevance when the long-term agreement was entered into, and when there is no knowing that it will not be leased out again.

(d) The additional machinery installed for expanding the production capacity of the factory was to be paid for and retained by the assessee itself. This circumstance too is capable of two interpretations.

(e) The power supply was to continue in the name of the assessee only. (This clause too is of the same nature as that mentioned under clause (d) (above)).

(f) The Department itself continued to treat the income from the lease deeds as business income until 1969 but suddenly changed its stand when the long-term agreement was entered into. The mere duration of the lease deed is of no significance (We have already expressed our opinion on this aspect).

(g) The broad and liberal test evolved by the Supreme Court in CEPT v. Shri Lakshmi Silk Mills Ltd. .

18. We are unable to say that on a cumulative consideration of the above facts and circumstances, the Tribunal was not justified in coming to the conclusion it did. The broad and liberal test evolved in CEPT v. Shri Lakshmi Silk Mills Ltd. certainly supports the Tribunal's conclusion. In the present case, the assessee has not either by, word or conduct, expressed its intention of discontinuing the business altogether, as was done by the assessee in New Savan Sugar and Gur Refining Co. Ltd. v. CIT . In the totality of this state of affairs, legal and factual, we are inclined to answer the question referred to us in affirmative and in favour of the assessee. No costs.