Rama Rao, J.:— The question referred is:

“Whether, on the facts and in the circumstances of the case, the income received from lease of machinery should be assessed as income from business or income from other sources?”

2. The assessee-company was incorporated with the object of carrying on business of producers, cultivators and manufacturers of tobacco, cigars, cigarettes, etc. The machinery purchased for the purpose of manufacturing was leased out on a monthly lease of Rs. 6,000 and the machinery was not used by the assessee for the purpose of manufacturing. The Income-tax Officer negatived the plea of the assessee that the income from the leasing out should be assessed under the head “Business” and held that it should be assessed under the head “Other sources”. On appeal, the Appellate Assistant Commissioner upheld the order of the Income-tax Officer and on further appeal, the Income-tax Appellate Tribunal also confirmed that order. Learned counsel for the assessee, Sri Ratnakar, contended that the mere non-starting of the manufacturing activity does not lead to the conclusion that the leased out machinery should not be considered as commercial asset and the exploitation of the machinery by the assessee by leasing it out is the appropriate mode of using the machinery for commercial purposes in the circumstances. Learned standing counsel for the Revenue contends that in the absence of any manufacturing activity, the asset cannot be considered to have the incidence of a commermercial asset and, therefore, the question of assessability under the head “Business” does not arise.

3. Learned counsel for the assessee at the outset referred to the decision of the Supreme Court in CEPT v. Shri Lakshmi Silk Mills Ltd., [1951] 20 ITR 45], wherein the principles regarding exploitation of the asset to the best advantage including letting out have been enunciated. In that case, the assessee was a manufacturer of silk cloth and was also dyeing silk yarn. During the concerned year, the assessee could not work the dyeing plant due to dearth of silk yarn on account of the war and, therefore, let it out on a monthly rent. In the context of considering whether the rent can be assessed as business income, the Supreme Court held as follows (p. 455):

“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.”

4. Learned counsel for the assessee heavily relied upon the decision of the Delhi High Court in Addl. CIT v. Rajindra Flour & Allied Industries P. Ltd., [1981] 128 ITR 402. In this case, the assessee-company commenced the erection of a building and machinery for its flour mill and incurred considerable expenditure. Originally, no licence was necessary. But, however, the licensing procedure was changed and the company was required to obtain an industrial licence. At the crucial time when the activity could have been commenced, the person who was at the helm of the affairs and who was also instrumental in starting the venture died and his widow had to taka over as managing director. The assessee thereafter arranged for credit facilities and also negotiated with the parties for appointment of sole selling agents and sub-agents and fixed a miller for running the mills. However, the company could not get the industrial licence. In view of these circumstances, the assessee had to let out the mill on lease for a period of five years to a party who secured the licence within a matter of months. On the expiry of the lease, the assets were restored to the assessee and the assessee started working the mill after receiving the permit and licence. In the context of considering whether the income from leasing out the mills is exigible to tax as business income or as income from other sources, it was held thus (p. 420):

“This was the case of a company which was forced to let out its factory due to business losses. No doubt, the factory was a commercial asset because it was being run by the company itself. On principle, it is difficult to distinguish the said case from the present case. The mere fact that the assessee-company did not run the factory itself is no distinguishing feature because obviously the company could not run the business due to the absence of an industrial licence. Absence of the industrial licence was a legal bar to otherwise exploiting the business assets of the company. This does not mean that there was no business commercially or commercial assets as commonly understood. The asses-see-company intended to run the factory for commercial or business purposes, but was prevented to do so by reasons outside its control.

There is another aspect of the case that helps us to decide the question referred to us. No doubt, the company was floated as per its memorandum of association for the purpose of purchasing, erecting, constructing, setting up, acquiring and taking over flour mills, etc., and, for this purpose, the company constructed the mills which are now the subject-matter of this reference. But, in addition to these objects, there are other objects mentioned in the memorandum of association. It may be useful to refer to clause 3 which is reproduced as annexure ‘H’ annexed to the statement of case. The opening words of this clause are ‘To buy, sell, manufacture, repair, alter, improve, exchange, let out on hire, import, export and deal in all factories, works, plant, machinery, tools, utensils, appliances…’

Thus, one of the objects of the company was to hire out factories. No doubt, if there is a person whose business is to hire out machines or plants, etc., he would be said to be doing business although in normal circumstances this might be considered a non-business purpose. Similarly, on the facts of the present case, the objects clause permitted the assessee to hire out its factory as part of its business activities. Therefore, the leasing of the factory would be a part of the business by the assessee. So, in addition to all the previous reasons given, it would appear that the leasing of the factory was a business activity.”

5. In CIT v. Northern India Theatres (P) Ltd., [1981] 128 ITR 497 (Delhi). the assessee constructed a cinema house. Subsequently, the assessee has taken an interest-free loan of one lakh rupees to meet the cost of construction. Thereafter, a lease agreement was entered into with the person who gave the loan under which the premises together with the equipment was let out for a period of ten years. On the facts arising out of this case, the Delhi High Court held that the lease coupled with the interest-free loan was an arrangement made by the assessee-company for both financing the setting up of the cinema and the exploitation of the same in a commercial manner and it was the assessee which had got the permission to run the cinema and the legal position is that the cinema is run by the assessee. Therefore, the assessee was carrying on business using the cinema house as a commercial asset and hence the assessee's income from letting out the cinema was assessable as business income. In Sri Ram Mahadeo Prasad v. CIT, [1961] 42 ITR 211 (All), the assessee was running a flour mill and in the course of running a flour mill, he constructed an oil mill by utilising the funds out of the flour mill business and received rents by letting out the oil mill. Subsequently, the assessee himself ran the mill. While considering whether the income from the lease of the oil mill is assessable under the head ‘Other sources’, it was held that on the facts the mill could be considered as a commercial asset and the income from the lease of the oil mill was income from business.

6. In CIT v. Prem Chand Jute Mills Ltd., [1978] 114 ITR 769, the Calcutta High Court set out the principles propounded time and again stating that in order to be business income, there must be evidence of exploitation of a commercial asset but in order that the income derived from the lease should be taxable, it must be shown that the lessor's intention was that during the period of the lease, the asset leased out must remain and be treated as a commercial asset and be exploited as such. This intention of the lessor has to be ascertained from the cumulative effect of all the terms of the lease and other material circumstances of the case. On the recitals in the lease deed, it was held that the attempts at settlement and the clauses in the lease deed indicated an intention on the part of the assessee to ensure that its asset retained its commercial character and to exploit it as such as to facilitate resumption of the commercial use of the asset, it was leased out and, therefore, the income has to be assessed as business income.

7. Learned standing counsel for the Revenue invited our attention to the decision in CIT v. Aryan Industries (P.) Ltd., [1982] 138 ITR 718 (AP), wherein the Division Bench of this court comprising Jeevan Reddy and Amareswari JJ. held that as long as the assessee retained the character of an asset as a commercial asset and did not express his intention to go out of business by converting the commercial asset into property, the income that accrued to the assessee by the exploitation of such an asset by whatever process the assessee felt expedient to adopt, could be only business income and not income from other sources. Jeevan Reddy J., speaking for the Bench, held as follows (p. 728):

“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 Limited, [1951] 20 ITR 451 (SC) 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, [1969] 74 ITR 7 (SC).”

8. Stress was laid upon the totality of the state of affairs “legal and factual”. In CIT v. Ajmera Industries Pvt. Ltd., [1976] 103 ITR 245 (Cal), the assessee-company was formed with the main object of manufacturing pipes and the factory sheds were Constructed and high tension wires and a transformer also were installed. The manufacturing activity could not be started for want of machinery as the import licence could not be obtained. The assessee let out the factory sheds and claimed that the rental income was assessable as income from business. The Calcutta High Court held that as the assessee did not start its manufacturing business, it could not be said that the assessee derived the income by exploiting its commercial asset through other agencies and the rental income could not be assessed as income from business. Learned counsel for the assessee stressed that the machinery is a commercial asset and it was used to the best advantage by leasing it out though the manufacturing activity was not commenced. The stamp and incidence of a commercial asset arises when the asset is acquired and used for the purpose of the business. The mere acquisition of an asset normally used for business or manufacturing activity does not make the asset a commercial asset unless it is used for the said purpose. Therefore, the user is the primary requisite for labelling the asset as a commercial asset. It is not uncommon that the same asset is capable of yielding income by putting it into the stream of business activity or leasing it out. In a situation, where the asset is leased out without exploiting the same for business or manufacture, such an asset cannot be treated as a commercial asset. The actual user acquires importance in a situation where the asset can be exploited for a dual purpose, i.e, both business and letting out. If the asset is merely let out without any trace of business activity, the question of considering the asset as a commercial asset does not arise. It may be that in certain situations, the leasing or letting out of the asset may be necessitated due to a lull in business activity or temporary cessation of manufacturing operations. The leasing out during this period should be considered as putting the commercial asset to the best use and in such circumstances, the commercial asset is not stripped of its characteristic of commercial asset. In the instant case, admittedly, the machinery was not used for manufacture at any time and, therefore, the question of considering the same as a business asset does not arise. The acquisition of the asset for the purpose of manufacture does not alter the situation as the machinery cannot be taken as a business asset unless the business or manufacturing activity is commenced. Learned counsel for the assessee relied upon the observation of the Supreme Court in CEPT v. Shri Lakshmi Silk Mills Ltd., [1951] 20 ITR 451, that the asset can be put to the best use by leasing it out. The observations are torn out of context and in the Supreme Court case, the assessee was obliged to lease out as there was interruption in manufacturing activity and in such circumstances, the Supreme Court held that the commercial asset can be exploited to the maximum advantage by leasing it out also and in such a situation, the commercial asset is not denuded of its commercial complexion. Learned counsel for the assessee emphasised that the asset possessing the potentialities of being utilised in business or manufacture can be characterised as commercial asset and pointed out that the decision of the Delhi High Court is intimate with the situation in the instant case. The Delhi High Court adverted to two aspects, namely, that the hiring out of the factory is a part of the business activity of the assessee and the intention to lease the factory for a commercial purpose coupled with the circumstances obliging the assessee to lease it out. In this decision, the accent appears to be more on the business activity comprising the leasing out. In so far as the other aspect is concerned, we are unable to subscribe to the view propounded by the Delhi High Court as their intention to lease the factory and the impelling circumstances to defer the manufacturing activity does not impress the asset with commercial characteristics. The user is the essential key to discover the appropriate attribute together (sic) whether business or otherwise and the mere intention or the compelling circumstances necessitating the exploitation of the asset for use otherwise, that business activity does not impress the asset with the incident of a commercial asset. As Jeevan Reddy J. pointed out in CIT v. Aryan Industries Ltd., [1982] 138 ITR 718 (AP), the totality of the circumstances has to be surveyed. The decision in CIT v. Northern India Theatres (P.) Lid., [1981] 128 ITR 497 (Delhi), Sri Ram Mahadeo Prasad v. CIT, [1961] 42 ITR 211 (All) and CIT v. Prem Chand Jute Mills Ltd., [1978] 114 ITR 769 (Cal) turned upon the facts and the exploitation of the assets for business purpose and the intention to continue the same despite the lease during lull period are emphasised. The decision of the Calcutta High Court in CIT v. Ajmera Industries (P.) Ltd., [1976] 103 ITR 245 bears close affinity to the facts in the instant case.

9. In the result, the income from lease of machinery should be assessed as income from other sources. The question is answerd in favour of the Revenue and against the assessee. No costs.