The Judgment of the Court was delivered by
Srinivasan, J.:— The question that has been referred to us by the Tribunal is: “Whether the assessee is entitled to the allowance of the claim to set off the carried forward loss of Rs. 2,15,724 against the income of the relevant accounting year under the provisions of section 24(2) of the Indian Income-tax Act.”
2. The question arises in this manner. The assessee which is a private limited company owns an oil and rice mill. The assessment year is 1956-57, for which a return of income of Rs. 36,318 was made. It was stated in an explanatory note accompanying the return that during the account year relating to the assessment year this entire mill had been leased out at Rs. 3,000 a month to one Veerappa Chettiar. There had been no manufacturing operations during the year and only the opening stock of oil and cake as on March 31, 1955, had been disposed of during the year. It would appear that as a result of the working in the preceding years a total loss of Rs. 2,15,724 had been incurred which was carried forward. The assessee sought to have this loss set off against the profits realised during the year of account. In his order the Income-tax Officer recorded the income realised by the lease of the mills as “business” income. But he refused the set-off claimed on the ground that the business was not carried on by the assessee during this year. The Appellate Assistant Commissioner observed:
“Even assuming that the income from the lease of the mill is assessable under section 10, it is not the same business as was previously carried on by the appellant. Under section 24(2), even as amended now, the carrying forward of the loss can be allowed only if the same business, profession or vocation in which the loss was originally sustained continued to be carried on by him in that year. Apparently, the loss was incurred while running the mill, whereas the present income is not from the running of the mill by the appellant itself, but from leasing the machinery, etc……… In my judgment the business carried on by the appellant in the assessment year 1956-57 if any is not the same as the business in which the loss was incurred.”
3. For these reasons he dismissed the appeal. This view was accepted by the Income-tax Appellate Tribunal in the appeal before it, and on an application by the assessee the above question has been referred to us.
4. Section 24(2) of the Act in so far as it is relevant provides:
“Where any assessee sustains a loss of profits or gains in any year, being a previous year., in any business, profession or vocation, and the loss cannot be wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year, and…… (ii) where the loss was sustained by him in any other business, profession or vocation, it shall be set off against the profits and gains, if any, of any business, profession or vocation carried on by him in that year: provided that the business, profession or vocation in which the loss was originally sustained continued to be carried on by him in that year.”
5. It is seen from the above that in order to enable the set-off of losses carried forward, the business, profession or vocation in which the loss was originally sustained must be continued to be carried on by the assessee in the year in which the set-off is claimed. The view taken by the Department and the Tribunal was that in the relevant year the business that was carried on by the assessee was only of lease of the machinery of the mill and that it was not the same as the business that was carried on previously, namely, that of manufacturing groundnut oil and cake and the sale of the products thereof. The short question before us is, therefore, what is the nature of the business, if any, that was carried on by the assessee during the relevant accounting year?
6. The Tribunal in its appellate order referred to the decision in Commissioner of Excess Profits Tax v. Lakshmi Silk Mills [1951] 20 I.T.R 451., but thought that the decision had no application to the circumstances of the present case on the simple ground that the question for decision in that case was, whether the letting of the factory was a business or not a business for the purpose of the Excess Profits Tax Act. The basis of distinction relied upon by the Tribunal does not appear to us to be correct. The facts of the above case were that an assessee, who was a manufacturer of silk cloth, with a plant for dyeing silk yarn as part of its manufacturing process let out its dyeing plant on a monthly rent on the ground that there was difficulty in obtaining silk yarn for dyeing and it was unable to make use of this plant. The question arose whether the rent amount realised was chargeable to excess profits tax as profits of business or was income from other sources. The assessee apparently contended that this income was not income from business but was from other sources. This contention was repelled by the Supreme Court. It was held 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 profits 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 assessee 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. While it is true that in so far as excess profits tax is concerned, the income from all the business would become liable to tax, the question that was prominently before the Supreme Court in the above decision was, whether the rental realised by letting the dyeing plant, which was a commercial asset of the assessee, was not income from that business. It would have made no difference to the assessability to excess profits tax, had the position been that it was income from a different business and not from the business that was being run by the assessee. But it was held clearly that even this rental income should be regarded as income from the same business. These observations would make that point clear:
“In this case the company was incorporated purely as a manufacturing concern with the object of making profit. It installed plant and machinery for the purpose of its business, and it was open to it if at any time it found that any part of its plant ‘for the time being’ could not be advantageously employed for earning profit by the company itself, to earn profit by leasing it to somebody else. It is difficult to hold that the income thus earned by the commercial assets is not income from the business of the company that has been solely incorporated for the purpose of doing business and earning profits.”
7. It may be mentioned here that the decision of the Bombay High Court from which this appeal to the Supreme Court arose held to the contrary, the High Court holding 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. This 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, was not accepted by the Supreme Court. They specifically stated: “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.”
8. It follows from the above that the rental income realised by the assessee in the present case by letting out the entire machinery is no less the income of the business which he was carrying on than the income which he would have realised had he worked the mill himself.
9. In a subsequent decision of the Bombay High Court, Commissioner of Income-tax v. National Mills Co. Ltd., the court was dealing with a case where a manufacturing concern had gone into liquidation. A liquidator had been appointed who let the plant and machinery of the company at a monthly rent for a period of three years, the lessees having the option to renew the lease for a further period of three years. The Tribunal held that the income derived by the company by such lease was income from business and could be set off against its losses in the preceding year brought forward. There was a reference to the High Court on the application of the Commissioner of Income-tax, who questioned the correctness of this view. The learned Chief Justice observed:
“An assessee carrying on business utilises certain assets as business or commercial assets. With the help of these assets, the assessee carries on its business and makes profits. There is another way by which the assessee may also make profits out of these assets. Instead of carrying on business itself, it may permit someone else to use these assets and carry on the same identical business. Even in such a case, the activity of the assessee would be a business activity. It would be carrying on the same business through a different instrumentality. It is not necessary that in order that the income of the assessee should be business income, it should be produced by the assessee utilising the business assets itself. So long as those assets are used as business assets, it is irrelevant whether the business assets are exploited and used by the assessee itself or someone else.”
10. The Tribunal thought that even this case was distinguishable for the reason that the judgment opened with the sentence, “The decision this reference may turn on what, in our opinion, is essentially a question of fact.” Apparently, the Tribunal took the view that the facts in this case were different justifying its conclusion. It seems to us that no such distinction is available in this case.
11. On behalf of the Department the same reasons which induced the Tribunal to hold that this was not income from the same business have been urged before us. It is pointed out that in Commissioner of Excess Profits Tax v. Lakshmi Silk Mills [1951] 20 I.T.R 451. the non-availability of yarn and the consequent lease of the dyeing factory indicated only a temporary suspension of the business of dyeing. But here, according to the learned counsel for the Department, is a case where the business has been wholly discontinued. If what is meant is that in Commissioner of Excess Profits Tax v. Lakshmi Silk Mills the assessee had both a weaving and a dyeing section the latter of which alone was let out, there is no doubt a point of difference. But it is clear from the facts of that case that the dyeing plant was a separate part of the business and there is no doubt that that was “discontinued”. In the present case, however, the entire manufacturing plant had been leased out for a duration, but we are unable to conclude therefrom that the assessee had given up his business altogether and had no intention of resuming the business when favourable circumstances offered themselves. There is no finding at all by the Tribunal on this head. Whatever that may be, it does not seem to us that a distinction can be made on these facts and the principles laid down in the two decisions referred to above can be held not to apply. On the other hand, the facts in the present case are far more favourable to the assessee than in the case reported in Commissioner of Income-tax v. National Mills Co. Ltd., where there was a clear indication of the fact that the company was ordered to be wound up and the business of manufacturing textiles by the company was wholly given up. It may also be mentioned that on behalf of the assessee before us it is stated that in the subsequent year the assessee recommenced his business.
12. There is one other circumstance which inclines us to the view that the assessee had not ceased to do business. The business of the assessee consisted in purchasing groundnut, expelling oil therefrom and selling oil and cake as the resultant products of the manufacture. The business accordingly included also the disposal of the products of the factory. There is clear evidence on record that during the relevant accounting year the assessee had a stock of oil and groundnut, which he sold. The sales were, no doubt, not of a large volume, but the fact remains that he did effect such sales. It would accordingly show that the assessee was still carrying on its business.
13. It follows that the question has to be answered in the affirmative and in favour of the assessee. The assessee will get his costs; counsel's fee Rs. 250.
14. Along with this reference two writ petitions filed by the assessee have been heard. In W.P No. 502 of 1959 the assessee seeks for a suitable writ to stay the collection of the income-tax arrears for the assessment year 1956-57. It may be mentioned that the question refer red to us relates to the assessment year 1956-57. In W.P No. 503 of 1959 a similar relief has been prayed for 1957-58. It, however, appears that in respect of the assessment year 1957-58, to which W.P No. 503 of 1959 relates, an appeal is pending disposal with Appellate Tribunal. The grounds upon which reliefs in these two writs have been rested are the very same as those that have been dealt with in the referred case, in which we have answered the question in favour of the assessee. These petitions accordingly serve no further purpose and are dismissed. There will be no order as to costs.
15. Question answered in the affirmative.
16. Petitions dismissed.