COMMISSIONER OF INCOME TAX, vs. VIKRAM COTTON MILLS LTD.

CIVIL APPEAL No. 689/1975Supreme Court[1988] 2 S.C.R. 38915 December 1987Bench: 2 JudgesAuthor: SABYASACHI MUKHERJI, S. RANGANATHAN COMMISSIONER OF12 pages
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court held that the income derived by the assessee company by way of lease rent from the letting out of its assets is assessable to tax under the head 'Profits and gains of business'. The Court reasoned that whether income is business income or rental income depends on the manner of exploitation of the assessee's assets, which varies with the facts and circumstances of each case. The intention of the assessee is crucial. In this case, the lease was a temporary suspension of business for reconstruction and to tide over a financial crisis, with the intention to resume business after the lease period. The Tribunal's finding that the intention was not to part with the machinery but to lease it out temporarily as part of exploitation was considered plausible and sustainable. Therefore, it could not be said that no business was carried on and the income was merely rent. The High Court's view was affirmed. No issue was expressly left undecided.

What were the facts?

The assessee, Vikram Cotton Mills Ltd., manufactured textiles but incurred losses from 1949, ceasing operations in December 1953. Facing a winding-up petition and with a major creditor taking possession of hypothecated assets, a scheme was approved by the High Court. Under this scheme, the company's business assets were leased out for Rs. 2,50,000 per year for ten years, with an option for renewal, to repay creditors. For assessment years 1957-58 to 1959-60, the lease income was taxed as business income. However, for subsequent years, the Income Tax Officer sought to tax it as income from other sources. The assessee appealed, and after the Commissioner upheld the ITO's order, the matter went to the Income Tax Tribunal, which directed the income to be treated as business income. The High Court affirmed this, and the revenue appealed to the Supreme Court.

What were the issues?

1. Whether the income derived by the assessee company from letting out its assets is assessable to tax under the head 'Profits and gains of business' (Section 10 of the Income Tax Act) or under the head 'Income from other sources' (Section 12 of the Income Tax Act). Assessee's Contention: The assessee argued that the assets were exploited and there was no intention to discontinue business activities. The lease was a temporary measure to liquidate liabilities and overcome financial crises. The income should be treated as business income. Revenue's Contention: The revenue contended that the income from the lease rent was liable to be taxed under the head 'Income from other sources' rather than 'Profits and gains of business'.

Which sections of the Income-tax Act were involved?

Section 10,Section 12

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, COMMISSIONER OF INCOME TAX, v. VIKRAM COTTON MILLS LTD. DECEMBER 15, 1987 [SABYASACHI MUKHARJI AND S. RANGANATHAN, JJ.] Whether the income of the assessee company which lets out its assets temporarily is liable to tax as "profits and gains of business" or "Income from other sources"-Sections 10 and 12 of the Income Tax Act.

The respondent, the assessee company, carried on business of manufacture of textiles. From the year 1949, the respondent started running into losses, resulting in the stoppage of its manufacturing acti· vity from December, 1953. In May, 1956, one of the creditors of the company filed a winding up petition in the High Court. One major creditor of the respondent company, in exercise of its powers under an English mortgage of the iv<ed assets of the company took actual posses- sion of the immovable properties hypothecated to the creditor. The High Court, with the approval of the assessee company and its cre- ditors, evolved a scheme whereunder the business assets of the company were let out on a rent of Rs.2,50,000 per year. The lease was for ten years with option of renewal for another ten years. The intention was that the various creditors w

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