CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1593 of 1968. Appeal from the judgment and order dated, September 20, 1963 of the Calcutta High Court in Income-tax Reference’ No. 23 of 1960. Sachin Chaudhari, T. A. Ramachandran and D. N. Gupta, for the appellant. D.Narsaraju, R. N. Sachthey and B. D. Sharma, for the respondent. The Judgment of the Court was delivered by Ramaswami, J This appeal is brought by certificate from the judgment of the Calcutta High Court dated 20th September, 1963 in Income Tax Reference No. 23 of 1960. The appellant (hereinafter referred to as the assessee was carrying on the business of crushing sugar-cane and gur refining. M/s. Andrew Yule & Co. were acting as the managing agents of the assessee. In a letter dated 5th February, 1946 addressed to the share-holders of the assessee the managing agents referred, to the alarming increase of Government interference in the affairs of the sugar industry in Bihar and the increase of wages of the workers, as well as the levy of a cess of Government and deterioration in the cane crops. In view of this state of affairs, the managing agents apprehended a loss and suggested that the company’s affairs should be put on a "less discouraging basis" by accepting the offer of a lease of the company as a running concern from the Standard Refinery & Distillery Ltd. At an extra-ordinary general meeting of the share-holders of the assessee company held on 5th March, 1946 it was decided to authorise the directors to enter into a lease with the said Standard Refinery & Distillery Ltd. By an indenture of 15th March, 1948 the lease was executed to come into effect retrospectively from 1st June, 1945. The term of the lease was originally for 5 years commencing from 1st June 1945 with an option to the lessee to continue for further five years and thereafter two further options to the lessee, each for five years, on the same terms and conditions, but subject to the payment of higher rates of royalties and also subject to the option on the part of the assessee company to terminate the lease by a resolution of the shareholders of the company to be held before 30th November in any year after the first two years. This option of termination of the lease was not exercised by the assessee company. The consideration of the lease as described in clause 7 of the indenture was royalty payable on the manufacture of sugar and molasses. The royalty on sugar was to be at the rate of Rs. 75 per hundred maunds of sugar manufactured for the first and second term of five years, at the rate of Rs. 82.50 per hundred maunds of sugar manufactured for the third five year period and at Rs. 90 for the fourth five year period. The royalty on molasses was to be calculated at 3 pies per maund on all molasses sold during each year of the original period or the renewed period of the lease. The computation of the royalty was subject to a minimum payment of Rs. 65,000 per annum. For the assessment year 1955-56 the relevant accounting year of the assessee ended on 31st May, 1954. In the assessment proceedings for 1955-56 the assessee’s main contention was that the lease granted under the indenture of 15th March, 1948 was a lease of a commercial asset and therefore the income arising from the lease should be assessed under S. 10 of the Income Tax Act and the assessee should be allowed depreciation and development rebate in accordance with clause (vi-a) and clause (vi-b) of sub-section (2) of section 10 of the Income Tax Act. The Income Tax Officer assessed the income under S. 12 of the Act as being income under the head "other sources" and held that no additional depreciation or development rebate could be allowed as claimed by the assessee. According to the assessee, the, income derived from the lease of the sugar factory was income from business because the factory was leased as a going concern and the rent of the building, machinery, plant and spare parts was fixed at a certain rate per maund of sugar produced, and at a certain rate per maund of molasses sold. On appeal, the Appellate Assistant Commissioner found that it was a simple lease of the building and machinery in a sugar factory, and as such the method of payment based on production could not affect the character and nature of the income derived under the said lease. In further appeal the Appellate Tribunal came to the conclusion that on the facts stated the case fell under section 12 and not under section 10 and that since sub-section (3) of section 12 did not include clauses (vi-a) and (vi-b) of section 10(2) the claim of additional depreciation and development rebate could not be allowed. At the instance of the assessee the Appellate Tribunal stated a case to the High Court on the following questions of law under section 66(1) of the Income Tax Act, 1922 (hereinafter referred to as the Act) :
"(1) Whether on the facts and in the
circumstances of the case, the income of the
assessee company was liable to be assessed
under section 12 of the Indian Income Tax Act
and not under section 10 of the said Act ?
(2)Whether on the facts and in the
circumstances of the case, additional
depreciation and development rebate can be
allowed as a deduction ?"
The High Court answered both the, questions
against the assessee holding that the income
was liable to be assessed under section 12 and
that no additional depreciation and
development rebate could be allowed.
Section 10 of the Act stood as follows at the
material time
"10. (1) The tax shall be payable by an
assessee under the head ’profit sand gains of
business, profession or vocation’ in respect
of the profit or gain of any business,
profession or vocation carried on by him.
(2)Such profits or gains shall be computed
after making the following allowances, namely
(vi)in respect of depreciation of such
buildings, machinery, plant or furniture being
the property of the assessee, a sum
equivalent, where the assets are ships
other than ships ordinarily plying on inland
waters, to such percentage on the original
cost thereof to the assessee as may in any
case or class of cases be prescribed and in
any other case, to such percentage on the
written down value thereof as may in any case
or class of cases be prescribed :
and where the buildings have been newly
erected, of the machinery or plant being new,
not being machinery or plant entitled to the
development rebate under, clause (vi-b), has
been installed, after the 31st day of March,
1945, a further sum (which shall however not
be deductible in determining the written down
value for the purposes of this clause) in
respect of the year of erection or
installation equivalent--
(a) in the case of buildings the erection of
which is begun and completed between the 1st
day of April 1946 and the 31st day of March
1956 (both days inclusive), to fifteen per
cent of the cost thereof to the assessee;
(b) in the case of other buildings, to ten
per cent of the cost thereof to the. assessee;
(c) in the case of machinery or plant, to
twenty per cent of the cost thereof to the
assessee;
Provided that-
(c)the aggregate of all allowances in respect
of depreciation made under this clause and
clause (vi-a) or under any Act repealed
hereby, or under the Indian Income Tax Act,
1886 (II of 1886), shall, in no case, exceed
the original cost to the assessee of the
buildings, machinery, plant or furniture, as
the case may be;
(vi-a) in respect of depreciation of buildings
newly erected, or of machinery or plant being
new which has been installed, after the 31st
day of March, 1948, a further sum (which shall
be deductible in determining the written down
value) equal to the amount admissible under
clause (vi) (exclusive of the extra allowance
for double or multiple shift working of the
machinery or plant and the initial
depreciation allowance admissible under that
clause for the first year of erection of the
building or the installation of the machinery
or Plant) in not more than five successive
assessments for the financial years next
following the previous year
Sup/69-14
in which such buildings are erected and such
machinery and plant installed and falling
within the period commencing on the 1st day of
April 1949 and ending on the 31st day
of March, 1959;
(vi-b) in respect of machinery or plant being
new, which has been installed after the 31st
day of March, 1954, and which is wholly used
for the purposes of the business carried on by
the assessee, a sum by way of development
rebate in respect of the year of installation
equivalent to twenty-five per cent of the
actual cost of such machinery or plant to the
assessee;
Provided that no allowance under this clause
shall be made unless the particulars
prescribed for the purpose of clause (vi) have
been furnished by the assessee in respect of
such machinery or plant;
Section 12 was to the following effect
12. (1). The tax shall be payable by an
assessee under the head ’Income from other
sources’ in respect of income, profits and
gains of every kind which may be included in
his total income (if not included under any of
the preceding heads).
(2)Such income, profits and gains shall be
computed after making allowance for any
expenditure (not being in the nature of
capital expenditure) incurred solely for the
purpose of making or earning such income,
profits or gains.
(3)Where an assessee lets on hire machinery,
plant or furniture belonging to him, he shall
be entitled to allowances in accordance with
the provisions of clauses (iv), (v), (vi) and
(vii) of sub-section (2) of section 10.
(4)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, he shall be
entitled to allowances in accordance with the
provisions of clauses (iv), (v), (vi) and
(vii) of subsection (2) of section 10 in
respect of such buildings".
The main contention of the assessee was that
the lease as contemplated in the indenture
dated 15th March, 1948 was a lease of a
commercial asset, and, therefore, the income
arising from the lease should be assessed
under section 10(1) of the Act and not under
section 12(1). In order to examine the
validity of this argument it is necessary to
set out the relevant clauses of the indenture
of lease. Clause ( 1) of the lease provided
that the lease was for a term of five years
commencing from 1st June 1945 with an option
to continue for a further term of five years
and thereafter two further options of five
years in each case on the same terms and
conditions subject to higher payment of rates
of royalties.
Clause 2:
The lessee shall be entitled to run the said
sugar factory and all other machinery annexed
to the same and use all the tools and
implements, buildings and premises, offices,
and erections and utensils and all other
things which are now in or upon the said
premises and which may be added from time to
time thereto provided always that the lessees
shall not at any time remove the plant and/or
machinery etc. hereby demised or any part
thereof from the said premises elsewhere for
the purpose of or in connection with the
lessees’ other interests.
The lessees shall at the time of taking over
possession of the factory from the lessors be
entitled free of payment to the goods already
manufactured during the current crushing
season, i.e. 1945-46 or in the process of
manufacture and/or to be hereafter
manufactured by the lessees and the lessees
shall have absolute discretion to sell and
deal with the same in such manner as they
think fit and proper.
Clause 5:
The lessees shall also be entitled to erect,
construct and maintain any other machinery as
the lessees may think fit and proper. All
machinery brought in and erected by the
lessees would remain the lessees’ property and
after the termination of the lease the lessees
shall be entitled to remove the same provided
always that the lessees shall forthwith repair
and make good all damage caused to the demised
premises by such removal of the lessees’
machinery.
Clause 7
Clause 7 provides for the payment of royalty.
The royalty on sugar was to be computed at the
rate of Rupees Seventy-five per 100 maunds of
sugar manufactured for the first five years as
well as next five years then at the rate of
Rupees eighty two and annas eight per 100
maunds of sugar manufactured for the third
five years and Rs. 90/- for the fourth five
years. The royalty on molasses was computed
at three pies per maund on all molasses sold
during each year of the original lease period
and any renewals thereof subject to the
payment of a minimum royalty of Rs. 6,500/per
annum.
This clause provides that the lessee shall in
addition to the royalty reserved be
responsible for all the running expenses of
the factory including salaries and wages and
all factory staff and labour and shall pay all
sugar excise duty etc. excepting the ground
rents payable to the landlords and taxes on
income chargeable to the lessors and shall
fully reimburse the lessors in respect of such
expenses which have already been incurred by
the lessors since the first day of One thou-
sand nine hundred and forty five and property
tax.
(a)The lessors will keep the demised premises
insured to the full value thereof and shall
pay all expenses which will be incurred for
insuring the demised premises.
(b)The lessors shall pay all expenses of
running the lessors’ company e.g. Directors
fees, Audit fees, Ground rents etc. but not
the running expenses of the factory and
premises hereby demised and shall also pay for
all the expenditure for additions, alterations
breakdown and/or renewals and replacement of
capital nature (i.e. dubitable to block
account) to buildings and machineries etc. and
other similar expenses of a capital nature on
the demised premises. It appears from clauses 2 and 5 that the existing machinery which was. owned by the lessor could not be removed and that the lessee would be entitled to set up additional machinery without interference from the lessor and that on the termination of the lease the lessee would be entitled to remove the same without causing any damage to the property demised. Clause 3 contemplates that if during the period 1945-46 the lessors sell the commodity manufactured the price thereof should go back, to the lessee. Mr. Choudhury referred to clause 6 which entitled the lessee to use the railway siding during the period of the lease. But the right of use of railway siding by the lessee under this clause cannot in any way be construed as the exercise of control over the business of the assessee. The provision for minimum royalty of Rs. 65,000/- per annum indicates that the assessee had no direct interest in the production of the factory. The cumulative effect of clauses 11, 12, 13 and 14 is that the lessor will have no concern with the production of the factory which is the principal part of the business, previously carried on by the lessor. The provisions in clause 17 are that the lessors shall keep the demised premises insured to the full value and to repair and replace the machines which are of capital nature. On a scrutiny of all the clauses of the indenture of lease, our conclusion is that 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. The primary condition for the application of S. 10 of the Act is that the tax is payable by an assessee under the head "profits and gains of business" in respect of business carried on by him. When an assessee does not carry on business at all, section 10 cannot be applicable and the income that he 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. The royalty payable to the assessee was not paid under clause 7 of the indenture of lease for the production in the factory. The production was only a measure of the royalty to be paid and, in any event, the measure of payment had nothing to do with the character of the payment as a receipt from business or from other sources. It follows that in the circumstances of this case the income of the assessee cannot be characterised as income from the activity of the assessee carrying on any business. The High Court was therefore right in holding that the income of the assessee was liable to be assessed under section 12 and not under section 1 0 of the Act. On behalf of the assessee reference was made to the decision of this Court in Commissioner of Excess Profit Tax, Bombay City v. Shri Lakshmi Silk Mills Ltd.(1) in which the respondent company which was formed for the purpose of manufacturing silk cloth installed a plant for dying silk yarn as a part of its business during the relevant charging accounting period. Owing to the difficulty in obtaining silk yam on account of the war it could not make use of this plant which had remained idle for some time. In August, 1943, the plant was let out to another company on a monthly rent. The question arose whether the income received by the, respondent company in the chargeable accounting period by way of rent was income from business and assessable to excess profit tax. It was held by this Court that a part of the assets did not cease to be commercial assets of that business merely because it was temporarily put to a different use or let out to another and accordingly the income from the assets would be profits of the business irrespective of the manner in which the assets were exploited by the company. But this Court clearly indicated that no general principle could be laid down which would be applicable to all cases and that each case must be decided on its own circumstances according to ordinary commonsense principles. The material facts of Lakshmi Silk Mills Ltd. (1) are that only a part of the machinery was Let out on lease and the rest of the machinery was worked by the assessee. The letting out of the machinery was for a short period of five months. There was also no letting out of the premises of the factory by the assessee. The ratio of the decision in Lakshmi Silk Mills Ltd.(1) is therefore not applicable to the present case. Reference was made on behalf of the assessee to the decision in Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax(2) in which the assessee firm carrying on a manufacturing business consisted of three partners, N and his two sons R & G. In April, 1940, a public limited company was incorporated with the object of taking over the business of the assessee firm. This company was director-controlled and the directors were N, his three sons R, G & S and a brother-in-law of G. The company purchased only the building and leasehold rights from the assessee firm but took over from it on lease at an annual rent the plant and machinery. The assessee firm did not thereafter manufacture anything and it bad accordingly no further trading or commercial activity. In the circumstances, it was held that letting out of the plant and the machinery by the assessee to the company could not fall within the definition of "business" under section 2(5) and as the assessee firm had, no business during the relevant period to which the Act applied, section 10A could not be invoked by the Excess Profit Tax Authorities. It was however pointed out that whether a particular activity amounts to any trade, commerce or manufacture or any adventure in the nature of trade, commerce,- or manufacture is always a difficult question to answer and no general principle ran be laid down which would be applicable to all cases and each case must be decided in the setting and background ’of its own facts. It is evident that the material facts in- the present case are somewhat different from those of Narain Swadeshi Weaving Mills’ case(1) for there is no out-right sale of the building of the factory but only a lease of the factory premises together with the machinery for a long period of years. For the reasons already expressed our conclusion is that the intention of the assessee was not to treat the factory etc. as a commercial asset during the subsistence of the lease. In other words, the intention of the assessee was to go out of the business altogether so far as the factory and the machinery was concerned with effect from 1st June, 1945 and the intention was to use the income arising from the royalty in its capacity as the owner of the factory. it follows therefore that the first question was rightly answered by the High Court in favour of the Commissioner of Income Tax. As regards the second question the argument was stressed by Mr. Choudhury that clauses (vi-a) and (vi-b) of section 10(2) are ancillary to clause (vi) and should be taken to be included within clause. (vi) as mentioned in sub-section (3) of section 12. It appears that clause (vi-a) was inserted by section 11 of the Taxation Laws (Extension to Merged States and Amendment Act, 1949). Clause (vi-b) was inserted by s. 8 of the Finance Act, 1955 with effect from 1st April, 1955. At the time of making the amendment under the said Acts, no amendment was made to section 12(3) of the Act. It was argued by Mr. Choudhury that although this was not done specifically it followed by implication that additional depreciation allowance in respect of new assets and development rebate would cornsern within the ambit of section 12(3). It appears to us that clauses (vi-a) and (vi-b) are not ancillary to clause (vi) because the scheme of clauses (vi-a) and (vi-b) is somewhat different. Clause (vi-a) which was inserted in 1949 gives additional depreciation allowance over and above the initial allowance which was formerly available under ’the second paragraph of clause (vi) in respect of buildings newly erected and new machinery and plant but not furniture installed after the 31st March, 1948. The additional allowance under this clause is confined to not more than five successive assessments falling within the period from 1st April 1949 and 31st March 1959. Further it is deductible in determining the written down value, unlike the initial allowance granted under the second paragraph of clause (vi). Clause (vi-b) was inserted by the Finance Act, 1955. It grants development rebate in respect of machinery and plant provided that the machinery or plant is new and has been installed after the 31st March, 1954; and provided further that it is used wholly for the purpose of the assessee’s business and the particulars prescribed for the purpose of clause (vi) have been furnished. It is manifest that clauses (vi-a) and (vi-b) introduce a new scheme (1)26 I.T.R. 765. and cannot be treated as an integral part of clause (vi) by implication. Apart from this consideration it appears to us that these clauses were not specifically engrafted by Parliament in section 12(3) and section 12(4) while amending section 10(2) of the Act. It is therefore not permissible for the Court to read these same clauses by implication in section 12(3) and section 12(4) of the Act. The duty of the Court is to interpret the words that Parliament has used, it cannot supply the gap disclosed in an Act or to make up the deficiencies. "If", said Lord Brougham, in Gwynne v. Burnell,(1) "we depart from the plain and obvious meaning on account of such views (as those pressed in argument on 43. Geo. 3, c. 99) we do not in truth construe the Act, but alter it. We add words to it or vary the words in which its provisions are couched. We supply a defect which the legislature could easily have supplied, and are making the law, not interpreting it" (Cf. Kumar Kamalaranian Roy v. Secretary of State(2). Accordingly, we are of opinion that the assessee is not entitled to additional depreciation and development rebate and the second question was rightly answered by the High Court in the negative. For these reasons we hold that the judgment of the High Court dated 20th September, 1963 is correct and this appeal must be dismissed with costs. V.P.S. Appeal dismissed. (1) (1840) 7 Cl. & F. 572, 696. (2) 66 I.A. 110,