Decided on February 04,1994



R.V. Easwar, Judicial Member - (1.) THESE two appeals filed by the revenue pertain to the assessment years 1982-83 and 1986-87.
(2.) The first ground in the appeal for the assessment year 1982-83 which is also the only ground in the assessment year 1986-87 is that the CIT(A) was in error in directing the ITO to assess the licence fees received by the assessee under the head 'business'. The dispute arises this way. The assessee is a partnership firm which was deriving income under the Leave and Licence arrangement entered into with Shri Kashi Nath Kanodia representing M/s. Goverdhandas Bishwanath, a firm. The assessee firm was carrying on the business of trading and speculation in various commodities, commission agencies, flour and atta, etc. It also owned a flour mill known as Dhanbad Flour Mills. The flour mill was being worked by the assessee itself prior to 1-8-1975. On 21-4-1976 a document described as Indenture of Leave and Licence was entered into under which the assessee granted Leave and Licence to Kashi Nath Kanodia who represented the partnership of M/s. Goverdhandas Bishwanath to work Dhanbad Flour Mills. Under the agreement, the assessee granted Leave and Licence of the factory premises, machinery, plant and other equipments and accessories to the licensee on certain terms and conditions appearing in the agreement. Under Clause (1) of the agreement, the Leave and Licence covered all the rights and benefits of quotas, licences, grants, privileges, agreements, contracts, orders, permits, etc., relating to the operation of the flour mill. The agreement was for a period of three years commencing from 1-8-1975 and expiring on 31-7-1978. There was a right of renewal of the agreement. In consideration of the Leave and Licence the licensee was to pay a sum of Rs. 1,50,000 per year which was described as "licence fee". The amount was payable in quarterly instalments. It was further provided that the licence fee was payable irrespective of whether the flour mill ran profitably or not. Clause (2) of the agreement provided for the duties of the licensee. Under Sub-clause (vii), the licensee should permit the assessee at any time to enter and inspect the flour mill including the premises, plant and machinery, etc., with the engineers or other personnel for which all facilities had to be provided. More importantly, the sub-clause stipulated that the assessee firm would be entitled to keep a Miller and Electrician and Chowkidar in the flour mill premises. The Miller and the man incharge of the power house of the flour mill shall be persons appointed or whose appointment was approved by the assessee firm. They will not be dismissed or transferred without the written permission of the assessee-firm. The salary of the Miller, Electrician and Chowkidar would however be paid by the licensee. Under Sub-clause (ii), the licensee was to look after and maintain the flour mill in working condition and in a proper state of repair. Sub-clause (x) provided that the name of the licensee shall be added in the licences for the flour mill, food dealers' licence and all other professional licences and municipal licences. Clause (3) provided for the duties of the assessee-firm. In particular Sub-clause (iii) provided that the assessee should furnish all facilities, help and information which may be necessary in connection with past affairs of the flour mill and in connection with the operation of the flour mill to enable the licensee to successfully operate the mill. The assessee firm was also bound to disclose all trade secrets to the licensee. The assessee firm was liable under Clause (4)(3) to make a full and complete disclosure to the licensee with regard to the quotas, permits, orders, etc. but it will have no right to share the profits or will not be liable to share the loss arising out of all outstanding contracts or orders. It was provided in Clause (4)(8) that on the expiration of the licence period the licensee shall hand over peaceful and vacant possession of the flour mill to the assessee. In Clause (4)(10) it was provided that during the period of the Leave and Licence the assessee firm may continue to carry on the business which was carried on by it earlier including the running of any other flour mill. Under Clause (4)(14) it was provided that the assets of the flour mill shall be insured in the joint names of the assessee and the licensee. It was further provided in the same clause that the licensee shall pay premia and produce the policies for inspection of the assessee and all monies to be received under the policies shall be received by the assessee. If the licensee did not take out insurance policies, the assessee had the right to take out the insurance policies and the premia, in such event, it had to be reimbursed by the licensee. The said sub-clause further provided that if due to break-down for want of replacement of machinery etc. the operations in the flour mill remained suspended for over a month the licence fee for such period over one month shall not be payable by the licensee till the operations are restarted. The aforesaid clauses are some of the important clauses of the Leave and Licence Agreement entered into between the assessee and the licensee.
(3.) IN the assessments up to and including the assessment year 1979-80 the amount received by the assessee under the Leave and Licence Agreement was brought to tax as business income. From the assessment year 1980-81, the ITO took the view that the amount should be taxed under the head 'other sources' and not under the head 'business'. The appeals for the assessment years 1980-81 and 1981-82 are stated to be pending.;

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