- (1.) 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.
(2.) The appellant (hereinafter referred to as the assessee) was carrying on the business of crushing sugar cane and gur refining. M/s. Andrew Yule and 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 and Distillery Ltd. At an extraordinary general meeting of the shareholders 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 and Distillery Ltd. By an indenture of 15th March, 1948 the lease was executed to come into effect retrospectively from lst June, 1945. The term of the lease was originally for 5 years commencing from lst 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 so 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.
(3.) 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 l5th March, 1948 was a lease of a commercial asset and therefore the income arising from the lease should be assessed under Section 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 Section 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.;