Satish Chandra, J. - (1.) THE Income-tax Appellate Tribunal, Bombay Bench, has referred the following question of law for the opinion of this court : "Whether, on the facts and in the circumstances of the case, the income derived by the assessee-company by way of lease-rent from the letting out of its assets during the years ended December 31, 1959, December 31, 1960, December 31, 1961, and December 31, 1962, is assessable to tax under the head 'profits and gains of business' or under the head 'income from other sources' ?"
(2.) THE question relates to the assessment years 1960-61, 1961-62, 1962-63 and 1963-64. The assessee-company was a limited company. It carried on the business of manufacture of textiles. From 1949 the assessee-company started running into losses. At the end of December, 1953, the position was that as against the capital of Rs. 11,00,000 the accumulated liabilities of the assessee-company amounted to Rs. 26,00,000. Because of this the assessee-company stopped its manufacturing activity from December, 1953. This state of affairs continued till May 21, 1956, when one of the creditors of the company filed a winding-up petition in the High Court. M/s. Industrial Finance Corporation, who was one of the major creditors of the company, had in exercise of its powers under an English mortgage of the fixed assets of the company taken actual physical possession of the immovable properties hypothecated to them. Under Section 153 of the Indian Companies Act, 1913, the High Court with the approval of the assessee-company and the creditors evolved a scheme whereunder the business assets of the assessee-company were let out to M/s. Fibres Dealers (Pvt.) Ltd., Calcutta, on Rs. 2,50,000 per year rent. The lease was for 10 years with an option of renewal for another ten years. The intention was that the various creditors will be paid out of the lease money. The management of the assessee-company was transferred to a board of trustees appointed by the High Court, The lease money realised by the assessee-company for the assessment years 1957-58 to 1959-60 was assessed by the department under Section 10 of the Indian Income-tax Act, 1922, under the head "profits and gains of business". But in subsequent assessment years the Income-tax Officer held that the income from the lease rent was liable to be taxed under the head" income from other sources "under Section 12 of the Act.
(3.) THE assessee-company took the matter in appeal. It was urged before the Commissioner that the assets of the company were exploited and there was no intention for the assessee to discontinue the business activities. THE assets of the company were let to the lessee with the principal object of liquidating a colossal liability and extricating itself from financial crisis. THE Commissioner, however, upheld the finding of the Income-tax Officer. THE assessee-company then took the matter to the Tribunal. THE Tribunal found: (1) THEre was nothing on record to indicate that the assessee-company was formed to let out its plant and machinery on hire. (2) On account of financial crises, the assessee-company found it advantageous to let out the machinery for a temporary period of ten years to the lessee. (3) THE assessee-company was able to liquidate its liabilities at the end of such period and regain the physical possession of its assets. (4) THE assessee-company was able to persuade its creditors not to make any distress sale of the machinery taken over by the Industrial Finance Corporation, with a view to salvage the company from its total extinguishment. (5) At the end of the lease period, the assessee-company did not dismantle the assets and did not sell away or otherwise dispose of the assets. Maintenance of the assets by the company meant that the company had intention to restart manufacturing of textiles. The Tribunal inferred that the intention of the company in letting out its assets was to exploit the commercial assets for the purposes of its business. The Income-tax Officer was directed to treat the income arising out of the letting out of the assets as business income.;