Sabyasachi Mukharji, J. - (1.) Whether the amount realised as a result of leasing out of the mill, Premchand Jute Mills Ltd., was income assessable under Section 28 of the Income-tax Act, 1961?", is the main question that falls for determination in this reference under Section 256(1) of the Income-tax Act, 1961. We are concerned with the assessment for the year 1962-63. The relevant previous year ended on the 13th April, 1962. The assessee-company had been carrying on business of manufacture of jute goods having been incorporated in 1938 with an issued capital of about rupees 40 lakhs. It was under the control of two families which held equally 93% of its shares. The mill had 604 looms and was being run by steam power, but orders had been placed for running the mills by electric power at the cost of Rs. 5.45 lakhs. It appears that quarrels arose among the members of the two families resulting in a practical deadlock in the management of the assessee-company. Since it was found impossible to work the mill due to these difficulties, an arrangement for leasing out the mill to M/s. Soorajmul Nagurmall was thought of in 1956. But this arrangement could not be put through. Three of the directors who did not belong to these groups applied to the Central Government on the 3rd of February, 1958, to intervene and direct an investigation into the affairs of the company. Due to the mediation of the Jute Controller the parties came to a settlement on the 7th March, 1958, as to the terms and conditions on which the mill were to be run. Therefore, it is apparent that the company's affairs were not very prosperous. Even earlier, these were none too good. The boilers in the mill had been deprecated by the inspector of boilers in 1946 and this had led to the closing of the factory for about one and a half years resulting in a loss of Rs. 19'02 lakhs by the 15th October, 1946. There were some profits thereafter till the 13th April, 1951, but there was again loss and as on the 13th April, 1956, the company's losses amounted to Rs. 33'72 lakhs which after adjustment against reserves still remained at Rs. 26'22 lakhs. These losses were partly due to high price of raw jute but mainly due to the quarrels between the parties and deadlock in the management. The situation did not improve even after the settlement. Thereafter, with effect from the 12th November, 1958, the mill was leased out for a sum of Rs. 32,000 per mensem. The lease was for a period of five years, with an option to the lessee to have it renewed for another five years which was exercised in 1963. We will have to refer to the lease in a little detail later. For the assessment years 1959-60, 1960-61 and 1961-62, the assessee was assessed on the amount of the lease rent derived by it treating the same as income derived from business. The Income-tax Officer in completing the assessment for the assessment year 1962-63, however, took a different view. He was of the opinion that in view of the continued period of unprofitable working, the directors had finally decided its closure and the lease rent should be assessed under Section 56 of the Income-tax Act, 1961. He referred to the complaint of the directors to the Ministry of Commerce and observed that the uneconomic running of the mill coupled with absolute and unworkable machinery had led the company to decide finally to stop its business. The Income-tax Officer thought that the terms of the lease deed also reinforced this conclusion. He completed the assessment accordingly and disallowed several items of expenditure as not allowable under Section 57 of the Act.
(2.) There was an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner accepted the assessee's claim that the income derived after the 12th November, 1958, constituted income from business. But he was of the opinion that the business after that date was different from the business prior to that date. While, therefore, he allowed the revenue expenditure incurred by the company, he rejected the assessee's contention that the loss and unabsorbed depreciation relating to the period before the 12th November, 1958, and carried forward should be set off against either the subsequent business profits or the income from other sources.
(3.) There were appeals both by the revenue as well as by the assessee before the Tribunal. The Tribunal was of the opinion that the assessee-company continued to exploit the mill as a commercial asset though certain circumstances compelled it to let it out and not to run it as before. The Tribunal found that though there was a deadlock in the affairs of the company which had made it impossible to run it or even lease it out, this problem was solved in 1958. The company had no doubt suffered losses and its machinery was also not up-to-date. Yet it was resolved to raise a working capital somehow and run the mill. If the company had intended to go out of the business, the directors could have easily approved of the proposal for leasing out the mill which had been mooted previously but it was clear that they did not decide to do so and wanted to run the mill themselves. The company had also placed orders for electrical machinery to enable the running of the mill by electric power at a cost of about Rs. 5 lakhs and the Tribunal observed that one could understand the desire of the company to continue to run the mill and at a profit, the differences having been resolved. The Tribunal considered the lease and the annual report of the directors and found that the company did not go out of the business altogether. On a perusal of the terms of the agreement and the background of the lease, the Tribunal was of the opinion that the assessee's intention was that its commercial asset should be exploited as such. The Tribunal was, therefore, in agreement with the Appellate Assistant Commissioner that the income by leasing was assessable under Section 28 of the Income-tax Act, 1961. The Tribunal, however, did not agree with the Appellate Assistant Commissioner that the income, though from business, was from a different business after the 12th November, 1958. The Tribunal upheld the assessee's contention that the business of the assessee before and after the 13th November, 1958, was the same. In the premises it held that the assessee was entitled to carry forward and set off the unabsorbed depreciation and loss of the earlier years against the income of the present year which had been computed under Section 28 of the Income-tax Act, 1961. The Tribunal, therefore, dismissed the appeal on behalf of the revenue and the appeal of the assessee was allowed.;