NEW SAVAN SUGAR & GUR REFINING CO. LTD. versus COMMISSIONER OF INCOME-TAX, CALCUTTA

Citation: [1969] 3 S.C.R. 761 · Decided: 19-02-1969 · Supreme Court of India · Bench: J.C. SHAH · Disposal: Dismissed

Judgment (excerpt)

A 
B 
c 
D 
E 
F 
G 
H 
NEW SA VAN SUGAR & GUR REFINING CO. LTD. 
V, 
COMMISSIONER OF INCOME-TAX, CALCUTTA 
February 19, 1969 
761 
(J.C. SHAH, V, RAMASWAMI AND A. N. GROVER, JJ.] 
Income-tax Act (11 of 1922), ss. 10(2)(vi-a) and (vi-b) Qnd 12(3) 
and (4)--Scope of s. 10-lf els, (vi-a) and (vi-b) of s. 10(2) could be 
read bv implication into s. 12. 
The assessee-company, carrying on the business of crushing sugar 
cane and gur refining, apprehending loss, entered into a lease with another 
company. 
Under cl. (7) of the indenture, the consideration of the lease 
was royalty payable on the manufacture of sugar and molasses and was 
subject to a minimum payment of Rs. 65,000 per annum. The lease was 
for a term of 5 years commencttng from !st June 1945 with an option 
to continue for a further term of 5 years and thereafter with two further 
options of 5 years on the same terms and conditions subject to payme:.it 
of higher rates of royalty. 
Clauses 2 to 5 provided 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 inter-
ference 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. 
The effect of els. 11 to 14 was that the lessor would 
have no concernt with the production of the factory which was the princi-
pal part of the business pre:viously carried on by the lessor. In assessment 
proceedings for the assessment year 1955-56, the assessee contended that 
the lease was a lease of a commercial asset and therefore the income aris-
ing from it should be assessed under s. 10 of the Income-tax Act, 1922, 
and hence, the assessee should be allowed depreciation and deve1opment 
rebate in accordance with els. (vi-a) and (vi-b) of s. 10(2). The depart-
ment and the High Court rejected the assessee's contention and held that 
the income was liable to be assessed under s. 12 as 'income from other 
sources' and that no additional depreciation and development rebate could 
be allowed. 
Jn appeal to this Court it was contended that : . (I) the income of the 
assessee was liable to be assessed under s. 10 of the Income-tax Act and 
not under. s. 12; and (2) Since the benefit under cl. (vi) of s. 10(2) is 
allowed to the assessee under s. 12 ( 3), the assessee should be held to be 
entitled to additional depredation and development rebate under els (vi-a) 
and (vi-b) even if the assessment was under s. 12, on the groW,d that• 
those two clauses are ancillary to cl. (vi) and should be taken to have 
been included ins, 12(3) along with cl. (vi) . 
. HELD : ( 1 ) The income of the assessee could not be characterised 
as income from the activity of the assessee carrying on any business and 
was therefore, liable to be assessed under s. 12 and not under s. l O of the 
Income-tax Act. [769 F-G] 
The primary condition for the application of s. JO is that the tax is 
payabl_e 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, s. 10 cannot be applicable and the income that he re-
ceives cannot beair the character of profits of business. [769 D-E] 
762 
SUPREME COURT REPORTS 
[1969] 3 S.C.R. 
In the present case, a scrutiny of all the clauses of the indenture of 
lease, shows that the intention of the assessee was to go out of the busi~ 
ness altogether, so far as the factory and machinery were concerned with 
effect from !st June 1945, to part with the entire machinery of the factory 
and the premlses with the purpose of earning rental income, and to use 
the income arising from tl)e royalty in its capacity as owner of the factory. 
It was not the intention of the a:ssessee '"lo treat the factory and machinery 
as a commercial concern or asset during the subsistence of the lease. The 
provision fdr payment of minimum royalty indicates that the asses·see had 
no direct interest in the production of the factory. The royalty was not 
paid for the production in the factory. There was no 
direct nexus 
between the inqome of the assessee and the production of the factory. The 
production was only a measnre of the royalty to be paid and had nothing 
to do with the character of the payment as a receipt from business or 
from other sources. [769 C-D, E-F] 
Commissioner of Excess Profit Tax, Bomba,v City v. Shri Lakshmi Silk 
Mills 

Excerpt shown. Read the full judgment & AI analysis in Lexace.