UNIVERSAL PLAST LTD. versus COMMISSIONER OF INCOME TAX, CALCUTTA

Citation: [1999] 2 S.C.R. 131 · Decided: 23-03-1999 · Supreme Court of India · Bench: S.P. BHARUCHA · Disposal: Dismissed

Judgment (excerpt)

UNIVERSAL PLAST LTD. 
A 
v. 
COMMISSIONER OF INCOME TAX, CALCUTTA 
MARCH 23, 1999 
[S.P. BHARUCHA, S.S.M. QUADRI AND R.C. LAHOTI, JJ.] 
B 
Income Tax Act, 1961: Sections 2 (13) 28 and 56. 
Income Tax-Profits and Gains of business-A Y 1977-7 8-Licence fee-
Receipt of-By leasing and letting out factory, godowns and machinery C 
Business income or income from other sources-Tests to determine-Held 
: Such licence fee received by assessee is not business income-Such letting 
out also did not constitute business of assessee. 
The Appellant-assessee (in 'UPL' case) set up a factory for 
manufacturing of PVC sheet, and allied products. The assessee suffered D 
losses for two years and, therefore, .it entered into a "leave and licence" 
agreement with a manufacturer for a period of 7 years on payment of a 
certain licence fee. The agreement also gave an option to the licensee for 
renewal of the licence for a further period of 3 years. A question arose 
whether the licence fee received by the assessee for the accounting year 
relevant to the assessment year 1977-78 was the business income of the E 
assessee. The High Court answered the question in the negative, in favour 
of the Revenue and against the assessee. 
The appellant assessee (in Guntur Merchants' case) stopped its business 
of ginning cotton in 1964 for the sole reason of non-availability of cotton and 
that it did not start the same even in 1977, there was nothing to show that F 
the non-availability of cotton continued or could continue for such a long 
period, the godowns of the assessee were let out to a tobacco merchant. 
Moreover, the machinery remained idle for a very long period and the assessee 
had separated the machinery from the godown and let out the pressing 
factory to a metal pressing factory. A question arose whether the letting of 
godowns and the factory with machinery did not constitute business of the G 
assessee. The High Court answered the question in favour of the Revenue 
and against the assessee. Hence these appeals. 
Dismissing the appeals, this Court 
HELD : 1.1. No precise test can be laid down to ascertain whether H 
131 
132 
SUPREME COURT REPORTS 
[1999) 2 S.C.R. 
A income (referred to by whatever nomenclature, lease amount, rents or licence 
fee) received by an assessee from leasing or letting out of assets would fall 
under the head 'Profits and Gains of business or profession.' [138-H] 
1.2. It is a mixed question of law and fact to be determined from the 
point of view of a businessman in that business on the facts and in the 
B circumstances of each case including true interpretation of the agreement 
under which the assets are let out. (139-A] 
1.3 Where all the assets of the bushiness are let out, the period for 
which the assets are let out is a relevant factor to find out whether the 
C intention of the assessee is to go out of business altogether or to come back 
and restart the same. [139-B] 
1.4. If only, or a few of, the business assets are let out temporarily 
while the assessee is carrying out his other business activities then it is a 
case of exploiting the business assets otherwise than employing them for his 
D own use for making profit for that business, but if the business never started 
or has started but ceased with no intention to be resumed, the assets also 
will cease to be business assets and the transaction will be exploitation of 
property by an owner thereof, but not exploitation of business assets. 
E 
F 
. 
(139-C-D) 
Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax 
[1954) 26 ITR 765, followed. 
Commissioner of Excess Profits Tax v. Shri Lakmsmi Silk Mills Ltd., 
(1951) 20 ITR 451; C!Tv. Calcutta National Bank Ltd, (1959) 37 ITR 171; 
Sultan Brothers Pvt. Ltd, v. CIT, (1964) 51 ITR 353; New Seven Sugar and 
Gur Refining Co. Ltd. v. CIT, (1969) 74 ITR 7 and C!Tv. Vikram Coton Mills 
Ltd, (1988) 169 ITR 597, relied on. 
2. The High Court in UPL, case after referring to the various clauses 
in the "Leave and Licence" agreement concluded that "licensee exercising 
G its vested right of option to purchase the licensed premises, the assessee 
stands completely out in the cold". The clauses in tile agreement deal with 
a situation arising out of the breach of the terms of the agreement entitling 
the Licensor to terminate the Agreement on the expiry of the period of one 
month from the service of the notice to the Licensee and also reserve his 
right to determine the Agreement and retake t

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