Page 247 - DCOM301_INCOME_TAX_LAWS_I

Income Tax Laws – I

Notes
4. The duration of the agreement is for a maximum period of three years extendable
for a further period of two years only.
5. The lessor shall be entitled to use the facilities for its own manufacturing subject to
a maximum number of hours in a month as fixed in the agreement.

6. The company has retrenched 90% of its staff and workers and it shall employ contract
labour for the purpose of its own manufacturing.
7. The company shall continue manufacturing on a smaller scale and it shall also
continue business of trading.
The issue as to whether income from hiring out of property is business income or income
from house property in the circumstances as discussed above, has been considered in a
series of cases by the Supreme Court. In a recent decision in the case of Universal Plast v.
CIT, (1999) 237 ITR 454 (SC), the Court considered earlier decisions and laid down following
tests for determination of the issue:
1. no precise test can be laid down to ascertain whether income (referred to by whatever
nomenclature — lease amount, rents, 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’;
2. it is a mixed question of law and in fact has to be determined from the point of view
of a businessman in that business on the facts and in the circumstances of each case
including true interpretation of the agreement under which the assets are let out;
3. where all the assets of the business are let out, the period for which the assets are let
out is a relevant factor to find out whether the intention of the assessee is to go out
of business altogether or to come back and restart the same;

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 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
only be exploitation of property by an owner thereof, but not exploitation of business
assets.
Applying the tests to the facts of the case of the querist, it can be said that the letting out of
the premises is exploitation of the commercial assets more fruitfully inasmuch as the
manufacturing activity is continued though at a reduced scale, the duration of letting out
is for a period of three years initially with a maximum extension of further period of two
years, and the premises have not been let, rather the manufacturing facility itself along
with use of licences and permits has been let out on conductorship basis.

The fact that major part of labour has been retrenched may lead to conclusion that the
querist has no intention to restart business. However, in the changing economic scenario
when reduction of labour force is no more looked down upon and with even Govt.
Undertakings retrenching staff to reduce labour bills, it can be contended that mere
retrenchment of staff cannot be a criterion to determine that the company has no intention
to restart business.
As such, the querist can contend that letting out of manufacturing facilities is continuation
of its business and hire charges are assessable as business income.

Contd...

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