COMMISSIONER OF EXCESS PROFIT TAX BOMBAY CITY vs. SRI LAKSHMI SILK MILLS LTD.

A) ABSTRACT / HEADNOTE

The Supreme Court in Commissioner of Excess Profits Tax, Bombay City v. Sri Lakshmi Silk Mills Ltd., 1952 SCR 1, determined a significant question of law under the Excess Profits Tax Act, 1940. The case revolved around whether the rent received from temporarily leasing a dyeing plant constituted “income from business” and was therefore assessable under the Act. The assessee, a silk manufacturing company, could not use its dyeing plant due to war-induced scarcity of silk yarn. Consequently, it leased the plant to another business, Parakh & Co., and earned rent. The Bombay High Court ruled that since the plant was not in use as a commercial asset by the assessee, the rental income could not be considered business income. However, the Supreme Court reversed this, holding that a commercial asset temporarily not in use does not lose its business character. The Court underscored that income derived from such an asset—whether used directly or let out—remains business income. The judgment distinguished English precedents and established that no rigid rule can be laid down; the facts of each case must guide the determination. This landmark ruling thus clarified the scope of “income from business” under taxation statutes, reinforcing the commercial character of temporarily idle but otherwise integral business assets.

Keywords: Excess Profits Tax, Business Income, Commercial Asset, Rent Income, Temporary Lease, Section 2(5), Silk Industry, Manufacturing, Taxation Law

B) CASE DETAILS

i) Judgement Cause Title:
Commissioner of Excess Profits Tax, Bombay City v. Sri Lakshmi Silk Mills Ltd.

ii) Case Number:
Civil Appeal No. 46 of 1950

iii) Judgement Date:
September 18, 1951

iv) Court:
Supreme Court of India

v) Quorum:
Saiyid Fazl Ali, Mehr Chand Mahajan, Mukherjea JJ.

vi) Author:
Justice Mehr Chand Mahajan

vii) Citation:
AIR 1952 SC 159; [1952] SCR 1; [1951] 20 ITR 451 (SC)

viii) Legal Provisions Involved:
Section 2(5), Excess Profits Tax Act, 1940
Section 10, Indian Income-tax Act, 1922
Section 12, Indian Income-tax Act, 1922

ix) Judgments overruled by the Case (if any):
The decision reversed the ruling of the Bombay High Court in Income Tax Reference No. 16 of 1947.

x) Case is Related to which Law Subjects:
Taxation Law, Commercial Law, Income Tax, Business Law, Corporate Law

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

This appeal arose under special leave against a judgment of the Bombay High Court. The case concerned Sri Lakshmi Silk Mills Ltd., a company engaged in silk cloth manufacturing. As part of its business infrastructure, it had a dyeing plant. However, due to World War II, the company was unable to acquire silk yarn, rendering the plant temporarily redundant. The company then let the plant to Messrs Parakh & Co. on a monthly rental basis. The central legal issue was whether such rental income, earned from a temporarily idle commercial asset, still constituted “business income” under Section 2(5) of the Excess Profits Tax Act. The High Court ruled in the negative, finding that the plant ceased to be a commercial asset. However, the Supreme Court reversed this, offering a more expansive and functional interpretation of business assets and income in taxation.

D) FACTS OF THE CASE

The respondent company, Sri Lakshmi Silk Mills Ltd., was incorporated to manufacture silk cloth. As part of its business operations, it installed a dyeing plant specifically for processing silk yarn. During the chargeable accounting period (1st January 1943 to 31st December 1943), the company faced difficulty obtaining raw silk yarn due to wartime shortages. Consequently, the dyeing plant remained idle.

On August 20, 1943, the company leased the dyeing plant to Messrs Parakh & Co. at a monthly rent of ₹4,001. The company received ₹20,005 over five months. The Excess Profits Tax Officer assessed this rental income as part of business profits under the Excess Profits Tax Act. This assessment was affirmed by the Appellate Assistant Commissioner and the Income Tax Tribunal. However, upon reference, the Bombay High Court held that the asset, being idle, lost its character as a commercial asset and the rent could not be taxed as business income.

This factual matrix led to an appeal to the Supreme Court of India.

E) LEGAL ISSUES RAISED

i) Whether income of ₹20,005 earned by leasing the dyeing plant is “profits from business” under Section 2(5) of the Excess Profits Tax Act, 1940, and therefore liable to excess profits tax.

F) PETITIONER/APPELLANT’S ARGUMENTS

i) The counsels for the Commissioner submitted that:

The plant was a commercial asset, and mere non-use did not extinguish its business character. The asset remained part of the business capital and its use—whether by the assessee or someone else—yielded income from business. The nature of the asset did not change merely due to temporary idleness. It was further argued that income derived from exploitation of a commercial asset, regardless of the mode of exploitation, retains its business character.

The appellant relied on the English decision in Sutherland v. Commissioners of Inland Revenue, (1918) 12 Tax Cas 63, wherein it was held that “profit earned from various uses of a commercial asset would still be treated as business income” regardless of who uses it.

The Attorney-General further stressed that the company was not in the business of leasing property. The letting was incidental to the business, driven by war exigencies, and did not change the character of the income. Thus, the rental must be taxed as part of business profits under the Act.

G) RESPONDENT’S ARGUMENTS

i) The counsels for the Respondent submitted that:

The dyeing plant had become commercially redundant due to the non-availability of silk yarn. The company let it out only as a last resort. Therefore, the rental income arose from exploitation of property, not from a business activity. The income was passive in nature and fell under Section 12 of the Income-tax Act, not under Section 10 or the Excess Profits Tax Act.

Reliance was placed on the English case Inland Revenue Commissioners v. Iles, [1947] 1 A.E.R. 798, where income derived from licensing land was treated as income from property, not business. They also cited Croft v. Sywell Aerodrome Ltd., [1942] 1 A.E.R. 110, arguing that leasing commercial assets merely to make use of idle property does not constitute business activity.

The company emphasized that the dyeing plant, at the time of leasing, was not a “working asset”, and its use had been discontinued. Hence, the rent could not be considered business income.

H) RELATED LEGAL PROVISIONS

i) Section 2(5), Excess Profits Tax Act, 1940 – Defines “profits of business” and its scope.
ii) Section 10, Indian Income-tax Act, 1922 – Deals with computation of income from business.
iii) Section 12, Indian Income-tax Act, 1922 – Covers income from other sources including rent and royalties.

I) JUDGEMENT

a. RATIO DECIDENDI

i) The Supreme Court held that the dyeing plant did not cease to be a commercial asset merely because it was not in use temporarily. The company, being a manufacturing entity, acquired the asset for business purposes. Its temporary letting did not change its essential character.

The Court ruled that the manner of exploitation of a business asset does not affect the nature of income. So, rent earned from such an asset remains business income. The concept of a business asset does not imply constant active use by the owner. Rather, its availability for profit-making, including by leasing, maintains its commercial nature.

The Court relied on Sutherland v. Commissioners of Inland Revenue (1918) 12 Tax Cas. 63, and clearly distinguished other English rulings such as Iles, Croft, and Broadway Car Co. as inapplicable due to differing facts and legal contexts.

b. OBITER DICTA 

i) The Court observed that no general principle can be laid down applicable to all situations. Each case must be judged on its own facts and commercial context. Moreover, English tax precedents must be applied cautiously, given the differences in statutory frameworks.

c. GUIDELINES 

  • A commercial asset does not lose its business character merely due to temporary idleness.

  • Leasing a commercial asset temporarily does not convert business income into property income.

  • Income derived from commercial exploitation of business assets remains taxable as business income.

  • The functional character of the asset, not its momentary use, determines taxability under business income.

J) CONCLUSION & COMMENTS

The Supreme Court’s ruling in this case provides clarity on how to treat temporary leasing of idle commercial assets. It extends the scope of “business income” under the Excess Profits Tax Act and affirms that the intended purpose and functional utility of an asset are critical to determine the nature of income, not the particular manner of exploitation. This judgment safeguards businesses against adverse tax implications during temporary operational disruptions, especially during national emergencies such as war. It remains a foundational decision in Indian tax jurisprudence.

K) REFERENCES

a. Important Cases Referred
i) Sutherland v. Commissioners of Inland Revenue, (1918) 12 Tax Cas. 63
ii) Inland Revenue Commissioners v. Iles, [1947] 1 A.E.R. 798
iii) Croft v. Sywell Aerodrome Ltd., [1942] 1 A.E.R. 110
iv) Inland Revenue Commissioners v. Broadway Car Co. Ltd., [1946] 2 A.E.R. 609

b. Important Statutes Referred
i) Excess Profits Tax Act, 1940, Section 2(5)
ii) Indian Income-tax Act, 1922, Section 10 and Section 12

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