As assessee’s business to earn money using its machinery, it was taxed u/s 2(5).

1.  The assessee manufacturer of silk cloth installed a plant for dyeing silk yarn. 

2.  Owing to difficulty in obtaining silk yarn during chargeable accounting period on account of the war it could make no use of plant and let out on a monthly rent. 

3.  The Excess Profits Tax Officer included the sum realized as rent for five months, in the profits of the business of the assessee and held that excess profits tax was payable on that amount.

4.  On appeal, ACC confirmed the order. 

5.  After Tribunal too confirmed it. Reference was made to HC, wherein it was held that the said income was not profits from the business within the meaning of section 2(5) and was, therefore, not liable to excess profits tax.

      On appeal, Supreme Court held as under:

6.  If the commercial asset is not capable of being used as such, then its being let out to others does not result in an income which is the income of the business, but it cannot be accepted that an asset which was acquired and used for the purpose of the business ceased to be a commercial asset of that business as soon as it was temporarily put out of use or let out to another person for use in his business or trade. 

7.  The yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business. He is entitled to exploit it to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else.

8.  In this case the company was incorporated purely as a manufacturing concern with the object of making profit. It installed plant and machinery for the purpose of its business, and it was open to it if at any time it found that any part of its plant "for the time being" could not be advantageously employed for earning profit by the company itself, to earn profit by leasing it to somebody else. 

9.  It was difficult to hold that the income thus earned by the commercial asset was not income from the business of the company that had been solely incorporated for the purpose of doing business and earning profits. 

10.  There was no material whatever for taking the view that the assessee company was incorporated with any other object than of carrying on business or trade. Owning properties and letting them was not a purpose for which it was formed and that being so, the disputed income could not be said to fall under any section of the Indian Income-tax Act other than section 10.

11.  Cases of undertakings of this nature stand on an entirely different footing and are distinguishable from cases of individuals or companies acquiring lands or buildings and making income by letting them on hire. It was a part of the normal activities of the assessee’s business to earn money by making use of its machinery by either employing it in its own manufacturing concern or temporarily letting it to others for making profit for that business when for the time being it could not itself run it.

12.  The High Court was in error in holding that the dyeing plant had ceased to be a commercial asset of the assessee and the income earned by it and received from the lessee was chargeable to excess profits tax. The appeal was to be allowed.