Income received by an assessee-company in terms of an amalgamation agreement is not income from business if the intention of the assessee was to part with the entire machinery and other units of the concern with the sole purpose of earning rental income.

P.S.Sahay, J.

1. This is a reference under Sec.256(1) of the Income-tax Act, 1961 (hereinafter referred to as " the Act "), and in the statement of case submitted by the Tribunal the following questions have been referred for the opinion of the court :

" (1) Whether, on the facts and in the circumstances of the case, the income received by the assessee-company in terms of the amalgamation agreement was income from business ?

(2) If the answer to the above question is in the affirmative, whether the assessee is entitled to deduction for the expenses ? "

2. In order to appreciate the points involved in this application it is necessary to state some facts. The assessee, M/s. Selected Jharia Colliery Co, is a private limited company and derives income from colliery. Another private limited company, namely, M/s. East Bhugatdih Colliery (P.) Ltd. is situated contiguous to the assessee-company. By a deed dated March 5, 1963, the assessee-company and Bhugatdih Colliery were amalgamated for the sake of convenience and economic working and development of both the collieries. The amalgamated unit was to be known under the name and style of East Bhugatdih Colliery, and it was to carry on business operations in both the collieries. According to the agreement, the assessee was to get commission at the rate of Rs. 1.69 per ton of all coal raised from the collieries and an additional commission at the rate of 25 p. per ton of hard coke manufactured and despatched. During the assessment year 1968-69, the assessee received commission of Rs. 74,475. The ITO allowed deduction of Rs. 9,835 and assessed on the total income of Rs. 64,640.

3. On appeal, it was contended on behalf of the assessee-company that the income earned was business income and consequently all the deductions claimed by the company should have been allowed, but it was not accepted. Against the aforesaid order another appeal was taken before the Tribunal, which, by its order dated May 30, 1972, accepted the contention raised on behalf of the assessee and allowed the appeal on the basis of the earlier order of assessment passed by the Tribunal. On a consideration of the materials and after perusing the agreement it held that the amalgamation agreement did not create a relationship of lessor and lessee between the two companies. It further held that the sole purpose for executing the document was for good day-to-day working of the two units, and the assessee-company had appointed Bhugatdih Colliery as their agent and thus the relationship between them was that of principal and agent and it could not be treated as a lease, and the income was to be assessed as income from business. In that view of the matter, the case was remanded to the ITO for a fresh assessment in accordance with law, and the assessee-company was given full opportunity to file their papers in support of their case, relying on certain decisions which I will refer to later.

4. At the instance of the department, the Tribunal has stated a case which has been stated above.

5. Mr. B. P. Rajgarhia, learned counsel appearing on behalf of the department, has submitted that on reading the agreement it appears that it was a clear case of lease, because the entire management, control and administration of the company was transferred to Bhugatdih Colliery, and the Tribunal has, therefore, erred in law in accepting the case of the assessee. In support of his contention, reliance has been placed on the decision in New Savan Sugar and Gur Refining Co. Ltd. V/s. CIT [1969] 74 ITR 7 (SC), where a similar question arose for consideration under the provisions of the old Act of 1922. In order to appreciate the points it will be necessary to refer to some of the terms of the agreement :

"As a result of the amalgamation agreement, East Bhugatdih Colliery Co. is empowered- (Clause 4 of the agreement :)--to carry on the colliery operations and be responsible for all costs, maintenance and repairs of the collieries of the assessee-