2003 (12) TMI 37 - HC - Income Tax

Income from lease assessability - temporary arrangement with the lessee - the intention, that the directors of the assessee to remain associated with the management of the factory, even after the lease - Under the agreement upon the expiry of the lease, the lessor is to take over the staff and workmen then in employment in the said factory and also to take over all useable stocks of stores, spare parts and the raw materials. The lessor has kept the option to determine the lease by giving the lessee three months prior notice in writing. The aforesaid facts all taken together go to indicate that the assessee had no intention of parting with the factory finally and it was a temporary arrangement with the lessee without keeping any option for the lessee to renew the lease - income from lease was assessable as business income

Summary

Issues Involved:
1. Classification of lease rent income as "business income" or "income from other sources" for the assessment years 1978-79, 1979-80, and 1981-82.

Detailed Analysis:

Classification of Lease Rent Income:
The primary issue in this appeal is whether the lease rent income received by the petitioner, a public limited company engaged in the manufacture and sale of sugar, should be classified as "business income" or "income from other sources." The petitioner had leased out its sugar factory to M/s. Gobind Sugar Mills Ltd. due to financial difficulties, and the lease rent was initially treated as business income by the income-tax authorities from 1969-70 to 1977-78. However, for the assessment years 1978-79, 1979-80, and 1981-82, the income-tax authorities reclassified the lease rent as income from other sources.

Petitioner's Contention:
The petitioner argued that the factory and its assets were always used as commercial assets, and the lease was a temporary measure to overcome financial crises. The intention was never to part with the factory permanently, and the factory was let out to be run as a sugar factory. The petitioner cited various lease deeds and directors' reports to support this claim, emphasizing that the lease agreements were temporary and did not include renewal clauses, indicating no intention to create a long-term lease.

Respondent's Contention:
The respondent-Revenue contended that the principle of res judicata does not apply to income-tax matters, and the directors' reports, although indicating control over the business, were not reflected in the lease deeds. The Revenue argued that the continuous lease period of 34 years suggested a permanent arrangement, and the entire duration of the lease should be considered to determine the petitioner's intention.

Court's Findings:
The court analyzed the facts and legal precedents, including judgments in New Savan Sugar and Gur Refining Co. Ltd. v. CIT, Universal Plast Ltd. v. CIT, and others. It concluded that the intention behind the lease agreements must be ascertained from the attending circumstances. The court noted that the lease deeds and directors' reports indicated financial difficulties as the reason for the lease and that the petitioner retained certain controls and options, such as inspecting the factory and terminating the lease prematurely.

The court found that the lease agreements were temporary arrangements to address financial issues, not a final parting with the factory. The lease deeds did not include renewal clauses, and the directors' reports consistently indicated the intention to terminate the lease if financial conditions improved. Therefore, the lease rent income for the assessment years 1978-79, 1979-80, and 1981-82 should be treated as business income.

Conclusion:
The appeal was allowed, and the lease rent income for the assessment years 1978-79, 1979-80, and 1981-82 was classified as business income. The court clarified that future assessments could reach different conclusions if new facts indicated a permanent arrangement, but such findings must be based on separate facts and not be inconsistent with identical facts from previous years.