2002 (9) TMI 90 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the rental for the mere letting of godowns received by the assessee should be assessed under the head Income from business and not property ? - The case of Karanpura Development Co. Ltd. v. CIT relied upon by the Tribunal, dealt with the case of sub-lease given by a company which had acquired coal mining leases over large areas and the object of the company was to acquire such leases, develop them as coalfields and then sub-lease them to collieries and other companies. In the context of the facts of that case, the court held that the amounts paid to the lessors by the sub-lessees constituted business income. - The Tribunal was in error in holding that the rental income derived by the assessee was required to be treated as business income and not as income from property. The question referred to us is answered in favour of the Revenue and against the assessee.

Summary

Issues:
Assessment of rental income under 'Income from business' or 'property'

Analysis:
The case involved the assessment of rental income received by the assessee from letting out warehouses to the Food Corporation of India for the assessment years 1984-85 to 1988-89. The primary question was whether the rental income should be classified as 'Income from business' or 'property' for taxation purposes. The Assessing Officer initially treated the rental income as income from house property, contrary to the assessee's claim that it should be considered business income. The appellate authority, citing the decision in the case of Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362, held that the rental income should indeed be assessed as business income. This decision was upheld by the Tribunal, leading to the Revenue challenging the decision before the High Court.

The High Court analyzed the nature of the income received by the assessee, which was derived from renting out warehouses, a core objective of the assessee-company being the construction and leasing of warehouses. The court referred to the case of East India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR 49, where it was established that income from letting out property should be assessed as income from house property. The court emphasized the classification of income under distinct heads based on the source of income, as outlined in section 6 of the Indian Income-tax Act, 1922. It was clarified that the income from a specific source falling under a particular head must be computed for taxation under that head, irrespective of potential overlap with other heads.

Drawing parallels with the Supreme Court's previous rulings, the High Court determined that the income derived from the warehouses, regardless of the lessee's identity or duration of occupancy, should be categorized as income from property. The court highlighted that the primary source of income was the occupation of the warehouses, aligning with the precedent that income from property remains unchanged based on temporary or shifting occupants. The judgment differentiated the case at hand from Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362, which involved sub-leasing coal mining leases, emphasizing that the rental income in the present case did not qualify as business income.

Ultimately, the High Court concluded that the Tribunal erred in categorizing the rental income as business income, ruling in favor of the Revenue and against the assessee. The judgment reaffirmed the principle that income derived from letting out property should be assessed under the head of 'Income from property,' emphasizing the importance of the income source in determining the appropriate tax treatment.