2002 (8) TMI 88 - HC - Income Tax

Business, Other Sources, Property Taken On Lease - 1. Whether, on the facts and circumstances of the case, the rental income from the Bank of Baroda was taxable under the head Business income or Income from other sources ? - 2. Whether, on the facts and circumstances of the case, the interest difference on the extra amount of Rs. 2,50,000 could be allowed as a deduction? - The answer to question No. 1 is in the affirmative, that is to say, the rental income from the Bank of Baroda was taxable under the head Business income and not Income from other sources . The answer to question No. 2 is in the affirmative, that is to say, the interest difference on the extra amount of Rs. 2.50 lakhs was rightly allowed as a deduction. Both the questions are, therefore, answered in favour of the assessee and against the Revenue.

Summary

Issues:
1. Taxability of rental income from Bank of Baroda under 'Business income' or 'Income from other sources'.
2. Allowability of interest difference on the extra amount of Rs. 2,50,000 as a deduction.

Analysis:

Issue 1: Taxability of Rental Income
The case involved a reference by the Commissioner of Income-tax regarding the taxability of rental income for the assessment years 1979-80, 1980-81, and 1981-82. The Income-tax Appellate Tribunal referred two questions to the High Court for opinion. The Income-tax Officer treated the rental income as "income from other sources" based on the objects clause of the memorandum of association. However, the Commissioner of Income-tax (Appeals) held that the activity constituted a business. The Tribunal, considering the activities of the assessee-company, concluded that the rental income fell under "Income from profits and gains of business or profession." The Tribunal noted the amendment to the objects clause and the business activities carried out by the company, leading to the assessment of rental income as income from business.

Issue 2: Allowability of Interest Difference
Regarding the interest difference on the extra amount of Rs. 2,50,000, the Tribunal found that the additional funds were advanced to the Hindu undivided family for commercial expediency. The Tribunal considered the business interest of the assessee-company in advancing the extra amount to enable construction of additional floors. It concluded that the interest paid was allowable as a deduction, given the business nature of the transaction. The High Court upheld the Tribunal's decision, stating that the interest difference was rightly allowed as a deduction.

In the final judgment, the High Court affirmed the Tribunal's decision, stating that all relevant factors were considered, and the law was applied correctly based on the facts and evidence. The High Court answered both questions in favor of the assessee, concluding that the rental income was taxable under "Business income" and the interest difference was rightly allowed as a deduction. The reference was disposed of with no order as to costs.