2006 (10) TMI 120 - HC - Income Tax

Power exercised by Commissioner u/s 263 - erroneous and prejudicial order - Income from hiring of air conditioners to its directors - 'income from business' Or income from other sources - HELD THAT - In any event, when there are sufficient materials to support the claim of the assessee to treat the income derived from the hiring of air conditioners as business income for over two decades, the Commissioner has no authority to invoke the revisionary jurisdiction u/s 263 of the Act, merely on the surmise that the order of the Assessing Officer is erroneous or the order is prejudicial to the Revenue, on the ground of change of the lessee. Hence, in our considered opinion, the Tribunal had rightly held that the Commissioner had erroneously exercised the power u/s 263 of the Act. In the instant case, as referred to in the order of the Tribunal, the object clause of the memorandum of association of the assessee/company specifies that the object of the company is to carry on the business of running cinema house and lease out the climate control device and other machineries and as the assessee could not get the no objection certificate for running the cinema house, it was carrying on the business by regularly leasing out the air conditioners. Merely because of the change in the parties to whom the air conditioners were leased, in our considered opinion, that would not be a conclusive premise to change the assessment of the same from the head Business income to Income from other sources . Thus, finding no substantial question of law arises, this appeal is dismissed.

Summary

Issues:
1. Classification of income from hiring of air conditioners.
2. Validity of Commissioner's exercise of power under section 263 of the Income-tax Act.

Issue 1: Classification of income from hiring of air conditioners

The case involved a dispute regarding the classification of income derived from the hiring of air conditioners by the assessee. The Commissioner of Income-tax alleged underassessment and issued a notice proposing to treat the income as "income from other sources" instead of "income from business." The assessee argued that the business activity of leasing air conditioners had been ongoing for two decades, with expenses directly related to the business. The Tribunal accepted the assessee's explanation, emphasizing the continuity of the business activity despite a change in lessee, and set aside the revision order under section 263 of the Act. The Tribunal concluded that the income from hiring air conditioners should be considered as business income, consistent with the assessee's historical business operations.

Issue 2: Validity of Commissioner's exercise of power under section 263 of the Income-tax Act

The second issue revolved around the validity of the Commissioner's exercise of power under section 263 of the Income-tax Act. The Commissioner contended that the assessee did not conduct an organized and systematic business of hiring air conditioners, leading to the refusal of statutory allowances under the head "Income from house property." However, the Tribunal disagreed, highlighting that the assessee had consistently operated in the same line of business for nearly two decades. The Tribunal emphasized that the change in lessee did not alter the nature of the business activity. The High Court, relying on legal precedents, held that the Commissioner could not invoke the revisionary jurisdiction under section 263 merely based on a change in lessee, especially when there was substantial evidence supporting the classification of income as business income. The Court further cited legal principles to support the classification of income derived from hiring air conditioners as profits and gains from business, rather than income from other sources. Consequently, the Court dismissed the appeal, finding no substantial question of law.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing the continuity of the assessee's business activity and rejecting the Commissioner's attempt to reclassify the income. The judgment highlighted the importance of substantial evidence and legal principles in determining the classification of income for taxation purposes, ultimately dismissing the appeal.