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2011 (4) TMI 558 - HC - Income TaxBusiness income or Income from other source - Lease rental income - The assessee had entered into a lease agreement on 8.9.1993 for a period of 11 months - Admittedly after a period of 11 months the lease agreement was not renewed or the period was extended - There is no material and not even a recital to the effect that the company is likely to restart its business - Moreover it is also not the case of the assessee that its company had run to loss and therefore it has no other alternative than to lease out the company - In such circumstances we are not in a position to accept the contention of the assessee that the income arrived at by letting out its factory is to be treated as business income when there was nothing on record to show that the assessee had only let out the same temporarily and intended to resume its business - Appeals filed by the Revenue are allowed.
Issues Involved:
1. Whether the income from letting out the factory should be treated as "business income" or "income from other sources". 2. Applicability of the Supreme Court's decision in Vikram Cotton Mills Ltd. to the present case. 3. Consideration of the Supreme Court's decision in Universal Plast Ltd. and its relevance to the present case. Detailed Analysis: Issue 1: Treatment of Income from Letting Out Factory The core issue revolves around the classification of income derived from leasing the factory premises. The assessee, a Private Limited company, filed returns for the assessment years 1997-98 to 1999-2000, showing nil income but claimed lease rental income as business income. The Assessing Officer, however, assessed this income as "income from other sources." The Commissioner of Income Tax (Appeals) reversed this finding, treating the lease rental as business income. The Income Tax Appellate Tribunal upheld the appellate authority's decision, prompting the Revenue to challenge this in the High Court. Issue 2: Applicability of Vikram Cotton Mills Ltd. The Tribunal and the appellate authority relied heavily on the Supreme Court's decision in CIT (Appeals) v. Vikram Cotton Mills Ltd., where the rental income from leasing business assets was treated as business income. In Vikram Cotton Mills, the Supreme Court concluded that the intention behind leasing was crucial, and temporary suspension of business for reconstruction did not change the nature of income to "income from other sources." Issue 3: Consideration of Universal Plast Ltd. The Revenue argued that the later Supreme Court decision in Universal Plast Ltd. should guide the present case. This case clarified that no precise test exists to determine whether income from leasing assets falls under "profits and gains of business" or "income from other sources." It emphasized that this determination depends on the businessman's intent, the lease agreement's terms, and whether the business assets were let out temporarily or permanently. Judgment Analysis: 1. Intention and Temporary Nature of Lease: The High Court examined whether the assessee intended to resume its business or had permanently ceased operations. The assessee had leased the factory for 11 months starting from 8.9.1993, without renewal or extension. Unlike Vikram Cotton Mills, where the lease was part of a High Court-approved scheme to tide over financial crises with a clear intent to resume business, the present case lacked any such indication. 2. Application of Universal Plast Ltd. Propositions: The High Court applied the propositions from Universal Plast Ltd., which include: - The mixed question of law and fact to determine the nature of income. - The relevance of the lease period and the intention to resume business. - The distinction between temporary suspension and permanent cessation of business activities. The High Court found that the assessee did not demonstrate any intent to restart the business, nor was there any material to suggest that the lease was temporary. 3. Conclusion: The High Court concluded that the income from letting out the factory should be treated as "income from other sources" and not "business income." The substantial question of law was answered against the assessee. The orders of the appellate authority and the Tribunal were quashed as they were contrary to the Supreme Court's propositions in Universal Plast Ltd. Final Decision: The appeals filed by the Revenue were allowed, and the impugned orders were quashed. No costs were awarded.
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