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2011 (8) TMI 488 - HC - Income TaxBusiness income or Income from house property - Income from let out property - The AO assessed the income from property under the head Income from house property - Held that - If we apply the tests laid down by the Supreme Court in Universal Plast Ltd (1999 (3) TMI 15 - SUPREME Court) to the facts of the present case we find that all the assets of the business were not rented out by the appellant company. - In the interest of the company it decided to let out one of its properties to the City Bank by way of exploitation of business assets for making profit. The assets were let out while carrying out other business activities. There was nothing on record to show that the appellant had sold away the properties or abandoned its business activities. In the circumstances in order to exploit business assets as a prudent business decision the appellant took interest free loan from the City Bank rented out one of its properties to it and shifted its Regional Office. In this commercial venture the appellant received a higher income regularly from its commercial assets. - while deciding in favor of assessee matter remanded back to tribunal to decide the issue in accordance with law.
Issues Involved:
1. Classification of income from leasing property as "Income from house property" vs. "Income from business". 2. Interpretation of the agreement dated 4.11.1988 and the Memorandum of Association of the assessee company. Detailed Analysis: Issue 1: Classification of Income from Leasing Property The primary issue in this case was whether the income earned by the assessee from leasing out the premises should be assessed as "Income from house property" or "Income from business." Facts and Arguments: - The assessee, engaged in the business of import and sale of scientific instruments, had leased out a property located at Premises No. 82, 8th Floor, Sakhar Bhawan, Nariman Point, Bombay, to Citibank. - Initially, the assessee declared this income under the head "Business Income," but the Assessing Officer (AO) assessed it as "Income from house property," determining the annual letting value of the property at Rs. 22,70,497. - The CIT (A) considered the income as business income, but the Tribunal reversed this, holding it as income from house property, citing various precedents including CIT vs. Smt. Indermani Jatia, O.R.M. M.S.P.S.V. Firm vs CIT, and CIT vs National Storage Pvt Ltd. Legal Precedents and Tests Applied: - The Tribunal relied on the Supreme Court's decision in Universal Plast Ltd vs. CIT [(1999) 237 ITR 0454], which laid down tests to determine the nature of such income: 1. No precise test can be laid down; it is a mixed question of law and fact. 2. The intention behind letting out the property must be examined. 3. If all assets of the business are let out, it indicates cessation of business. 4. Temporary letting out of a few assets while continuing other business activities suggests business income. - The Tribunal concluded that the income should be classified as "Income from house property" based on these principles. Court's Analysis and Conclusion: - The High Court found that the Tribunal did not correctly apply the principles from Universal Plast Ltd to the facts of the case. - The assessee had not let out all its business assets and continued its primary business activities. The letting out of one property was a business decision to avoid losses and generate profit. - The High Court emphasized that the assessee's actions were in line with exploiting business assets for profit, thus qualifying the income as "Business Income." Issue 2: Interpretation of the Agreement and Memorandum of Association The second issue revolved around the interpretation of the agreement dated 4.11.1988 and the Memorandum of Association of the assessee company, specifically clause 3(e). Facts and Arguments: - The agreement with Citibank involved an initial licence fee and a significant interest-free security deposit. - The assessee argued that the arrangement was a strategic business decision to exploit its assets for profit, as authorized by clause 3(e) of its Memorandum of Association, which allowed the company to lease property as part of its business activities. Court's Analysis and Conclusion: - The High Court agreed with the assessee's interpretation, noting that the business decision to let out the property was within the scope of its authorized activities. - The Court highlighted that the assessee continued its business operations and had not abandoned its business activities, thus supporting the classification of the income as "Business Income." Conclusion: The High Court set aside the Tribunal's order, deciding in favor of the assessee. The income from leasing the property was to be assessed as "Business Income," not "Income from house property." The Tribunal was directed to re-evaluate the matter in light of the observations made in the judgment. The Income Tax appeals were allowed.
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