2011 (8) TMI 815 - HC - Income Tax

Income from property or business income - as the principle of income from property is an income of profit and gain of business or profit and gain from the house property have been clearly laid down by the Supreme Court - In the case of Universal Plast Ltd vs. Commission of Income Tax 1999 -TMI - 5737 - SUPREME Court wherein it was held that the amount earned by an assessee by leasing out the assets of the business would not be income from business carried on by it - Held that 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 - Taxable as business income - Decided in favor of the assessee

Summary

Issues Involved:
1. Classification of income from leasing property as 'Income from house property' vs. 'Income from business'.
2. Interpretation of agreements and Memorandum of Association regarding the nature of income.
3. Application of legal precedents and principles to determine the nature of income.

Detailed Analysis:

1. Classification of Income from Leasing Property:

The primary issue in these Income Tax Appeals under Section 260-A of the Income Tax Act was whether the income earned by the assessee from leasing out premises should be assessed as 'Income from property' or 'Income from business'. The assessee declared the income under 'Business Income', but the Assessing Officer (AO) assessed it under 'Income from house property', determining the annual letting value at Rs.22,70,497. This assessment was based on the fact that the property was given to Citibank on a leave and licence basis, and the income was derived from the property as its owner.

2. Interpretation of Agreements and Memorandum of Association:

The assessee argued that the letting out of the property was a business decision to avoid losses and exploit business assets for profit. The Memorandum of Association authorized the company to lease property as part of its business activities. The agreements between the assessee and Citibank, including the initial agreement dated 7th November 1987 and a subsequent agreement dated 4th November 1988, indicated that the property was leased to Citibank with a structured licence fee and interest-free deposits, suggesting a business arrangement rather than a simple property rental.

3. Application of Legal Precedents and Principles:

The Tribunal and the High Court referred to several precedents, including the Supreme Court's judgment in Universal Plast Ltd vs. CIT, which provided tests to determine whether income from leasing assets should be classified as business income. These tests include considering whether the assets are let out temporarily while the business continues, whether the company has ceased business activities, and the nature of the asset's exploitation.

The Tribunal initially held that the income should be assessed under 'Income from house property', relying on various judgments. However, the High Court found that the Tribunal did not apply the principles from Universal Plast Ltd correctly. The High Court noted that the assessee continued its main business activities and let out only one of its properties to Citibank, which was a prudent business decision to exploit business assets for profit.

Conclusion:

Applying the tests from Universal Plast Ltd, the High Court concluded that the income from leasing the property should be classified as 'Income from business'. The substantial question was decided in favor of the assessee, and the Tribunal's order was set aside. The Tribunal was directed to decide the matter in accordance with the observations made in the judgment. The Income Tax appeals were allowed, recognizing the income from the leased property as business income.