2015 (5) TMI 432 - HC - Income Tax

Treatment to the rental income from letting out of the godowns - business income or income from property - Tribunal confirmed the order of the CIT(Appeals) holding that so long character of the godown is retained as a godown it should be treated as a commercial asset and its rental income must be treated as an exploitation of commercial asset in the nature of trade - Held that - In the present case the main business of the assessee was the export of tobacco and for that purpose they had constructed godowns. As submitted by the learned counsel for the assessee the assessee would let out the godowns when they would not require the same and earn rental income therefrom. Apart from letting out the godowns no other services/amenities admittedly were extended by the assessee to the lessees. Merely because one of the objectives in the partnership deed was to let out the godowns would not mean that the assessee had undertaken the activity of construction of godowns and letting them out as business activity. Moreover it is not the case of assessee that letting out of the godowns was continuous activity from year to year. Therefore in our opinion the income received by the assessee by way of rent was the income received from property and it would not fall under the head income from business. The character of the income would not stand altered because it was received by the firm with one of the objects of the partnership deed to let out their godowns. The income derived from letting out the property in the facts of the present case would not amount to profits or gains from the business. In other words the income earned by letting out the godowns cannot be termed or treated as income from business. From the facts of the present case it is clear that the assessee could let out their godowns only because those were not in use at the relevant time. Therefore the rent received by the assessee would have to be computed as income from property. - Decided in favour of the Revenue

Summary

Issues Involved:
1. Whether the income from letting out of the godowns should be treated as income from business.
2. Whether the assessee is entitled to continuation of registration as a firm.

Issue-wise Detailed Analysis:

1. Income from Letting Out of Godowns:
The primary issue revolves around whether the rental income from the godowns should be classified as "income from business" or "income from property." The respondent-assessee, a partnership firm engaged in the export of tobacco, let out its godowns when not in use and claimed that the rental income should be treated as income from business, based on Clause 3 of the partnership deed. The Income Tax Appellate Tribunal (ITAT) and the Commissioner of Income Tax (Appeals) initially ruled in favor of the assessee, treating the rental income as business income. However, the High Court examined precedents and legal principles to determine the correct classification.

The court referred to several judgments to support its decision:
- Sultan Brothers Private Limited v. Commissioner of Income-Tax, Bombay City II: The Supreme Court held that income from letting out a building and furniture should be computed separately, and such income should not be classified under business income unless it is part of a continuous business activity.
- Universal Plast Ltd. v. Commissioner of Income-Tax: The Supreme Court affirmed that leasing out a factory was not a business activity but a make-shift arrangement, and thus, the income was not business income.
- Commissioner of Income-Tax v. Y. Narayana Murthy: The High Court held that letting out godowns did not amount to carrying on a business as it lacked continuous activity from year to year.
- Commissioner of Income-Tax v. Veerabhadra Industries: The court reiterated that a single act of constructing and letting out a godown does not constitute a business.
- East India Housing and Land Development Trust Ltd. v. Commissioner of Income-Tax: The Supreme Court held that income from letting out properties owned by a company formed for developing markets is income from property, not business.

The court concluded that the rental income from the godowns should be treated as income from property, not business. The assessee's activity of letting out godowns was not continuous and systematic to qualify as a business.

2. Entitlement to Continuation of Registration as a Firm:
Given the conclusion on the first issue, the second issue concerning the continuation of registration as a firm did not require further consideration. The court noted that since the rental income was not business income, the question of registration under Section 185(1)(a) of the Income Tax Act did not arise.

Conclusion:
The appeal was allowed, and the court ruled in favor of the Revenue, holding that the rental income from the godowns should be treated as income from property. Consequently, the question of the assessee's entitlement to continuation of registration as a firm became irrelevant. The court's decision emphasized the importance of continuous and systematic business activity to classify income as business income.