2015 (9) TMI 852 - HC - Income Tax

Assessment of the rental income - claim of deduction of amount paid to tenant for vacating the property - earlier assessee was showing the income as house property income - res-judicata - this year the income was shown as business income - whether under the head business or under the head house property - Held that - Though as noted, in earlier assessment years the appellant had shown rental income as income from house property , however, in this assessment year it has claimed rental income as business income, in view of the object as set out in clause 4 of the memorandum. Though before the Tribunal the Memorandum was relied on to put forward the case that the income was part of the business and payment of compensation was to earn higher income, it was not at all considered. Since in this assessment year the appellant had claimed rental income as business income, and as previously there was no adjudication or decision considering the Memorandum, and as being the owner of the premises, payment of compensation - the expenditure - was wholly and exclusively for commercial expediency. it earning and was revenue in nature. Since compensation was paid by the appellant, the landlord of the premises, to obtain possession from the lessee/tenant so as to earn a higher rental income, it had arisen out of business necessity and commercial expediency. Since there was no question of acquiring a property it cannot be said that the payment made was for having a benefit of enduring nature. Rather the compensation was paid to the existing tenants to have their portions vacated to have new tenants with higher rent and thus to have a higher rental income which was a business activity permitted by the Memorandum.Assessing Officer has to assess the income of an assessee after considering whether the figure in the return is taxable or not and then to determine the tax in accordance with law. In determining the same, a decision has to be reached on the issue raised. Unless a decision is reached, it cannot be said that the issue was adjudicated or decided. Keeping these principles of law as formulated by the Courts in mind, the finding by the Assessing Officer and Tribunal that declaring the rental income under the head income from house property precludes the appellant from calming deduction cannot be accepted as Memorandum permitted it to carry on business of letting out properties and indisputably it was carrying on business in letting out properties and in carrying on such trading activity had paid compensation. The observation of the Tribunal that the appellant had all along, including in this assessment year, had shown the income under Income from house property cannot be a ground for denial of the deduction as in the earlier assessment years never an occasion arose for adjudication or decision on the said issue Hence, as the appellant, being the owner of the property, was carrying on business and had paid compensation for deriving higher rent which was in tune with the Memorandum a fact which was not at all considered by the Assessing Officer and the Tribunal, the question no.1 is answered in the negative, against the Revenue and in favour of the Appellant. The question no.2 is answered in the affirmative, against the Revenue and in favour of the Appellant.

Issues Involved:
1. Whether the Tribunal was justified in holding that the appellant could not claim the assessment of the rental income under the head 'business' because the same was all along offered for assessment under the head 'house property'.
2. Whether the rental income earned by the appellant is assessable under the head 'business' and the compensation of Rs. 53,50,000/- paid by it for obtaining possession from lessee/tenant so as to earn a higher income is an admissible revenue deduction.

Detailed Analysis:

Issue 1: Assessment of Rental Income under the Head 'Business'

The appellant, a public limited company, argued that its rental income should be assessed under the head 'business' rather than 'house property'. The appellant's Memorandum of Association specified that one of its main objects was to acquire and develop properties and deal with them by way of sale, lease, letting out, etc. The appellant had consistently declared rental income under 'house property' in previous years, but in the assessment year in question, it claimed the rental income as 'business income'. The Assessing Officer and the Tribunal rejected this claim, holding that there was no change in the facts of the case and that the appellant had consistently declared rental income under 'house property'. The Tribunal did not consider the Memorandum of Association, which permitted the appellant to carry on business by letting out properties. The court held that since there was no prior adjudication on this issue, the principle of consistency or res judicata did not apply. The rental income should be assessed under the head 'business' as per the appellant's Memorandum.

Issue 2: Admissibility of Compensation as Revenue Deduction

The appellant paid Rs. 53,50,000/- as compensation to two tenants to obtain vacant possession and earn higher rental income. The Assessing Officer disallowed this payment as capital expenditure, stating that it was for acquiring a benefit of enduring nature. The CIT(A) allowed the deduction, holding that the income from rent constituted the appellant's business income and that the compensation was laid out wholly and exclusively for business purposes on grounds of commercial expediency. The Tribunal reversed this decision, but the court held that the compensation was paid to secure higher rental income, which was a business activity permitted by the Memorandum. The payment was not for acquiring a new asset or advantage of enduring nature but was a revenue expenditure for business purposes. The court referred to several judgments supporting the appellant's claim, including CIT v. Auto Distributors and Empire Jute Co. Ltd. The court concluded that the compensation was an admissible revenue deduction.

Conclusion:

The court answered both questions in favor of the appellant, holding that the rental income should be assessed under the head 'business' and that the compensation paid was an admissible revenue deduction. The appeal was allowed.

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