1981 (11) TMI 42 - HC - Income Tax

Summary

Issues:
1. Interpretation of business activity for the purpose of determining the status of a registered firm.
2. Validity of orders passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961.
3. Whether income derived from the lease of a factory constitutes income from business assessable under section 10 of the Income-tax Act.

Analysis:
The High Court was tasked with determining whether the Income-tax Appellate Tribunal was justified in upholding the orders passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961 for the assessment years 1972-73 and 1973-74. The assessee-firm, engaged in manufacturing machinery parts and hand-tools, ceased its manufacturing and trading activities, leasing out its factory premises instead. The Commissioner of Income-tax contended that since no business activity was conducted during the relevant accounting periods, the firm could not be considered a registered firm. The Commissioner issued notices under section 263 to cancel the orders granting registered firm status. The assessee argued that letting out the property constituted business activity, but the Commissioner disagreed, leading to the cancellation of the orders.

The High Court considered the legal precedent established in earlier judgments of the court. Referring to the case of Dal Chand & Sons v. CIT [1968] 69 ITR 247, the court emphasized that earning profits or gains from a commercial asset, regardless of whether it is run by the owner or a lessee, constitutes business activity. The court also cited Nauharchand Chananram v. CIT [1971] 82 ITR 189, which further supported the position that income derived from leasing a factory qualifies as income from business under section 10 of the Income-tax Act. The Revenue's argument that the partnership deed lacked an express provision for letting out property was dismissed by the court, which highlighted a clause allowing the partnership firm to engage in any business mutually agreed upon, including renting out property.

Ultimately, the High Court ruled in favor of the assessee, holding that the income derived from leasing the factory premises constituted income from business assessable under section 10 of the Income-tax Act. The court rejected the Revenue's argument and answered the question of law in the negative, indicating a decision in favor of the assessee. No costs were awarded in this judgment.