2016 (9) TMI 910 - HC - Income Tax

Income arising out of the leasing out of the business assets - business income or income from other sources - Held that - Clause-7 clearly indicates that the assessee did not intend the lease arrangement to continue for an indefinite period of time. That as a matter of fact the lease is now terminated is a different matter. We cannot base our decision on that fact for it has not been brought on record. However, even otherwise, clause-7 is in favour of the assessee. The Tribunal has merely speculated that the clause could be a conscious decision to avoid legal difficulties and financial loss on account of the termination of the employment and reemployment by UB Ltd. If it was the assessee s intention to make this a permanent arrangement or an arrangement for an indefinite period, there was no reason for it to insist upon UB Ltd. continuing with its employees. Indeed, if UB Ltd. terminated the services of the employees in accordance with law, it would not have affected the assessee s rights or interest in its property in any manner whatsoever if the assessee intended continuing with the system indefinitely. The fact that the assessee insisted upon its employees being retained is a strong indication that it intended coming back into the business using the same assets and properties. This was an important term of the contract. There are other factors also which together with clause-7 support the assessee s case. For instance, the second paragraph of clause-1 provides that after completion of two years the parties would discuss the revision of the annual consideration of ₹ 30 lakhs for the year 2005-06 onwards. If the parties had not agreed to the revised consideration, the agreement would have come to an end. In the normal course of events, a party intending to continue such an arrangement for an indefinite period of time, would have finalized the consideration payable and not have left such a crucial aspect open-ended. The second paragraph of clause-1 read with clause-4 makes this clearer. Clause-4 requires the parties to mutually decide regarding the capital expenditure for upgrading the technologies and the facilities. Clause-2 also indicates that the assessee retained an interest in the plant and machinery and the property for otherwise it would not have agreed to expand the installed capacity at its costs. It was contended on behalf of the Revenue that clause-2 indicates that there was no necessity on account of financial hardship for the assessee leasing the property. However, as Mr. Abhishek Sanghi, the learned counsel appearing on behalf of the appellant pointed out, the financial difficulties faced by the assessee would have been alleviated on account of the lease rentals that it was to receive under the agreement. The construction of a term in an agreement is a question of law. Moreover, as we indicated, the Tribunal proceeded on an erroneous presumption, namely, that UB Ltd. and the assessee are sister concerns. In any event, the Tribunal ought to have considered the agreement as a whole. The findings of the Tribunal, therefore, are perverse. We, however, confirm the finding of the Tribunal that the decision of the Department to treat the income for the previous years in respect of the first lease deed as business income does not bind the Department with respect to the income received under the second lease deed.In the circumstances, the question of law is answered in favour of the assessee and against the Revenue.

Summary

Issues Involved:
1. Whether the income arising out of the leasing out of the business assets is business income or income from other sources.

Detailed Analysis:

Background:
The appeal was against the Tribunal's order allowing the Department’s appeal, challenging the Commissioner of Income Tax (Appeals) decision. The matter pertains to the Assessment Year 2004-05. The primary question was whether the lease rent received by the assessee from UB Ltd. should be assessed under "Profits and gains from business" or "Income from other sources."

Facts:
The assessee owned plant and machinery, fixtures, fittings, and equipment installed on a 10-acre property. The assessee had been manufacturing products from this property for 20 to 30 years. Two lease agreements were pivotal in this case: the first lease deed dated 01.04.1998 and the second lease deed dated 29.01.2003.

First Lease Deed:
- The first lease deed was for five years starting from 01.04.1998, with an annual consideration of ?25 lakhs for the first two years and ?30 lakhs thereafter.
- The lease rental received under the first lease deed was previously assessed as business income, which was not challenged by the Department.

Second Lease Deed:
- The second lease deed was for ten years starting from 29.01.2003, with an annual consideration of ?30 lakhs.
- The second lease deed included clauses about expanding the installed capacity, technical audits, and maintaining the employees on the rolls of the lessor.

Assessing Officer's Findings:
- The Assessing Officer concluded that the income from the lease agreement could not be considered business income, relying on the Supreme Court judgment in Sultan Bros (P) Ltd. vs. CIT.
- The CIT (A) favored the assessee, citing past practice where income under the first lease deed was considered business income.
- The Tribunal upheld the Assessing Officer’s findings, stating that the assessee had no intention of restarting the business and the lease was for an extended period of 10 years.

Tribunal's Decision:
- The Tribunal concluded that the income from letting out the plant and machinery should be classified under "income from other sources."
- The Tribunal's decision was based on the assumption that UB Ltd. and the assessee were sister concerns, which was incorrect.

High Court's Analysis:
1. Nature of Lease and Intention:
- The court noted that the duration of 10 to 15 years for such leases does not indicate an intention to part with business assets permanently.
- The lease agreement required significant investment and maintenance, indicating it was not financially feasible for a short period.

2. Precedents and Legal Principles:
- The court referred to Universal Plast Ltd. vs. CIT and Sultan Bros (P) Ltd. vs. CIT, emphasizing that the nature of the lease and the intention behind it are crucial.
- The court reiterated that no precise test exists to determine whether income from leasing assets is business income or income from other sources; it depends on the facts and circumstances of each case.

3. Clauses in the Lease Deeds:
- Clause-7 of the second lease deed indicated that the assessee intended to return to business, as it required UB Ltd. to continue employing the assessee’s employees.
- Clause-1 and Clause-4 showed that the lease arrangement was not intended to be indefinite, as they included provisions for revising the annual consideration and mutually deciding on capital expenditure.

4. Tribunal's Error:
- The Tribunal’s assumption that UB Ltd. and the assessee were sister concerns was erroneous.
- The Tribunal failed to consider the agreement as a whole and based its decision on incorrect factual premises.

Conclusion:
The High Court found the Tribunal's findings perverse and confirmed that the income from the lease should be treated as business income. The decision of the Department to treat the income from the first lease deed as business income did not bind it concerning the second lease deed.

The appeal was allowed, and the question of law was answered in favor of the assessee and against the Revenue.