2019 (10) TMI 1002 - HC - Income Tax

Correct head of Income - Income from business or income from house property or income from other sources - property acquired by the assessee and subsequently entered into an agreement with GAIL and the receipts at the hand of assessee pursuant to the agreements - HELD THAT - In the present case, the AO found sufficient materials and changes in the year under consideration, as he after examining the relevant clauses of agreements formed an opinion that the property was taken on lease for giving it on rent to GAIL. Further, Section 2(13) defines business, which includes any trade, commerce or manufacture or adventure or concerned in the nature of trade, commerce or manufacture. In the present case no business activity was being carried out by the assessee as business is a continuous and systematic activity carried on with a view to earn profit. Further, the records of the assessee revealed that only one person was employed, which cannot go on to establish the fact that any business activity was being carried out by the appellant, and the premises was only let out to GAIL pursuant to the agreement and was thus rightly assessed by the Assessing Officer under the heading 'income from house property and income from other sources'. In a similar set of fact, the Bombay High Court in case of Mangla Homes Pvt. Ltd. vs. Income Tax Officer 2008 (8) TMI 522 - BOMBAY HIGH COURT following the decision of the Apex Court in case of East India Housing and Land Development Trust Ltd. v. CIT 1960 (11) TMI 7 - SUPREME COURT held that income derived by the company from shops and stalls is income received from property and falls under the specific head described in Section 9 being income from property. AO after examining all the three agreements found that the assessee did not indulge in any kind of recurring, systematic and in organized manner, business activity and having only one employee rightly assessed the receipts under the heading 'income from house property and income from other sources'. In depth and the findings recorded by the authorities below, we are of the considered opinion that as the appellant-assessee did not carry out any systematic, recurring and in organised manner, any business activity nor there was any volume, frequency, continuity and regularity of transactions, and only one person was employed by him for the management and look after of the leased property, the taxing authorities had rightly held the receipts to be income from house property and income from other sources and not business income.

Summary

Issues Involved:
1. Classification of receipts as business income vs. income from house property/other sources.
2. Legality of the Tribunal's decision to discard the treatment of receipts as business income for specific assessment years.

Issue-wise Detailed Analysis:

1. Classification of Receipts as Business Income vs. Income from House Property/Other Sources:
The primary issue was whether the receipts from leasing a property to GAIL should be classified as business income or income from house property/other sources. The assessee argued that the receipts should be considered business income because the firm was engaged in real estate and allied activities, including leasing and maintaining properties. The assessee contended that the three agreements with GAIL were part of a composite transaction and should not be read in isolation.

The court examined various precedents, including the Constitution Bench judgment in Sultan Brothers Pvt. Ltd. vs. CIT and other relevant cases like Universal Plast Ltd. vs. CIT and Karnani Properties Ltd. vs. CIT. The court noted that merely stating an object in the partnership deed does not automatically classify the income as business income. The court emphasized the necessity of a systematic, continuous, and organized business activity to classify the income as business income.

The court found that the assessee did not engage in any recurring or systematic business activity. Only one person was employed for maintaining the property, which indicated a lack of business operations. The court concluded that the receipts were rightly assessed as income from house property and other sources because the primary activity was leasing the property, not conducting a business.

2. Legality of the Tribunal's Decision to Discard the Treatment of Receipts as Business Income:
The assessee argued that the Assessing Officer (AO) had already accepted the receipts as business income for the assessment year 2005-06, and thus, the same treatment should have been maintained for subsequent years. The court referred to the Supreme Court's judgment in Bhart Sanchar Nigam Ltd. vs. Union of India, which stated that res judicata does not apply to tax matters for different assessment years because each year is a distinct cause of action.

The court also cited the Supreme Court's decision in Commissioner of Income Tax vs. British Paints India Ltd., which emphasized the AO's duty to ensure that the correct profits and gains are deduced from the accounts maintained by the assessee. The court found that the AO had sufficient material to reassess the income for the subsequent years and rightly classified the receipts under the correct heads.

The court concluded that the AO and the Tribunal were justified in treating the receipts as income from house property and other sources for the assessment years in question. The court dismissed the appeals and upheld the Tribunal's decision.

Conclusion:
The court dismissed the appeals, holding that the receipts from leasing the property to GAIL were rightly classified as income from house property and other sources, not business income. The court also affirmed that res judicata does not apply to tax matters for different assessment years, allowing the AO to reassess the income based on the material available for each year. The questions of law were answered in favor of the Revenue and against the assessee.