2022 (8) TMI 525 - AT - Income Tax

Rental income from letting out of the factory building - Profits and gains of business or profession OR Income from Other Sources - HELD THAT - Assessee has ceased its business operations and leased out factory building and Plant Machinery to one lessee under two separate agreements. However, the terms and conditions of both the leases are pari-materia the same. The terms of the lease agreements led to formation of belief that the intention of the assessee was to lease out both the assets together to the same person and for the same period. The separate agreements could only be considered as the deeds of convenience deigned to suit the requirements. As long as the Machinery was housed in the factory building and that too in operational condition, the building could not be let out to some other person. Considering this factual matrix, Ld. CIT(A) reached a conclusion that the letting of the two assets was inseparable. In para 4.2.6 of the impugned order, the Ld. CIT(A) has tabulated the lease tenure and lease rental to the received under the two agreement. The perusal of the same would show that the terms and conditions go hand-in-hand which would support the conclusion that the intention of the assessee was to lease out both the assets to the same lessee and the usage of the two assets was inseparable. Therefore, the conclusion of Ld. CIT(A) could not be faulted with. The income earned by the assessee, under both the streams, have rightly been held to be assessable u/s 56(2)(iii) which provide for assessment of income as Income from other sources where the assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income- tax under the head Profits and gains of business or profession . Therefore, we confirm the stand of Ld. CIT(A) in the impugned order. The appeal stand dismissed.

Summary

Issues:
Assessment of rental income from letting out factory building, interpretation of relevant sections of the Income Tax Act, treatment of rental income under different heads, permissibility of splitting rental income under different heads, applicability of deductions, allowance of expenses, inseparability of leasing agreements for factory building and machinery.

Analysis:

Assessment of Rental Income:
The appellant contested the assessment of rental income from letting out the factory building as Income from Other Sources. The contention was based on the interpretation of Sec. 56(1) and Sec. 22 of the Income Tax Act, 1961. The appellant argued that the factory building was let out only after the cessation of business activities and that the letting out of plant & machinery and the factory building occurred through separate lease deeds at different times. The appellant also claimed that the split-up of rental income under different heads was permissible based on judicial decisions. However, the Assessing Officer deemed the income assessable under the head of other sources. The appellate tribunal upheld the Assessing Officer's decision, emphasizing the inseparability of the leasing agreements for the factory building and machinery, leading to the income being assessable as Income from Other Sources under Sec. 56(2)(iii).

Interpretation of Relevant Sections:
The appellant raised concerns regarding the incorrect application of the provisions of law and judicial precedents by both the Assessing Officer and the Commissioner of Income Tax (Appeals). The tribunal analyzed the terms and conditions of the lease agreements for the factory building and machinery, concluding that the intention of the appellant was to lease out both assets together to the same lessee for the same period. This analysis aligned with the provisions of Sec. 56(2)(iii) of the Act, supporting the decision to assess the income as Income from Other Sources.

Treatment of Rental Income:
The tribunal addressed the issue of treating the rental income from the factory building and machinery under different heads. The appellant argued for a separate treatment of income, while the Assessing Officer assessed the income from both streams as income from other sources. The tribunal upheld the Assessing Officer's decision based on the inseparability of the leasing agreements and the intention of the appellant to lease out both assets together.

Permissibility of Splitting Rental Income:
The appellant contended that splitting the rental income under different heads was feasible, citing judicial decisions. However, the tribunal emphasized the factual matrix of the case, highlighting the inseparability of the leasing agreements and the intention of the appellant to lease out both assets together. This led to the confirmation of the Assessing Officer's assessment of the income as Income from Other Sources.

Allowance of Expenses:
Regarding the allowance of expenses, the tribunal noted that the Assessing Officer had disallowed certain expenses, including depreciation on a car. The Commissioner of Income Tax (Appeals) directed the Assessing Officer to allow these expenses, which was upheld by the tribunal.

Inseparability of Leasing Agreements:
The tribunal reiterated the inseparability of the leasing agreements for the factory building and machinery based on the terms and conditions of the agreements. The intention of the appellant to lease out both assets together to the same lessee for the same period was a crucial factor in assessing the income as Income from Other Sources.

Conclusion:
Both appeals challenging the assessment of rental income were dismissed by the tribunal, affirming the decision to treat the income as Income from Other Sources based on the inseparability of the leasing agreements for the factory building and machinery. The tribunal also upheld the allowance of certain expenses as directed by the Commissioner of Income Tax (Appeals).