1987 (12) TMI 1 - SC - Income Tax

Whether, the income derived by the assessee-company by way of lease rent from the letting out of its assets during the years ended 31-12-1959, 31-12-1960, 31-12-1961 and 31-12-1962, is assessable to tax under the head Profits and gains of business or under the head Income from other sources

Summary

Issues Involved:
1. Classification of income derived from lease rent.
2. Applicability of section 24 of the Indian Income-tax Act, 1922.
3. Intention behind letting out assets.
4. Precedents and judicial interpretations relevant to business income versus rental income.

Issue-wise Detailed Analysis:

1. Classification of Income Derived from Lease Rent:
The core issue was whether the income derived by the assessee-company from the lease rent of its assets should be classified under "Profits and gains of business" or "Income from other sources." The Tribunal found that the income should be treated as business income, noting the temporary nature of the lease and the intention to exploit commercial assets for business purposes. The High Court upheld this view, relying on precedents such as CEPT v. Shri Lakshmi Silk Mills Ltd. and Narain Swadeshi Weaving Mills v. CEPT, which established that income from temporarily letting out commercial assets could be classified as business income.

2. Applicability of Section 24 of the Indian Income-tax Act, 1922:
Section 24 deals with the set-off and carry-forward of losses. The High Court noted that if the lease rent was classified as business income, the unabsorbed loss of the preceding year could be adjusted against such income under section 24. This was crucial because the assessee sought to adjust its unabsorbed losses from previous years against the lease rent income.

3. Intention Behind Letting Out Assets:
The Tribunal and the High Court both emphasized the intention behind letting out the assets. The Tribunal found that the assessee-company did not intend to discontinue its business activities but rather aimed to liquidate its liabilities and salvage the company from financial crisis. The lease was temporary, and the company maintained its assets with an intention to restart manufacturing. This intention was crucial in classifying the income as business income.

4. Precedents and Judicial Interpretations:
The judgment extensively discussed various precedents to elucidate the principles governing the classification of income. Key cases included:
- CEPT v. Shri Lakshmi Silk Mills Ltd.: Established that income from temporarily letting out commercial assets is business income.
- Narain Swadeshi Weaving Mills v. CEPT: Highlighted that the definition of "business" includes the continuous exercise of an activity with a set purpose.
- CIT v. Calcutta National Bank Ltd.: Reiterated that the term "business" has a wide scope and includes activities carried out in the course of business.
- New Savan Sugar and Gur Refining Co. Ltd. v. CIT: Distinguished between rental income and business income based on the intention behind letting out assets.

The Supreme Court concluded that the Tribunal's finding that the income was business income was neither perverse nor unsustainable. The High Court's decision was upheld, and the appeals were dismissed with costs. The Special Leave Petitions were also dismissed without any order as to costs.

Conclusion:
The Supreme Court affirmed the High Court's judgment that the income derived by the assessee-company from the lease rent of its assets was assessable under "Profits and gains of business." The judgment underscored the importance of the intention behind letting out assets and relied on established precedents to classify the income appropriately. The appeals and petitions were dismissed, reinforcing the principle that temporary suspension of business activities for financial recovery does not change the nature of business income.