1995 (9) TMI 90 - AT - Income Tax

Summary

Issues Involved:
1. Determination of the correct head of income for the rental income received by the assessee-trust.
2. Applicability of Section 22 (Income from house property), Section 28 (Income from business or profession), and Section 56 (Income from other sources) of the Income-tax Act.

Detailed Analysis:

1. Determination of the Correct Head of Income for the Rental Income Received by the Assessee-Trust

Background:
The assessee-trust was created on 13-12-1982 and took on lease a partly constructed property, completed its construction, and rented it out to the Post and Telephone Department, earning rental income. The trust initially showed this income as "income from property."

CIT's Invocation of Section 263:
The Commissioner of Income-tax, Surat, invoked Section 263 for assessment years 1986-87 and 1987-88, setting aside the assessments due to insufficient inquiry into the nature of the lease agreement and the funds used for construction. The ITAT Ahmedabad Bench "C" confirmed this order.

Assessing Officer's Findings:
Upon de novo assessment, the Assessing Officer concluded that since the assessee was not the owner of the property, the income could not be assessed under Section 22. He observed that the trust's activities indicated a business intent to sublet the property for profit, thus categorizing the income as business income under Section 28.

CIT(A)'s Decision:
The CIT(A) held that:
- The income could not be taxed under Section 22 as the assessee was not the owner.
- The assessee-trust was not carrying on any business activity; therefore, the income could not be assessed under Section 28.
- The income should be assessed under Section 56 as "Income from other sources."

Arguments from Both Sides:
- Revenue's Argument: The learned DR argued that the activity of completing construction and renting out the property constituted a business activity, thus the income should be assessed as business income.
- Assessee's Argument: The learned counsel for the assessee contended that the income should be assessed as "Income from house property" and not as business income, citing various case laws.

2. Applicability of Section 22, Section 28, and Section 56 of the Income-tax Act

ITAT's Analysis:
- Section 22 (Income from house property): The ITAT agreed with the CIT(A) that the income could not be assessed under Section 22 as the assessee was not the owner of the property. The lease deed described the assessee as a "tenant" and the other party as a "landlord," indicating that the assessee did not hold ownership rights.

- Section 28 (Income from business or profession): The ITAT concluded that the income should be assessed under Section 28 as business income. The trust deed empowered the trustees to invest in various ventures, including the lease and development of properties. The trust's activities of taking on lease a partly built property, completing its construction, and letting it out to the Telephone Department constituted commercial exploitation of an asset. The ITAT referenced the Supreme Court's judgment in the case of S.G. Mercantile Corpn. (P.) Ltd., which held that such activities could be considered business activities.

- Section 56 (Income from other sources): The ITAT disagreed with the CIT(A)'s decision to assess the income under Section 56. The ITAT emphasized that the residuary head of income (Section 56) could only be applied if none of the specific heads were applicable. Since the income could appropriately fall under Section 28 as business income, it could not be assessed under Section 56.

Distinguishing Case Laws:
The ITAT noted that the facts of the cases cited by the assessee's counsel were distinguishable:
- In Kanaiyalal Nimani's case, the assessee was considered the owner of the stalls during the lease period.
- In Smt. T.P. Sidhwa's case, the assessee became the full owner of the property.
- In Saiffuddin's case, the assessee and his brothers bore the construction expenses, indicating ownership.
- In D.R. Puttanna Sons (P.) Ltd.'s case, the ownership of the structure remained with the lessee.

Final Judgment:
The ITAT held that the income derived by the assessee from letting out the building to the Telephone Department is assessable under the head "Income from business" under Section 28 and not under Section 22 or Section 56. The ITAT reversed the CIT(A)'s finding and allowed the Revenue's appeals while dismissing the cross-objections filed by the assessee.