1991 (7) TMI 130 - AT - Income Tax

Summary

Issues:
Classification of income - Business income or income from other sources.

Analysis:
The judgment pertains to two appeals challenging orders of the CIT(A) regarding the classification of income for assessment years 1982-83 and 1983-84. The assessee, a private limited company engaged in manufacturing and selling plastic wares, provided warehousing facilities to an exporter under an agreement. The Income Tax Officer (ITO) treated the income as income from house property, while the CIT(A) held it to be income from other sources due to the company's Memorandum of Association not permitting warehousing business. The key question was whether the income derived was business income or income from other sources.

The agreement between the assessee and the exporter outlined the terms of providing warehousing facilities, including charges, responsibilities, and guarantees. The ITAT Bombay-C analyzed the agreement and concluded that the activity of providing warehousing facilities was an organized business activity. The possession of the property was retained by the assessee, and it had the option to provide similar facilities to other parties, indicating a business nature. The ITAT disagreed with the CIT(A)'s view that the income was from house property, as it did not constitute a lease. However, the ITAT also disagreed with the CIT(A)'s reasoning that the income should be treated as income from other sources due to the Memorandum of Association restrictions.

The ITAT held that even if the company's Memorandum of Association did not permit the specific business activity, if the income was intrinsically derived from a business activity, it should be taxed as business income. In this case, the ITAT found the activity to be organized business activity, and thus the income should be treated as business income, not income from other sources. Consequently, the ITAT allowed the appeals, directing that the income from warehouses be treated and taxed as business income for both assessment years.

In conclusion, the ITAT Bombay-C ruled in favor of the assessee, determining that the income derived from providing warehousing facilities should be classified as business income, not income from other sources. The judgment emphasized that the nature of the activity and income source should dictate the classification for taxation purposes, overriding any restrictions in the company's Memorandum of Association.