1985 (12) TMI 114 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessee-company was carrying on business by acquiring and letting out property.
2. Whether the income from the property should be assessed under "Income from House Property" or "Income from Business."
3. Whether the expenses claimed by the assessee-company should be allowed as business expenditure.

Detailed Analysis:

Issue 1: Whether the assessee-company was carrying on business by acquiring and letting out property.

The assessee-company was incorporated with the primary objective to acquire and take over the assets, rights, and privileges of a co-proprietorship firm, M/s Pushpa Aggarwal & Co. The company entered into an agreement to purchase a property from the co-proprietors and subsequently derived rental income from it. The assessee argued that acquiring the property and realizing rent constituted a business activity as per its Memorandum of Association.

The Tribunal referred to the Supreme Court's judgment in Karanpura Development Co. Ltd., which stated that ownership and leasing of property could either be part of a business or an act of a landowner, depending on the objective behind it. The Tribunal concluded that the assessee acquired the property as a landlord and not as a trader, thus not setting up a business.

Issue 2: Whether the income from the property should be assessed under "Income from House Property" or "Income from Business."

The Income Tax Officer (ITO) and the Commissioner of Income Tax (Appeals) [CIT(A)] assessed the income under "Income from House Property," denying the assessee's claim for business expenditure. The Tribunal upheld this view, stating that the property was acquired and held as a landlord, and the income derived from it should be assessed under the head "Property Income."

The Tribunal also referenced the case of Fry vs. Salisbury House Estates Ltd., where the House of Lords held that rents from property were profits from ownership of land and should be assessed under "Property Income," not as trade receipts.

Issue 3: Whether the expenses claimed by the assessee-company should be allowed as business expenditure.

The assessee claimed various expenses, including salaries to directors and legal charges, arguing they were business expenditures. The ITO and CIT(A) denied these claims, as the income was assessed under "Property Income," where such expenses are not deductible.

The Tribunal agreed with the lower authorities, stating that since the income was from property and not business, the expenses could not be allowed as business expenditure. The Tribunal referenced various cases, including CIT vs. Cotton Fabrics Ltd. and CIT vs. New India Investment Corpn. Ltd., to support that expenses incurred in the course of business could not be set off against property income.

Conclusion:

The Tribunal dismissed the appeal, holding that the assessee-company's income from the property should be assessed under "Income from House Property" and not "Income from Business." Consequently, the expenses claimed as business expenditure were not allowable. The Tribunal found no merit in the assessee's contention that acquiring and letting out the property constituted a business activity. The orders of the lower authorities were upheld, and no interference with the computation of income was deemed necessary.