1993 (3) TMI 160 - AT - Income Tax

Summary

Issues Involved:
1. Classification of income from theatre lease as business income or income from other sources.
2. Allowance of depreciation on the theatre assets.
3. Classification of interest income from money-lending business and recognition of business loss.

Issue-wise Detailed Analysis:

1. Classification of Income from Theatre Lease:
The primary issue was whether the income from leasing out the cinema hall should be considered as business income or income from other sources. The assessee, a specified HUF with a 95% interest in the cinema hall, argued that the lease rent should be treated as business income, allowing for depreciation. The Income-tax Officer (ITO) classified the lease rent as income from other sources, noting that the theatre was always leased out and never run by the assessee. The Tribunal found that the cinema hall, including its equipment, constituted a commercial asset. The Tribunal noted that the co-owners had previously run the theatre, obtained the necessary licenses, and entered into contracts with film distributors. The lease was seen as a temporary arrangement, and the co-owners intended to resume business operations after the lease period. The Tribunal concluded that the lease income should be treated as business income, referencing several judgments, including G.R. Narasimier & Co. v. CIT, CIT v. Northern India Theatres (P.) Ltd., CIT v. Sri Venkateswara Talkies, and CIT v. Laxmi Rice Mills, which supported the view that income derived from exploiting a commercial asset should be considered business income.

2. Allowance of Depreciation on Theatre Assets:
The second issue was whether the assessee was entitled to claim depreciation of Rs. 1,31,595 on the cinema hall assets. The ITO denied the depreciation claim, citing the Supreme Court's decision in Seth Banarsi Dass Gupta v. CIT, which held that depreciation cannot be allowed to a fractional owner. The Tribunal upheld this view, stating that the benefit of depreciation under section 10(2)(vi) of the Act is only admissible to full owners and not to fractional owners. Therefore, the rejection of the depreciation claim by the ITO was deemed correct.

3. Classification of Interest Income from Money-Lending Business:
The third issue involved the classification of interest income from the assessee's money-lending business and the recognition of business loss. The assessee disclosed a business loss of Rs. 6,025, claiming interest income from two parties and various expenses. The ITO refused to recognize the loss, classifying the interest income as income from other sources, as the assessee was not carrying on regular money-lending business. The Appellate Assistant Commissioner (AAC) allowed only Rs. 1,000 towards expenses, finding no justification for the substantial claimed expenses. The Tribunal agreed with the AAC, noting the lack of evidence linking the expenses to the earning of interest income and upheld the decision to allow only Rs. 1,000 towards expenses.

Additional Ground:
The assessee filed an additional ground, arguing that the lease income should be considered the income of an Association of Persons (AOP), as held by the Wealth-tax Officer. The Tribunal noted that the status of the lessors as AOP did not materially affect the other issues decided in the appeal. The Tribunal upheld the decision that the lease income should be assessed under the head 'business'.

Conclusion:
The Tribunal allowed the appeal in part, concluding that the lease income should be treated as business income, denying the claim for depreciation, and allowing only Rs. 1,000 towards expenses related to the interest income.