1994 (2) TMI 119 - AT - Income Tax

Assessing Officer, Assessment Year, Business Income, General Public Utility, Income From Business, Income From House Property, Income From Property, Mistake Apparent From Record, Orders Passed, Private Trust

Summary

Issues Involved:
1. Adequate opportunity for the assessee to file objections.
2. Whether the issue of taxing income at maximum marginal rate is debatable and outside the scope of section 154.
3. Correct procedure for rectification and the applicability of section 161(1A) based on the nature of income (business vs. property income).

Detailed Analysis:

Issue 1: Adequate Opportunity for the Assessee to File Objections
The assessee contended that it was not given adequate opportunity to file objections to the rectificatory notices issued by the Income-tax Officer (ITO). The ITO issued notices under section 154 to rectify the assessment orders for the four assessment years, stating that the income should have been taxed at the maximum marginal rate under section 161(1A). The assessee requested adjournments but ultimately failed to file any objections. The ITO considered this failure as 'no objection' and passed rectificatory orders.

Issue 2: Debatable Issue and Scope of Section 154
The assessee argued that the question of whether its income should be taxed at the maximum marginal rate is debatable and thus outside the scope of section 154, which is meant for rectifying apparent mistakes. The Deputy Commissioner (Appeals) dismissed this contention, stating that section 161(1A) clearly applies to the assessee's case, making it a mistake apparent from the records. Therefore, the ITO was correct in using section 154 for rectification.

Issue 3: Correct Procedure and Nature of Income
The assessee contended that the ITO should have initiated proceedings under section 147 instead of using section 154. Additionally, the assessee argued that the income should be classified as 'property income' rather than 'business income,' making section 161(1A) inapplicable. The Deputy Commissioner (Appeals) rejected this argument, holding that the income was business income, and thus, section 161(1A) applied, warranting taxation at the maximum marginal rate.

The Tribunal examined the will under which the trust was constituted and the nature of the income derived from letting out a marriage hall and rest rooms. The Tribunal found that the income should be classified as 'property income' rather than 'business income.' It noted that the use of the property was more aligned with public utility rather than a commercial enterprise aimed at profit. The Tribunal relied on various judicial precedents, including the Allahabad High Court's decision in Abdul Qayume v. CIT and the Karnataka High Court's decision in Addl. CIT v. Hindustan Machine Tools Ltd., to conclude that the income derived was property income.

The Tribunal also referenced principles from the Gujarat High Court's decision in CIT v. New India Industries Ltd., emphasizing that the nature of the asset and its use determine whether the income is property or business income. The Tribunal concluded that the marriage hall and rest rooms were not commercial assets and thus, the income derived should be classified as property income.

Conclusion:
The Tribunal held that the rectificatory orders dated 30-3-1990 were illegal as the income should have been assessed as property income, making section 161(1A) inapplicable. Therefore, the original assessments were reinstated, and the appeals were allowed.