1983 (12) TMI 113 - AT - Income Tax

Summary

Issues Involved:
1. Classification of rent received from leasing godowns as 'property income' or 'business income'.
2. Applicability of specific legal precedents and principles to the case.
3. Determination of the intention behind leasing the godown and its impact on income classification.

Detailed Analysis:

Issue 1: Classification of Rent Received from Leasing Godowns
The primary issue in these appeals is whether the rent received by the assessee from leasing its godowns to VSTCO should be classified as 'property income' under Section 22 of the Income-tax Act, 1961, or as 'business income' under Section 28 of the Act. The revenue contends it should be classified as property income, while the assessee argues it should be treated as business income.

The assessee, a partnership firm, constructed godowns and leased them to VSTCO. The lease agreement included a clause where VSTCO advanced Rs. 3,05,200 for construction, to be adjusted against the monthly rent. The assessee also obtained central excise and labor licenses for these godowns. The assessee argued that leasing the godowns was intended to secure more business from VSTCO, thereby maintaining a direct nexus with its business activities.

Issue 2: Applicability of Legal Precedents
The Commissioner (Appeals) and the ITO initially classified the income as property income, citing the Supreme Court's decision in Sultan Bros. (P.) Ltd. v. CIT and the Allahabad High Court's decision in Seth Banarsi Das Gupta v. CIT. These decisions emphasize that an asset must be part of a running business to be considered a commercial asset and that the exploitation of an asset for business purposes must be evident.

The assessee cited several cases, including CIT v. National Newsprint & Paper Mills Ltd. and CIT v. Prem Chand Jute Mills Ltd., arguing that the letting out of the godowns had a direct nexus with its business activities and should be classified as business income. The Tribunal agreed with the assessee, noting that the godowns were used for business purposes, such as processing tobacco for VSTCO, and the income derived should be assessed under the head 'Profits and gains of business or profession'.

Issue 3: Intention Behind Leasing the Godown
The Tribunal examined the intention behind leasing the godowns. The assessee argued that the godowns were constructed to facilitate its tobacco business and that the lease to VSTCO was intended to secure a steady business relationship. The Tribunal found that the assessee's intention was to use the godowns as commercial assets in its business, supported by the fact that the assessee continued to process tobacco for VSTCO in the leased premises.

The Tribunal also considered the letter from VSTCO's director, which confirmed that the godowns were constructed and leased with the understanding that the assessee would process VSTCO's tobacco at those premises. This reinforced the assessee's claim that the leasing arrangement was part of its business strategy.

Conclusion
The Tribunal concluded that the leasing of the godowns was indeed part of the assessee's business activities. The income derived from leasing the godowns should be classified as business income under Section 28 of the Income-tax Act, 1961, rather than property income under Section 22. The Tribunal's decision was based on the direct nexus between the leasing activity and the assessee's business operations, supported by legal precedents and the facts of the case.

Summary of Judgment:
The Tribunal ruled in favor of the assessee, holding that the rent received from leasing the godowns to VSTCO should be classified as business income. The Tribunal's decision was based on the intention behind the leasing arrangement, the direct nexus with the assessee's business activities, and relevant legal precedents. The appeals were allowed, and the income was to be assessed under the head 'Profits and gains of business or profession'.