1987 (2) TMI 124 - AT - Income Tax

Investment Allowance, Deduction, Profits And Gains From Newly Established Industrial Undertaking, Powers Of Tribunal

Summary

Issues Involved:
1. Entitlement to investment allowance under Section 32A.
2. Entitlement to deduction under Section 80J.
3. Entitlement to deduction under Section 80HHA.
4. Classification of lease income as business income or income from other sources.

Issue-wise Detailed Analysis:

1. Entitlement to Investment Allowance under Section 32A:
The primary contention was whether the assessee was entitled to investment allowance under Section 32A. The Commissioner of Income-tax argued that since the assessee's income was assessed under other sources and the leasing of the rice mill did not constitute a business activity, the assessee was not entitled to the investment allowance. The Tribunal, however, noted that the assessee and other co-owners had purchased the rice mill with the intention of leasing it out from the beginning, which constituted a business activity. The Tribunal referenced prior decisions, including ITA No. 354/Hyd. 1984 and ITA No. 356/Hyd. 1984, where similar cases were decided in favor of the assessee. It was concluded that the assessee was engaged in a business activity, fulfilling the conditions stipulated in Section 32A, thus entitling the assessee to the investment allowance.

2. Entitlement to Deduction under Section 80J:
The Tribunal examined whether the assessee was entitled to deduction under Section 80J, which requires the profits and gains to be derived from an industrial undertaking. The Tribunal acknowledged that the rice mill was an industrial undertaking and that the assessee, as a co-owner-cum-partner, received income from this undertaking. It was determined that if the lessee-firm was not allowed deduction under Section 80J, the assessee should be entitled to it, provided other conditions under Section 80J were satisfied. The Tribunal modified the Commissioner's order to reflect this entitlement.

3. Entitlement to Deduction under Section 80HHA:
The Commissioner of Income-tax had disallowed the deduction under Section 80HHA, arguing that the assessee was not engaged in running a small-scale industrial undertaking but merely leasing the mill. The Tribunal confirmed this part of the Commissioner's order, noting that the issue was not seriously contested before them.

4. Classification of Lease Income as Business Income or Income from Other Sources:
The Tribunal addressed the classification of the lease income, which the assessee had initially returned under other sources. The Tribunal accepted the argument that the true character of the income was business income, as the assessee was actively involved in the business of leasing the rice mill. The Tribunal cited the Supreme Court decision in CIT v. S. Nelliappan [1967] 66 ITR 722, which allowed for reclassification of income if the true nature was different from what was initially reported. Consequently, the Tribunal upheld the contention that the lease income constituted business income, allowing the assessee to claim the relevant deductions.

Conclusion:
The Tribunal partly allowed the appeals, granting the assessee entitlement to the investment allowance under Section 32A and the deduction under Section 80J, while confirming the Commissioner's order regarding the denial of deduction under Section 80HHA. The Tribunal also reclassified the lease income as business income, enabling the assessee to claim the associated benefits.