1991 (4) TMI 204 - AT - Income Tax

Summary

Issues Involved:
1. Whether the sums of Rs. 1,27,475 for the assessment year 1985-86 and Rs. 1,69,565 for the assessment year 1986-87 are liable to be included as business income of the assessee under section 161(1A).
2. Whether the income received from Varalakshmi Agencies should be treated as business income or income from other sources.
3. Application of section 161(1A) to the whole of the income or only to the business income.
4. The validity of the sub-distributorship agreement with Varalakshmi Agencies.
5. The status of the assessee as an association of persons.

Detailed Analysis:

1. Inclusion of Sums as Business Income under Section 161(1A):
The primary issue is whether the sums of Rs. 1,27,475 for the assessment year 1985-86 and Rs. 1,69,565 for the assessment year 1986-87 should be included as business income of the assessee by virtue of section 161(1A). The Tribunal held that the income derived from leasing out the distributorship rights to Varalakshmi Agencies represents business income. This conclusion was based on the nature of the distributorship agreement, which was considered a commercial asset capable of producing income only upon exploitation. The Tribunal emphasized that the assessee continued to exploit the distributorship agreement and earned business income by leasing it out, thus falling under the purview of section 161(1A).

2. Treatment of Income from Varalakshmi Agencies:
The assessee contended that the income received from Varalakshmi Agencies should be treated as income from other sources, as the trust was merely receiving a fixed amount for the distributorship rights and was not actively engaged in the business. However, the Tribunal rejected this argument, stating that the distributorship rights were a commercial asset and the income derived from leasing them out should be considered business income. The Tribunal relied on precedents such as the Supreme Court decision in CEPT v. Shri Lakshmi Silk Mills Ltd., which held that the yield of income by a commercial asset is the profit of the business, irrespective of the manner in which the asset is exploited.

3. Application of Section 161(1A):
The assessee argued that even if the income is considered business income, only the business income should be taxed at the maximum marginal rate under section 161(1A), not the whole income. The Tribunal disagreed, stating that section 161(1A) applies to the whole of the income, whether business income or other income, derived by the assessee. The Tribunal cited the clear and unambiguous wording of section 161(1A) and the explanatory notes provided by the CBDT, which support the application of the maximum marginal rate to the entire income.

4. Validity of the Sub-Distributorship Agreement:
The Tribunal examined the sub-distributorship agreement with Varalakshmi Agencies and found it to be a genuine commercial arrangement. The Tribunal noted that the agreement did not indicate an intention to permanently discontinue the business but rather to temporarily lease out the distributorship rights. The Tribunal also observed that the assessee did not withdraw the substantial advance deposited with the publishers, indicating a continued interest in the business. The Tribunal concluded that the sub-distributorship agreement was a legitimate business arrangement and the income derived from it should be treated as business income.

5. Status of the Assessee as an Association of Persons:
The Income-tax Officer treated the assessee as an association of persons and assessed the income accordingly. The Tribunal upheld this treatment, noting that the trust was conducting business through the medium of a private trust, which is a common practice for tax avoidance. The Tribunal found that the trust, beneficiaries, and trustees were interconnected and operated as a single business entity. Therefore, treating the assessee as an association of persons and taxing the income at the maximum marginal rate was justified.

Conclusion:
The Tribunal confirmed the orders of the lower authorities, holding that the sums of Rs. 1,27,475 for the assessment year 1985-86 and Rs. 1,69,565 for the assessment year 1986-87 should be included as business income of the assessee and taxed at the maximum marginal rate under section 161(1A). The appeals of the assessee were dismissed.