1972 (8) TMI 11 - HC - Income Tax

Rental receipts income from property vis-s-vis income from business - company closes down its business and after sale of machinery lets out the building - rent received by the assessee could only be traced to the ownership of the building - It could not be said to be income from the business of film production especially when assessee had sold all the machinery required for the film production - income should be assessed under the head income from property

Issues Involved:
1. Whether the rental income from the studio building should be assessed under "Profits and gains of business or profession" or "Income from property."
2. Whether the losses from earlier years can be set off against the rental income from the studio building.

Issue-Wise Detailed Analysis:

1. Rental Income Assessment:
The central issue was whether the rental income from the studio building should be assessed under "Profits and gains of business or profession" or "Income from property." The assessee-company had ceased its film production business before the assessment year 1958-59 and had leased out the studio building initially for film production and later as a cotton godown. The assessee contended that the rental income should be assessed as business income, relying on the memorandum and articles of association which allowed renting out properties and machinery.

The Income-tax Officer (ITO) rejected this claim, stating:
- The company itself had shown the income as "income from house property" in its return.
- The presence of a clause in the memorandum and articles of association permitting the company to let out properties does not make the letting out a business activity.
- The authorization in the articles of association does not enable the computation of income under one head to be taken under a different head for tax purposes.

The Appellate Assistant Commissioner (AAC) allowed the assessee's claim, treating the rental income as business income based on earlier decisions and the articles of association. The Tribunal upheld the AAC's decision, noting no change in circumstances from previous years.

However, the High Court emphasized that each assessment year is a separate unit, and decisions from previous years do not constitute res judicata or estoppel for subsequent years. The Court cited several precedents, including:
- H.C. Kothari v. Commissioner of Income-tax: Income falling under a specific head must be charged under that head.
- United Commercial Bank Ltd. v. Commissioner of Income-tax: Interest on securities, even if held as trading assets, must be charged under the specific head "interest on securities."
- East India Housing and Land Development Trust Ltd. v. Commissioner of Income-tax: Income from property is to be taxed under "income from property" even if the property is owned by a company formed for developing and setting up markets.

The Court concluded that the rental income from the studio building, used as a cotton godown, should be assessed under "income from property" and not "profits and gains of business."

2. Setting Off Losses:
The assessee claimed deductions for irrecoverable rent from producers who had rented the studio for film production in earlier years. The ITO disallowed these claims, arguing that the business of film production had been wound up, and the distribution business was different.

The AAC allowed the claim, stating that the business of letting out immovable properties and machinery was continuing, as authorized by the articles of association. The Tribunal upheld this view, relying on the AAC's decisions from earlier years.

However, the High Court found that the rental income from the studio building should be assessed under "income from property." Therefore, the losses from earlier years related to the film production business could not be set off against the rental income from the studio building, as it was not business income.

Conclusion:
The High Court held that the rental income from the studio building should be assessed under "income from property" and not "profits and gains of business." Consequently, the losses from earlier years related to the film production business could not be set off against this rental income. The question was answered in the negative and against the assessee, with costs awarded to the revenue.

← Previous Next →