Income though chargeable under head other than business income can still be income from business for accounting and some tax purposes under some provisions.

[DEVKUMAR KOTHARI]

Income though chargeable under head other than business income can still be income from business for accounting and some tax purposes  under some provisions.

Business and the same business:

In case of business organization deployment of funds is made in direct business activities and also indirect activities which are necessary for business. For example, some investment can be made in properties, securities, deposits etc. Investment is in course and part of an adventure in nature of trade or commerce. Therefore, these constitute as business of the organization.

There is generally common ness of funds and control. These are also reflected in one balance sheet. Common funds, common bank accounts. There is unity of control and interlacing of funds.

The income may be taxable under different heads of income like income from house property, income from capital gains and income from other sources as per applicable head of income in view of nature   of income. However, fact remains that these income arise from activities which are adventure in nature of trade or commerce and are business income of assesse.

 Treatment based on income from business:

Under provisions of Income-tax Act, there can be some specific treatment about computation of income, deductions, set off losses, carry forward of loss etc. Depending on provision, an income falling under a head other than ‘income from business and profession’ , and also computed under such other head, can still be considered as income from business for some specific purposes or provisions.

Accounting treatment:

Accounting treatment is also a relevant consideration for determining nature of income as income from business. In case of assesse carrying business and maintaining proper books of accounts with accounting policies and their disclosures, the final accounts like profit and loss account, balance sheet, cash flow statement etc. are important to find out nature of business and income from business for many of purposes related to accounts and taxation.

Case law discussed:

In the case law discussed in this article, rental income arising from business of assesse, though taxable and computed under head ‘income from house property’ was considered as forming part of business income of assesse for the purpose of computing amount of deduction, the principal  may  equally apply to income arising from and in course of business but chargeable under some other heads of income like other sources and capital gains if those income are part of business income of the same business of assesse.

Recent judgment:

INDIAN EXPRESS NEWSPAPERS (BOMBAY) LTD. VERSUS THE COMMISSIONER OF INCOME TAX, CITY I, MUMBAI [2024 (3) TMI 1079 - BOMBAY HIGH COURT]

In this the following judgment has been referred to and applied:

APOLLO TYRES LTD. VERSUS COMMISSIONER OF INCOME TAX - 2002 (5) TMI 5 - SUPREME COURT in case of

Relevant provision:

In this case the honorable Court dealt with matter of deduction under section 32AB

Relevant portion of S.32AB relevant to the judgment and the present article , on issue of ‘income from business’  is reproduced below with highlights added by author:

[Investment deposit account.

32AB. (1) Subject to the other provisions of this section, where an assessee, whose total income includes income chargeable to tax under the head "Profits and gains of business or profession", has, out of such income,-

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(ii) a sum equal to twenty per cent of the profits of ³[***] business or profession as computed in the accounts of the assessee audited in accordance with sub-section (5), whichever is less :

3) [The profits of business or profession of an assessee for the purposes of sub-section (1) shall] be an amount arrived at after deducting an amount equal to the depreciation computed in accordance with the provisions of sub-section (1) of section 32 from the amounts of profits computed in accordance with the requirements of Parts II and III of the ⁹[Schedule VI] to the Companies Act, 1956 (1 of 1956), ¹⁰[as increased by the aggregate of-

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The issue   decided was about computation of income from business for computing allowable deduction under section 32AB.

Summary and analysis from paragraph 7-11 of the judgment:

 1. The  appellant / assessee  is eligible for deduction under Section 32AB of the Act is not in dispute.

 2. Whether appellant is entitled to deduction on the entire income which would include income from house property or it should be restricted only to the income chargeable to tax under the head “profits and gains of business or profession”?  Was  to be considered and decided

3. The assessee should first have income chargeable to tax under the head “profits and gains of business or profession”. This is one primary  condition.

 4. The assessee must have (a) deposited any amount in an account maintained by him with the Development Bank before the expiry of six months from the end of the previous year or before furnishing the return of his income, whichever is earlier; or (b) utilised any amount during the previous year for the purchase of any new ship, new aircraft, new machinery or plant, without depositing any amount in the deposit account under clause (a), in accordance with, and for the purposes specified in, a scheme to be framed etc.

5.  If these conditions are met, then the assessee shall be allowed a deduction, such deduction being allowed before the loss, if any, brought forward from earlier years is set off under Section 72 of the Act

6. Limit is  (i) a sum equal to the amount, or the aggregate of the amounts, so deposited and any amount so utilised; or

    (ii) a sum equal to 20% of the profits of eligible business or profession as computed in the accounts of the assessee audited in accordance with sub-section (5), whichever is less.

7.  Therefore, though the source of the amount for deposit or for the purchase of the new machinery should come from income chargeable to tax under the head “profits and gains of business”, the definition of "eligible business or profession" is rather wide.

8.  It is clear from the definition that except those business specified in clauses (a) and (b) of sub-section (2) of Section 32AB of the Act, all other business or profession have to be construed as eligible business.

9.  an eligible business need not necessarily be an industrial undertaking engaged in the manufacture or production of an article. One of the components to be considered for deduction under sub-section (1)(ii) of Section 32AB of the Act is the profit of eligible business to the extent of 20% of the same.

10. That profit has to be computed in the manner laid down in sub-section (3) of Section 32AB of the Act.

11.  Therefore, court took  view that , whatever income is earned by the assessee either from its activity of manufacture or production for sale or printing business or from other activities such as earning rental income from house property, as long as they constituted the business all will fall under the category of “eligible business”.

12  It was not in dispute that the accounts of appellant show the rental income as part of the business income. The reason is, by definition, eligible business, is not confined to manufacture or production. Further, in the case of appellant, the accounts have been prepared in accordance with Part II and Part III of the Sixth Schedule to the Companies Act, 1956 as is the mandate in sub-section (3) of Section 32AB of the Act.

13.  The rental income from house property were considered as business income before ascertainment of the net profit of the undertaking of appellant.

14. From such profit, the adjustments envisaged in sub-section (3) of Section 32AB of the Act are to be given effect to.

15. The activity of income from house property has to be construed as forming part of the same business as there is one account for the printing business and for income from house property and the business is conducted under a common management. There is one profit and loss account and one balance sheet.

16. It is the perception of the activities from the point of view of businessman that is material. It is such perception that is recognised in Part II and Part III of the Sixth Schedule to the Companies Act, 1956. In Section 32AB(3) or Section 32AB (1)(ii) of the Act, the expression “chargeable to profits and gains of business” is conspicuous by its absence.

17. Hence, the dichotomy as between the income from printing and rental income from house property is not warranted in terms of Section 32AB(3) of the Act.

18. The Court took  view, that  all eligible business or profession shall include every income except that which is excluded specifically in the definition of eligible business or profession.

19. Court referred and found  support for this view from rulings  in Apollo Tyres Ltd.  Kerala High Court and Hon’ble Apex Court (supra)

20. Court further observed that it is not the case of the Revenue or the findings of the ITAT that appellant has in its account not shown rental income as part of the business income. Infact as per the assessment order, these charges have been considered as part of business income but the Assessing Officer has excluded it for the purpose of profits to arrive at the eligible business income for the purpose of Section 32AB of the Act.

21. Therefore, so long as the rental income is part of the business income, it will be included in the term of eligible business because the rental income is not excluded in the definition of eligible business.

22. Therefore, the question of law, as framed,was answered in negative. Holding that the  rental income earned by appellant and assessed under the head “Income from house property” will qualify for deduction under Section 32AB of the Act.

Further observations:

While applying any judgment one need to consider the provisions as applicable in any given case  in hand for particular year and facts and circumstances of the case. As mentioned in earlier discussion, in some circumstances income falling under some other heads of income can also be considered as income from business for some purposes.