2009 (11) TMI 548 - AT - Income Tax

Income from House Property - there was no manufacturing activity during the relevant previous year and it had sold its machinery. The lease was for a period of five years and only the land and building were leased. Assessee had no case that such a lease was on account of a temporary lull in business or that it had resumed the possession of the property. But on the other hand the lease was continuing. This being so, the lease rental is clearly from exploitation of property which was neither a complex commercial activity nor a lease of property along with machinery, furniture and fittings. Therefore learned CIT(A) was justified in holding that such lease income had to be assessed under income from house property. Carry forward business losses - set off against lease rentals assessed under the head Income from house property cl. (i) of sub-s. (1) of s. 72 clearly stipulates that carry forward loss of business shall be set off only against profits and gains of any business or profession carried on by an assessee. - Clearly assessee was not carrying on any business during the relevant previous year. Therefore its claim that carry forward business losses ought to have been considered for set off against lease rentals cannot be accepted.

Summary

Issues:
1. Assessment of lease rent under the head 'Income from house property'.
2. Allowance of set off of carry forward losses against lease receipts.

Assessment of lease rent under the head 'Income from house property':
The appeal and cross-objection were filed against the order of the CIT(A) for the assessment year 2004-05. The Revenue contended that the lease rent received by the assessee should be assessed under the head 'Income from house property', as a significant portion of the leased property was land, allowing the lessee to construct permanent structures. On the other hand, the assessee argued that it had only leased out part of its business assets, retaining the rest, and thus the lease income should be considered as business income. The AO assessed the lease income under 'Other sources' based on the cessation of manufacturing activity and sale of machinery by the assessee. The CIT(A) agreed that the income should be assessed under 'House property', citing relevant case law. However, the CIT(A) did not allow the set off of earlier years' losses against the lease income.

Allowance of set off of carry forward losses against lease receipts:
The assessee contended that regardless of the head under which the lease income was assessed, the assets leased were business assets, making the income eligible for set off against carried forward losses. The assessee relied on a decision by the jurisdictional High Court to support this argument. The Departmental Representative opposed this claim, stating that carry forward losses could only be set off against 'profits and gains of a business' as per the Income Tax Act. The Tribunal analyzed the case law cited by the assessee and concluded that since the leased assets were not part of the trading assets and the assessee had ceased business activity, the claim for set off against lease rentals could not be accepted. Thus, the Tribunal dismissed both the Revenue's appeal and the assessee's cross-objection.

In conclusion, the Tribunal upheld the assessment of lease income under the head 'Income from house property' and denied the allowance of set off of carry forward losses against the lease receipts, emphasizing that the assets leased were not part of the trading assets and the assessee had ceased its business activity during the relevant year.