2013 (10) TMI 644 - AT - Income Tax

Classification of Income Income from House Property u/s 22 OR Income from Other Sources u/s 56 Held that - The compensation received by the assessee under the agreement was essentially for use of her licenses and other assets and there being no business risk assumed by the assessee, the compensation received by her under the agreement was not her business income - one of the assets given by the assessee for use in the restaurant business was building premises and since the assessee was the owner of the said main asset, the compensation received by the assessee to the extent attributable to the use of building premises is chargeable to tax under the head income from house property while the compensation received for other assets and licences is chargeable to tax under the head income from other sources - As there is no such bifurcation of compensation indicated in the relevant conducting agreement, we direct the assessee to make such bifurcation on some reasonable basis and the A.O. is directed to verify the same and bring to tax the compensation attributable to the use of building premises under the head income from house property and for use of other assets and licences under the head income from other sources . Disallowance of Expenses Held that - Since it is already held that the receipts under the conducting agreement did not constitute business income of the assessee, the consequential disallowance on account of expenses made by the A.O. is liable to be confirmed - the disallowance is confirmed Decided Partly in favour of Assessee.

Issues:
1. Determination of the head of income for the amount received under a conducting agreement.

Analysis:
The appeal involved a common issue regarding the head of income under which the amount received by the assessee as per the conducting agreement is assessed to tax. The assessee, an individual, entered into an agreement with another party for conducting a restaurant business due to losses incurred in her own business. The assessing officer (A.O.) examined the conducting agreement and concluded that the entire business risk was transferred to the other party, and the compensation received was not business income but taxable under "income from other sources." The A.O. disallowed certain expenses claimed by the assessee. The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], challenging the treatment of receipts as "income from other sources" instead of business income. The CIT(A) upheld the A.O.'s decision. Subsequently, the assessee appealed to the Income Tax Appellate Tribunal (ITAT).

The assessee contended that the receipts under the agreement should be considered business income as the restaurant business was temporarily handed over to the other party due to losses suffered. The Departmental Representative (D.R.) supported the lower authorities' decision, emphasizing the absence of business risk for the assessee. The ITAT analyzed the conducting agreement terms and concurred with the lower authorities that the compensation received was for the use of licenses and assets without assuming business risk, hence not constituting business income. However, the ITAT differentiated the compensation attributable to the building premises as taxable under "income from house property" and the rest under "income from other sources." The ITAT directed the assessee to bifurcate the compensation accordingly. The ITAT partly allowed grounds 1 to 4 of the appeal.

Regarding the disallowance of expenses by the A.O. due to the receipts not being treated as business income, the ITAT confirmed the disallowance since the receipts were not considered business income. Consequently, ground 5 of the appeal was dismissed. The ITAT pronounced the order partly allowing the assessee's appeal on 11th October 2013.

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