2014 (11) TMI 180 - HC - Income Tax

Classification of income Income from profits and gains of business or income from other sources - Reopening of assessment justified or not - Held that - Where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the machinery, plant or furniture, the income from letting, is chargeable to income-tax under the head Profits and gains of business or profession - If for any reason it is not so assessed, then it should be assessed under the head 'income from other 'sources' the assessee commenced his business - At the inception he had no intention of letting out the building, machinery and licence to anyone - He set up the business for carrying on the business - He was expecting income. In 1980's because of the labour problem, as the assessee found it difficult to carry on the business, he leased this entire business as a going concern with the licence in favour of the lessee M/s McDowell and Company and thus was deriving income from such lease and treated the said lease under the head 'profits and gains of business or profession' - The assessee was so assessed. Without any justification whatsoever, notice was issued for reopening of the assessment for the AY 1997-98 and 1998-99 The Tribunal was rightly of the view that mere change of opinion would not be a ground for reopening of the assessment especially when from 1980 onwards the assessment was made on the very same basis and, therefore, no fault could be found with that portion of the order - also, what is leased is the commercial assets of the assessee - Earlier he was personally exploiting the commercial asset - Subsequently, he allowed the lessee to exploit that commercial asset - When he gave the commercial asset to the lessee, the intention was not to lease - The intention was to exploit the commercial asset through his expertise and derive income - in view of Section 56(2)(iii) and the decision of Supreme Court in CEPT v. Shri Lakshmi Silk Mills Ltd. 1951 (9) TMI 1 - SUPREME Court - the income should fall under the head 'profits and gains of business' and not from 'income from other sources' Decided against revenue.

Summary

Issues:
1. Assessment of income derived from letting out assets under the head 'profits and gains of the business' or 'income from other sources'.
2. Justification for reopening of assessments based on change of opinion.
3. Consideration of amalgamation of companies in assessing income.

Analysis:

Issue 1: Assessment of Income
The High Court examined whether the income derived by the assessee from letting out assets should be treated as income under the head 'profits and gains of the business' or 'income from other sources.' The assessee had let out the factory along with plant, machinery, and excise license to a lessee. The Tribunal held that the income from letting out assets should be assessed under 'profits and gains of the business' based on Section 56(2)(iii) of the Income Tax Act, 1961. The Court referred to various judgments, including CEPT v. Shri Lakshmi Silk Mills Ltd. and CIT v. Vikram Cotton Mills Ltd., to support the assessment under the business income category. The Court concluded that the income derived from the lease should be considered under 'profits and gains of the business.'

Issue 2: Reopening of Assessments
The Court considered the justification for reopening the assessments for the years 1997-98 and 1998-99. The Tribunal found that there was no change in facts from previous assessments and that the reopening based on a change of opinion was not permissible under the law. The Court agreed with the Tribunal's decision, emphasizing that mere change of opinion is not a valid ground for reopening assessments, especially when consistent assessments were made in the past. The Court upheld the Tribunal's decision that the reopening was unjustified.

Issue 3: Amalgamation of Companies
The Court addressed the issue of the amalgamation of companies and its impact on assessing income. It was argued whether the amalgamation of companies should affect the assessment of income derived from letting out assets. The Court considered the intention behind letting out assets and the commercial nature of the assets. Referring to Section 56(2)(iii) and relevant judgments, the Court concluded that the income should be categorized under 'profits and gains of the business' and not 'income from other sources.' The Court dismissed the appeals, answering the substantial questions in favor of the assessee and against the revenue.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing the correct categorization of income derived from letting out assets and rejecting the reopening of assessments based on a mere change of opinion. The Court's analysis focused on legal provisions, precedents, and the commercial nature of the assets to determine the appropriate classification of income for tax purposes.