2015 (10) TMI 400 - HC - Income Tax

Nature of Sum receive from TELCO - whether taxable under the head income from business and not under the head income from house property ? - Assessee was engaged in the business of procuring Mercedes trucks from TELCO on behalf of its customers - Held that - In the present case, it is plain from the agreement entered into between the Assessee and TELCO that it is the business of the Assessee as a whole that has been exploited by TELCO and not merely the business premises of the Assessee. In other words, the payment received by the Assessee from TELCO pursuant to the agreement in question is incapable of being segregated into income derived from the exploitation of the premises by TELCO and the income derived from exploitation of the commercial assets of the Assessee which are integral to the running of the business. Since the AO had not made effort to segregate such income, which in any event does not seem to be capable of being segregated, it is plain to the Court that what was being received by the Assessee from TELCO in terms of the agreement was a payment for commercial exploitation by TELCO and of the business assets of the Assessee not confined to house property . It would, therefore, be erroneous to treat the entire income received from TELCO as income from house property as has been sought to be done by the AO. There is no factual basis for coming to any other conclusion than the one arrived at by the CIT (A) which has been affirmed by the ITAT. CIT (A) and the ITAT were justified in treating the income received by the Assessee, pursuant to the agreement entered between it and TELCO, as business income and not as income from house property . - Decided in favour of assessee.

Summary

Issues:
1. Whether the sum received by the Assessee from TELCO is taxable under 'income from business' or 'income from house property'?

Analysis:
1. The appeals before the High Court involved two separate issues regarding the taxability of the sum received by the Assessee from TELCO under different heads of income. The common question of law framed in both appeals was whether the Income Tax Appellate Tribunal (ITAT) was correct in admitting that the sum received should be taxable under 'income from business' and not 'income from house property.'

2. The background of the case revealed that the Assessee, a public limited company, was engaged in procuring Mercedes trucks from TELCO on behalf of its customers. The Assessee operated a service station and workshop in Delhi, where business activities were conducted with employees and workers.

3. Disputes within the Sanghi family led the Assessee to enter into an agreement with TELCO for the use of its premises for service, maintenance, and repairs of automobiles. The agreement outlined various obligations of both parties, including repairs, provision of utilities, staffing, insurance, and maintenance responsibilities.

4. TELCO agreed to appoint staff, stock spare parts, and provide necessary services, with the Assessee responsible for certain operational aspects. TELCO was to pay the Assessee a monthly sum as 'margin' and reimburse various expenses, including salaries and advances.

5. The Assessing Officer (AO) initially treated the payment from TELCO as income from house property, considering the agreement akin to renting out premises. However, the Commissioner of Income Tax (Appeals) (CIT (A)) disagreed, stating that the Assessee had entered into a temporary arrangement for exploiting its commercial assets, leading to the income being taxed as business income.

6. The ITAT upheld the decision, noting that the Assessee's business had not ceased entirely, and the utilization of its assets by TELCO did not alter the nature of the income. The High Court observed that the payment received was for the commercial exploitation of the Assessee's business assets, not just the premises, justifying the treatment as business income.

7. Citing relevant legal precedents, the High Court emphasized that the income received by the Assessee from TELCO was for the exploitation of its business assets as a whole, not merely the premises. The Court affirmed the decisions of the CIT (A) and ITAT, concluding that the income should be treated as 'business income' and not 'income from house property.'

8. Ultimately, the High Court dismissed the appeals, affirming the decision that the income received by the Assessee from TELCO, pursuant to the agreement, should be categorized as 'business income' based on the facts and circumstances of the case.