2022 (4) TMI 396 - HC - Income Tax

Characterization of income - rental income earned by the assessee as income from the business - whether the rental income is income from business or income from house property? - HELD THAT - The arrangement is made or entered into more to adjust the outstanding liability of the assessee to KSBC. The clauses in the agreement refer to an owner of property transferring lease-hold rights. As rightly held by the appellate authority the additional advantage or reduction in overheads is not the deciding factor for meriting a claim as business income. The crux of the matter is whether the object of the transaction whether the assessee continues to do business or not chances of revival nature of asset in which third-party enjoyment right is created for consideration are relevant and essential. Looking at the circumstance stated by the assessee it is clear that the assessee was doing the same business before the subject Assessment Year and continued to do the same business of manufacture of IMFL. The assessee has let several portions of available building on lease to different individuals/entities. The parting of possession of godown particularly in the circumstances of the case is more as an owner of a business asset but not for exploiting a commercial asset. Assessing Officer the Appellate Authority and the Tribunal have considered the case in the right perspective and disallowed the claim of rental income as business income. We hold that the Tribunal and the authorities have rendered available findings of fact on the assessee s claim of rental income as business income and rejected the claim. No ground warranting interference is made out. The question is answered against the assessee and in favour of the Revenue.

Summary

Issues Involved:
1. Whether the rental income received by the assessee from the premises let out to KSBC can be held as income earned from business or should be treated as income from house property.

Issue-wise Detailed Analysis:

1. Assessee's Claim and Background:
The assessee, a Government Company engaged in manufacturing and selling Indian Made Foreign Liquor (IMFL), claimed the rental income earned from letting out certain assets (godown, building premises, etc.) to Kerala State Beverages Corporation (KSBC), State Bank of Travancore (SBT), and a Police Station as income from business. The Assessing Officer disallowed this claim, treating the rental income as income from house property. This view was upheld by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal.

2. Reference to Larger Bench:
The Division Bench, noticing the similarity of circumstances in the Malabar and Pioneer Hosiery (P.) Ltd case and the case on hand, expressed reservations on the correctness of the view taken by the Division Bench in the Malabar and Pioneer Hosiery (P.) Ltd case and referred the matter to a Larger Bench.

3. Assessee's Argument:
The assessee argued that the rental income should be treated as business income because the godown was a business asset, and letting it out to KSBC reduced operational costs and enhanced profitability. The assessee relied on the judgment in Commissioner of Income Tax v. Malabar and Pioneer Hosiery (P.) Ltd, which emphasized that income from a commercial asset should be treated as income from business, irrespective of how the asset is exploited.

4. Revenue's Argument:
The Revenue argued that the nature of receipt depends on the totality of circumstances. The mere fact that the assessee derives operational advantages is not sufficient to classify the rental income as business income. The Revenue contended that the findings of fact recorded by the Tribunal do not warrant interference and relied on judgments like Sultan Brothers Private Ltd v. Commissioner of Income Tax and Attukal Shopping Complex P. Ltd v. Commissioner of Income Tax.

5. Legal Precedents and Analysis:
The court analyzed various judgments, including Shri Lakshmi Silk Mills Limited, East India Housing and Land Development Trust Ltd., Karanpura Development Co. Ltd., Sultan Brothers Pvt. Ltd., and Universal Plast Ltd. These cases provided different perspectives on whether rental income should be treated as business income or income from house property, emphasizing that the nature of the asset, the intention behind letting it out, and the totality of circumstances should be considered.

6. Conclusion:
The court concluded that the source of income being a commercial asset is one of the tests but not an absolute proposition to treat rental income as business income. The comprehensive tests laid down in Sultan Brothers Private Ltd and Universal Plast Ltd should be applied. The court held that the view in Malabar and Pioneer Hosiery (P.) Ltd case cannot be applied universally to all instances of letting out godowns by an assessee.

7. Specific Case Decision:
In the present case, the court found that the arrangement with KSBC was more to adjust the outstanding liability of the assessee to KSBC rather than exploiting a commercial asset. The assessee continued to do the same business of manufacturing IMFL and had let out several portions of the building to different entities. The court upheld the findings of the Assessing Officer, the Appellate Authority, and the Tribunal that the rental income should be treated as income from house property.

Final Judgment:
The appeals were dismissed, and the questions were answered in favor of the Revenue and against the assessee.