2001 (3) TMI 77 - HC - Income Tax

Nature of Income received from Office space - business income or rental income - Intention of letting out the property or any portion - relationship between landlord and tenant - Revision u/s 263 - assessment under section 143(3) as erroneous and prejudicial to the interests of the Revenue. Relationship between landlord and tenant - HELD THAT - From the copy of the agreement produced before us it appears that the assessee has let out the furnished office at a monthly rent payable month by month by the respective occupants. The services rendered to the various occupants according to the said agreement are not separately charged and the monthly rent payable is inclusive of all charges to the assessee. Nature of Income - A portion of the said property is used by the assessee himself for his own business purpose. The rest of the said property has been let out to the various occupiers as stated hereinbefore. It further appears that the assessee had already recovered a sum of Rs. 4, 25, 000 as and by way of security free advance from three occupants. Hence the entire cost of the property let out to those occupiers has already been recovered as and by way of interest-free advance by the assessee. Hence it cannot be said that the assessee is exploiting the property for its commercial business activities and such business activities are prime motive and letting out the property is a secondary one. By applying the test suggested by the five judges Bench in the case of Sultan Brothers Pvt. Ltd. 1963 (12) TMI 4 - SUPREME COURT we hold that by the said agreement the parties have intended that such letting out would be an inseparable one. Hence we hold that the prime object of the assessee under the said agreement was to let out the portion of the said property to various occupants by giving them additional right of using the furniture and fixtures and other common facilities for which rent was being paid month by month in addition to the security free advance covering the entire cost of the said immovable property. In fact there was a relationship of landlord and tenant between the assessee and the persons who hired the office accommodation. Hence we hold that the income derived from the said property is an income from property and should be assessed as rental income. Erroneous or prejudicial Order - We supported the Commissioner s stance that the assessment was indeed erroneous and prejudicial. Therefore we decide all the issues raised above in favour of the Revenue and against the assessee.

Summary

Issues Involved:

1. Whether there was a landlord-tenant relationship between the assessee and the occupiers of the office space.
2. Whether the income from the office space should be assessed as business income or rental income.
3. Whether the Tribunal was justified in canceling the order under section 263 of the Income-tax Act, 1961, passed by the Commissioner.

Detailed Analysis:

Issue 1: Landlord-Tenant Relationship

The primary question was whether the relationship between the assessee and the occupiers was that of landlord and tenant. The Tribunal had previously found no such relationship, but the High Court disagreed. The judgment emphasized that the agreement allowed occupiers to use furnished office space with amenities, indicating a landlord-tenant relationship. The court concluded that there was indeed a landlord-tenant relationship, as the occupiers were granted the right to use the space and facilities in a manner consistent with tenancy. Thus, the court answered this question in the negative, in favor of the Revenue, establishing that a landlord-tenant relationship existed.

Issue 2: Nature of Income - Business or Rental

The core issue was whether the income from the office space should be classified as business income or rental income. The assessee had argued that the income was business income due to the services provided, while the Commissioner contended it was rental income. The court analyzed the agreements and found that the primary intention was to let out the property, with services being secondary. Citing precedents, the court noted that if the primary object is letting out the property, it should be considered rental income. The court applied the test from the Sultan Brothers case, concluding that the letting was inseparable from the use of the property and its fixtures, thus classifying the income as rental. Consequently, the court answered this question in the negative, favoring the Revenue.

Issue 3: Justification of Tribunal's Decision

The final issue was whether the Tribunal was justified in canceling the Commissioner's order under section 263. The Tribunal had found the original assessment by the Income-tax Officer not erroneous or prejudicial to the Revenue's interests. However, the High Court disagreed, holding that the Tribunal erred in its judgment by not recognizing the income as rental. The court supported the Commissioner's stance that the assessment was indeed erroneous and prejudicial. Therefore, the court answered this question in the negative, siding with the Revenue and against the assessee.

Conclusion:

The High Court concluded that the income derived from the property should be assessed as rental income, affirming the landlord-tenant relationship and supporting the Commissioner's action under section 263. The court's decision was unanimous, with both judges agreeing on the outcome.