1993 (6) TMI 124 - AT - Income Tax

Summary

Issues Involved:

1. Classification of lease income: Whether the lease income derived from leasing out the mill premises along with plant and machinery is exigible to income-tax under the head 'business income' or under the head 'other sources'.

Issue-wise Detailed Analysis:

1. Classification of Lease Income:

The primary issue in these appeals is the classification of lease income derived from leasing out the mill premises along with plant and machinery. The question is whether this income should be taxed under the head 'business income' or 'other sources'.

Background and Arguments:

The assessee, a private limited company incorporated to run a cotton ginning and oil extraction mill, initially operated the mill on its own but incurred losses. Subsequently, the company decided to lease out the factory, including the plant and machinery, to avoid further losses. The factory was leased out in an integrated manner, without separating the building from the machinery, and the lessee was required to run it as a factory for ginning cotton and extracting oil from cotton seeds.

The assessee's counsel argued that the lease agreements and the resolutions passed by the Board of Directors indicated that the company intended to lease out the mill as a commercial asset to derive maximum profit. The intention was not to treat the assets as mere investments but to exploit them commercially. The counsel contended that the lease income should be considered as 'business income' because the mill was a commercial asset, and the company always intended to resume business operations when conditions were favorable.

Assessment Officer and CIT (A) Findings:

The Income Tax Officer (ITO) treated the lease income as 'income from other sources', relying on the Supreme Court decision in New Savan Sugar & Gur Refining Co. Ltd. v. CIT. The CIT (A) upheld this view, dismissing the assessee's appeals for all four assessment years.

Tribunal's Analysis and Conclusion:

The Tribunal found that the Supreme Court decision in New Savan Sugar & Gur Refining Co. Ltd.'s case was distinguishable. In that case, the Supreme Court concluded that the assessee intended to part with the factory and machinery to earn rental income, treating the assets as investments. However, in the present case, the assessee always treated the mill as a commercial asset and intended to resume business operations. The lease agreements included stipulations that indicated the company's intention to return to business, such as the right to purchase additional machinery installed by the lessee.

The Tribunal referred to several decisions supporting the view that income derived from leasing a commercial asset should be considered 'business income'. Notably, the Calcutta High Court in Prem Chand Jute Mills Ltd.'s case and the Andhra Pradesh High Court in Aryan Industries (P.) Ltd.'s case held that as long as the asset is treated as a commercial asset and not merely as an investment, the income derived from its exploitation should be considered 'business income'.

The Tribunal also distinguished the Andhra Pradesh High Court decision in Ambica Tobacco Co. (P.) Ltd.'s case, where the machinery was never used for manufacturing purposes and was leased out for non-manufacturing use. In contrast, the mill in the present case was a commercial asset used for manufacturing, and the lease was intended to exploit it commercially.

Final Decision:

The Tribunal concluded that the lease income derived from leasing out the mill premises along with plant and machinery should be treated as 'business income' and not 'income from other sources'. The orders of the lower authorities were set aside, and the Assessing Officer was directed to treat the lease amounts as part of the business income of the assessee for the relevant assessment years.

Result:

The appeals were allowed.