2025 (7) TMI 1226 - AT - Income Tax

Correct head - lease rental income - Treating the income as income from house property v/s income from business - difference of opinion arising between the Members HELD THAT - No precise test can be laid down to ascertain whether income received by an assessee from leasing or letting out of assets would fall under the head profits and gains of business or profession or income from house property which is a mixed question of law and fact and has to be decided on the facts and circumstances of each case. The Hon ble Supreme Court in Universal Plast Limited v. CIT 1999 (3) TMI 15 - SUPREME COURT has laid down this ratio. In the instant case the assessee has discontinued his business and is also not participated in the management of the M/s. Narayana Educational Society who has taken out the premises on lease along with the infrastructure and hence it can be concluded that the assessee is not engaged in any business activity but has let out the immovable property only for the purpose of earning rental income. Third Member vide his order has agreed with the view taken by Hon ble Accountant Member and held that the impugned addition treating the income as income from house property by the Ld. AO is valid as against the claim made by the assessee as income from business . In view of the majority opinion we hold that the addition made by the revenue authorities treating the income as income from house property is decided in favor of the revenue and against the assessee.

Summary

ISSUES:

Whether the Revenue can reagitate the classification of income from leasing of business assets year after year without any change in facts, after acceptance of such classification in an earlier assessment year.Whether income derived from leasing out the entire business premises and infrastructure should be treated as "income from business" or as "income from house property".Whether the principle of consistency or doctrine of res judicata applies in income tax proceedings across different assessment years.Whether the intention of the assessee to temporarily discontinue business and lease out assets impacts the classification of income.Whether the facts and circumstances, including terms of lease and conduct of parties, support treating the income as business income or income from house property.

RULINGS / HOLDINGS:

The Revenue cannot reagitate the issue of classification of income year after year without any change in facts, once the issue has been decided and accepted in an earlier assessment year; "questions of fact cannot be agitated and reagitated every year" and "public policy demands that there shall be an end to the determination of facts."The income from leasing out the entire business assets, including premises and infrastructure, is to be treated as "income from house property" rather than "income from business" where the assessee has permanently discontinued the business and leased out all assets with no intention to resume business.The principle of res judicata does not strictly apply in income tax proceedings as each assessment year is a separate unit; however, the rule of consistency is to be followed unless there is a change in facts or law.Where the business has ceased with no intention to be resumed, the assets cease to be business assets and the income derived from letting out such assets is "only exploitation of property by owner thereof, but not exploitation of business assets."The presence of clauses in the lease deed allowing termination on six months' notice and the assessee's conduct of continuing the lease beyond the initial term without resuming business indicate permanent discontinuance rather than temporary suspension.

RATIONALE:

The Court applied the legal framework that income classification depends on the intention of the assessee and the nature of the transaction, which is a mixed question of law and fact requiring examination of the lease agreement, Memorandum of Understanding, and conduct of the parties.The Court relied on precedents including the Hon'ble Supreme Court decisions in Universal Plast Limited v. CIT, Keyaram Hotels (P.) Ltd. v. DCIT, CIT v. Vikram Cotton Mills Ltd., and Sri Lakshmi Silk Mills, which emphasize that if business assets are let out with no intention to resume business, income is from property and not business.The Court recognized that the principle of res judicata is not applicable in tax matters due to separate proceedings for each assessment year but acknowledged that the rule of consistency prevents arbitrary change in classification without change in facts.The Court rejected the factual inferences by the Assessing Officer that the lease was permanent based on factors such as lease duration and capital account balances, finding these either factually incorrect or misappreciated.The Court highlighted the importance of the lease deed clause permitting termination on six months' notice, indicating flexibility and intention to resume business, supporting the assessee's claim of temporary discontinuance for the 2009-10 year.However, the Court found that subsequent conduct of the assessee, including renewal of lease beyond initial term and failure to resume business, demonstrated permanent cessation, justifying treatment of income as income from house property for later years.The Court noted that the assessee's own acceptance of income as house property in later years negates the application of consistency in their favor for those years.The Court distinguished the facts from cases cited by the assessee where the lessor retained management or business activity, whereas here the assessee relinquished management and business operations.