2005 (9) TMI 46 - HC - Income Tax

Income from house property OR income from business - Whether the income of Rs. 7, 80, 000 received from V.M. Salgaokar and Bros. P. Ltd. in the hands of the assessee is income from house property under section 22 or income from business under section 28 of the Income-tax Act? - In the present case the agreement entered into between the assessee and the Salgaokars clearly shows that a sum of Rs. 7, 80, 000 received by the assessee from the Salgaokars in the form of guarantee income was the composite income from the hotel building with fittings and fixtures and was intended for exploitation of business assets and therefore cannot be held to be covered by the income from house property. - We accordingly hold that the income of Rs. 7, 80, 000 received from V.M. Salgaokar and Bros. P. Ltd. in the hands of the assessee is income from the business under section 28 of the Income-tax Act and the Tribunal did not commit any error in holding so

Summary

Issues Involved:
1. Classification of income received by the assessee: Whether it is "income from house property" under section 22 or "income from business" under section 28 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Classification of Income:
The primary issue in this appeal is whether the income of Rs. 7,80,000 received by the assessee from V.M. Salgaokar and Bros. P. Ltd. (Salgaokars) should be classified as "income from house property" under section 22 or "income from business" under section 28 of the Income-tax Act, 1961.

Facts and Background:
- The assessee, a company incorporated under the Companies Act, constructed a hotel and appointed the Salgaokars as managers to manage and run the hotel business through an agreement dated February 1, 1987.
- The agreement stipulated that the Salgaokars would pay a guaranteed income of Rs. 7,80,000 annually for the first 10 years, Rs. 10,20,000 per annum for the next five years, and Rs. 12,00,000 per annum for the subsequent five years.
- The Assessing Officer initially treated this income as "income from house property." However, the Commissioner of Income-tax (Appeals) reversed this decision, classifying it as "income from other sources" under section 56.
- The Income-tax Appellate Tribunal (ITAT) later held that the income was "business income" under section 28, which led to the present appeal.

Legal Principles and Precedents:
- The Supreme Court in Universal Plast Ltd. v. CIT [1999] 237 ITR 454 laid down general principles for determining whether income from leasing or letting out business assets should be classified under "profits and gains of business or profession."
- Key principles include the necessity to consider the intention of the assessee, the nature of the agreement, and whether the assessee intended to go out of business or temporarily let out assets while continuing other business activities.

Analysis of the Agreement:
- The agreement between the assessee and the Salgaokars clearly indicated that the hotel was ready for commencing business and included fittings and fixtures.
- The Salgaokars were appointed to manage and run the hotel, with provisions allowing them to make necessary alterations and improvements.
- The agreement specified that all licenses and permits for running the hotel would be obtained in the name of the assessee, indicating the intention to exploit business assets rather than merely earning rental income.
- The agreement also included a clause that upon expiration or termination, the Salgaokars would hand over the business and vacant possession of the hotel to the assessee, further supporting the business nature of the arrangement.

Court's Conclusion:
- The court concluded that the income of Rs. 7,80,000 received by the assessee from the Salgaokars was indeed "business income" under section 28 of the Income-tax Act.
- The intention of the parties, as reflected in the agreement, was to exploit the business assets (the hotel) rather than merely deriving rental income from property.
- The court emphasized that the agreement was not intended to transfer the hotel to the Salgaokars but to manage it efficiently and profitably.

Final Judgment:
- The substantial question of law was decided in favor of the assessee and against the Revenue.
- The court upheld the ITAT's decision that the income received from the Salgaokars was "business income" under section 28 of the Income-tax Act.

This comprehensive analysis ensures that all relevant legal principles, facts, and conclusions are preserved in their original form while providing a clear understanding of the judgment.