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The Commissioner of Income Tax Versus M/s. Sileman Khan Mahaboob Khan

2015 (5) TMI 432 - ANDHRA PRADESH HIGH COURT

Treatment to the rental income from letting out of the godowns - business income or income from property - Tribunal confirmed the order of the CIT(Appeals) holding that so long character of the godown is retained as a godown, it should be treated as a commercial asset and its rental income must be treated as an exploitation of commercial asset in the nature of trade - Held that:- In the present case, the main business of the assessee was the export of tobacco and for that purpose they had constr .....

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ng them out as business activity. Moreover, it is not the case of assessee that letting out of the godowns was continuous activity from year to year. Therefore, in our opinion, the income received by the assessee, by way of rent, was the income received from property and it would not fall under the head income from business.

The character of the income would not stand altered because it was received by the firm with one of the objects of the partnership deed to let out their godowns. .....

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. - Decided in favour of the Revenue - I.T.T.A. No. 316 of 2003 - Dated:- 11-3-2015 - Dilip B. Bhosale And A. Ramalingeswara Rao,JJ. For the Appellant : Ms. M. Kiranmai for Sri J. V. Prasad For the Respondent : Sri Challa Gunaranjan JUDGMENT (Per the Honble Sri Justice Dilip B. Bhosale) This Income Tax Appeal by the Revenue under Section 260-A of the Income Tax Act, 1961 (for short the Act) is directed against the order of the Income Tax Appellate Tribunal, Visakhapatnam Bench in I.T.A.No.78/H/9 .....

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he had let out, were being used by him for the business of export of tobacco, and whenever they were not in use, he had given them on lease to third parties and received rent therefrom. He, therefore, claimed before the authorities below, on the basis of Clause.3 of the partnership deed, that the godowns of the firm were let out, as provided for in the said deed and that being a part of their business, the rent received from the lessee should be treated as income from business. It has come on re .....

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late Tribunal (ITAT). Based on the order of the Appellate Tribunal, passed for the year 1991-92, the assessment for the year 1992-93, impugned in this appeal, was completed, treating the rental income as income from property. 2.1. The CIT(Appeals), in the appeal filed by the assessee, however, held that the income from letting out of the godowns should be treated as income from business and directed the Assessing Officer to grant renewal of registration as a firm. Feeling aggrieved and dissatisf .....

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this backdrop, though at the stage of admitting the appeal on 04-02-2004 no substantial question of law was formulated, in our opinion, the following questions fall for our consideration: 1. Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding the income from letting out of the godowns as income from business? 2. Whether on the facts and in the circumstances of the case, the Tribunal was justified in not recording any finding as to entitlement o .....

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upreme Court considered the question, how the income received as rent and hire is to be assessed, that is, under which section of Income Tax Act, 1922, (for short 1922 Act) is it assessable? According to the assessee in that case, the entire income ought to have been assessed under Section 10 as the income of a business or, in the alternative, under Section 12 as the income from residuary source, that is, a source not specified in the preceding Sections 7 to 11, with the allowances respectively .....

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se provided for a monthly rent of ₹ 5,950/- for the building and hire of ₹ 5,000/- for the furniture and fixtures. In this backdrop, the aforementioned question fell for consideration of the Supreme Court. One of the objects of the assessee- Company in Sultan Brothers Case (supra) was to acquire land and building and to turn the same into account by construction and reconstruction, decoration, furnishing and maintenance of them and by leasing and selling the same. The Supreme Court o .....

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in Section 9. The character of that income is not altered because it is received by a company formed with the object of developing and setting up markets. Then the Supreme Court considered the question and observed that it is true, the rent for the building and the hire for furniture were separately reserved in the lease but that does not make the two lettings separable. Then after referring to the Clauses in the lease, further observed that the building and fixtures were to be used for one pur .....

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ld be enjoyed altogether and not one separately from other. 4.2. In the result the Supreme Court held that the rent from the building will be computed separately from the income from the furniture and fixtures and in the case of rent from the building the appellant would be entitled to the allowances mentioned in Sub-section (4) of Section 12 and in the case of income from the furniture and fixtures, to those mentioned in Sub-section (3) and that no part of the income can be assessed under Secti .....

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f commercial exploitation of the commercial assets. Against this finding, the Calcutta High Court after referring to various Clauses in lease agreement, held that the assessee decided to go out of the business as far as this particular factory was concerned, the lease agreement was in fact a veiled agreement for lease-cum-sale and it could not be in the contemplation of the assessee, at the time of it entering into the license agreement, to retain the assets, any more as a commercial asset. In t .....

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essable as business income. 4.4. This Court in Commissioner of Income-Tax. v. Y.Narayana Murthy ((2004) 270 I.T.R. 275) considered the question whether, on the facts and in the circumstances of the case and in law, the Appellate Tribunal was justified in holding that letting out the godowns would amount to carrying on of business within the meaning of the Partnership Act disregarding the decision of the High Court in R.C.No.118 of 1980, dated November 29, 1984 in the case of CIT V. Phabiomal and .....

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r 1980-81. Accordingly, directions were issued to take the status of the assessee as an association of persons for the relevant assessment years 1979-80 and 1980-81. Consequently, the Assessing Officer passed the order for the assessment year 1979-80 which was upheld by the Appellate Assistant Commissioner. The assessing authority assessed the rental income as income from house property for the assessment years 1981-82 and it was upheld by the Commissioner of Income-Tax (Appeals). The Tribunal u .....

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n for the assessment year 1980-81. On a reference, this Court held that the expression business contemplates continuous activity from year to year. It was not the case of the assessee that it was in the business of construction of godowns and letting them out from year to year either to the F.C.I. or to any other interested person or persons, as the case may be. Therefore, the assessee was not continuing the activity of construction of godowns and letting them out from year to year. There was no .....

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-Tax v. Veerabhadra Industries ((1999) 240 I.T.R. 5), this Court had taken the similar view, as was taken in Y.Narayana Murthy (supra) holding the single act of constructing godowns and letting it out cannot be treated as a business. The expression business contemplates continuous activity from year to year. There was no evidence that the assessee was continuing the activity of constructing godowns and letting them out from year to year. There was no material that it had constructed a godown in .....

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g markets. It had purchased 10 bighas of land in the town of Calcutta and had set up a market therein. The question was whether the income realized from the tenants of the shops and stalls was liable to be taxed as business income under Section 10 of 1922 Act or as income from property under Section 9. In this case, it was contended that income from letting out of the godowns is business income and, therefore, the assessee was entitled for registration under Section 185 (1) (a) of 1922 Act. Whil .....

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n this year. Therefore, the income from a simple letting out of the godown cannot be treated as business income for the purpose of the Income-tax Act. When once it is not business income the question of availing of benefit under section 185 (1) (a) of the Act does not arise. The income has to be assessed as income from property in accordance with sections 22 to 27 of the Income-tax Act. We are fortified in our view by a judgment of this court in Phabiomal and Sons case [1986] 158 ITR 773, wherei .....

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se where the assessee went on putting up additional constructions and letting it out to various tenants which was in the nature of business activity, because, as pointed out in the earlier paragraph, it is a case where there is continuous activity and therefore that judgment is distinguishable on facts. (emphasis supplied) 05. Learned counsel for the assessee, in support of his case, placed reliance on the following judgments: Commissioner of Income Tax v. National Storage Pvt. Ltd. Bombay , Com .....

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the Supreme Court was considering the case of the distributors, who were required to store films only in godowns constructed strictly in conformity with the specifications laid down in the Film Rules and in a place to be approved by the Chief Inspector of Explosives, Government of India. The assessee, after purchasing a plot of land, constructed 13 units thereon. Each unit was divided into four vaults, having a ground floor for rewinding of films and an upper floor for storage of films. 12 units .....

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cidental and subservient to the main business of the assessee, the income derived from the letting will not be the income from property falling under Section 9 and the exception to Section 9 may also come into operation in such cases. The appeal was dismissed by the Supreme Court. In the instant case before us, the letting out of the godowns is not the main business of the assessee and therefore, income cannot be held to be from the business activity. Thus, this judgment is of no avail to the as .....

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handling and transport business. Thus, the facts in these cases are different and, hence, these judgments also are of no avail to the assessee. 6. In the present case, the main business of the assessee was the export of tobacco and for that purpose they had constructed godowns. As submitted by the learned counsel for the assessee, the assessee would let out the godowns when they would not require the same and earn rental income therefrom. Apart from letting out the godowns, no other services/ame .....

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