2002 (2) TMI 16 - HC - Income Tax

Rental Income Categorized as 'Income from Other Sources' Not Business Income

The court affirmed that the rental income was not classified as business income but rather as 'income from other sources' based on the cessation of ... '1. Whether, Tribunal was right in law in holding that the rental income derived by the assessee should be treated as 'income from property' and not 'income from business'? – Held that, under section 260A, our jurisdiction is now restricted to consider only substantial questions of law in order to entertain an appeal. On that count also, the assessee must fail. - 2. Whether, Tribunal was right in ignoring the order passed in the wealth-tax appeal, relating to the assessment year 1989-90, wherein it was held that the factory in question was a commercial asset?' - Held that even a commercial property which is exploited otherwise than in the course of business by letting out, the income from such letting out could not be said to be a business income. There fore, even if it is held that such a question could be argued, the question has to be answered against the assessee. In short, we find no reason to interfere with the orders. Issues Involved:1. Classification of rental income as 'income from property' vs. 'income from business'.2. Consideration of the wealth-tax appeal order in income-tax proceedings.Detailed Analysis:Issue 1: Classification of Rental IncomeThe primary issue is whether the rental income derived by the assessee should be treated as 'income from property' or 'income from business'. The assessee argued that the rental income should be classified as business income, citing the company's memorandum of association, which permits the exploitation of assets for profit. The company had ceased manufacturing activities since 1971 and leased out its premises to various tenants, earning rental income.The Tribunal, supported by the Supreme Court judgment in Universal Plast Ltd. v. CIT [1999] 237 ITR 454, concluded that the income could not be treated as business income. The Supreme Court had laid down four principles to determine the nature of such income, emphasizing that if the business had ceased with no intention to resume, the assets would cease to be business assets, and the income from letting them out would not be business income. The Tribunal found that the company had not made efforts to restart its manufacturing activities and had been continuously leasing out its premises since 1971. Thus, the income was classified as 'income from other sources' and not as business income.The court concurred with the Tribunal, stating that the authorities' task was limited to determining whether the income was business income. Once it was established that it was not, the classification under another head was not necessary. The court also noted that this was a mixed question of law and fact, and under section 260A, their jurisdiction was restricted to substantial questions of law, further supporting the Tribunal's decision.Issue 2: Consideration of Wealth-Tax Appeal OrderThe second issue was whether the finding in the wealth-tax appeal, which classified the leased assets as commercial assets, should influence the income-tax proceedings. The assessee argued that the Tribunal should have considered the wealth-tax order, which deemed the assets as commercial and thus, the income from them as business income.The court noted that a miscellaneous petition under section 254(2) was filed to rectify the Tribunal's order, which did not address the wealth-tax order. However, the Tribunal corrected only the factual error regarding the sale of machinery and did not address the wealth-tax order's relevance. The court agreed with the Department's counsel that a question not raised in the appeal memorandum could not be introduced via a rectification petition.On the merits, the court held that wealth-tax and income-tax concepts must be read separately. Even if the property was considered commercial in wealth-tax proceedings, the Supreme Court's judgment indicated that income from letting out commercial property, when not in the course of business, could not be classified as business income. Therefore, the wealth-tax order had no bearing on the income-tax proceedings, and the Tribunal's decision stood firm.Conclusion:The court dismissed the appeals, affirming that the rental income was not business income and that the wealth-tax order had no impact on the income-tax classification. Consequently, connected T.C.M.P. Nos. 3 and 4 of 2001 were also dismissed.