1996 (7) TMI 96 - HC - Income Tax

Court rules in favor of assessee on rental income and commission deductions.

Commissioner Of Income-Tax Versus VS. Thiagaraja Mudaliar & VST MOTORS P. LTD.

The court ruled in favor of the assessee on all three issues. The rental income was classified as business income due to the property being initially used ... Business Expenditure, Business Income, Business Premises, Income From Property Issues Involved:1. Classification of rental income as business income or income from property.2. Admissibility of commission paid to V. T. Padmanabhan and Bros. as a deduction.3. Validity of the Appellate Tribunal's view on services rendered by V. T. Padmanabhan and Bros.Summary:Issue 1: Classification of Rental IncomeThe primary issue was whether the rental income received by the assessee from letting out portions of its property should be treated as 'business income' or 'income from property.' The assessee, a dealer in Tata diesel vehicles, argued that the rental income should be considered as business income since the property was constructed for business purposes, and the surplus portion was let out due to shifting of branches. The Income-tax Officer (ITO) treated the income under the head 'Property' and disallowed repair expenses claimed under 'Business.'The court referred to several precedents, including the Supreme Court's decision in CEPT v. Shri Lakshmi Silk Mills [1951] 20 ITR 451, which established that income from a commercial asset remains business income irrespective of how it is exploited. The court concluded that since the property was a commercial asset initially used for business and later let out due to surplus, the rental income should be assessed as 'business income.' The Tribunal's decision to treat the rental income as business income was upheld.Issue 2: Admissibility of Commission PaidThe second issue was whether the commission of Rs. 34,100 paid to V. T. Padmanabhan and Bros. was an admissible deduction. The ITO disallowed the commission, arguing that the firm did not render any services and that the agreement was fictitious. However, the Commissioner of Income-tax (Appeals) allowed the deduction, noting that similar payments were allowed in the past and in the case of a sister concern, India Garage.The Tribunal confirmed the first appellate authority's decision, finding no grounds to doubt the agreement. The court upheld the Tribunal's decision, noting that the commission payments were consistently allowed in the past and the agreement was not disputed by the Department.Issue 3: Validity of Tribunal's View on Services RenderedThe third issue was whether the Tribunal's view that V. T. Padmanabhan and Bros. rendered services to the assessee-company was based on relevant and valid materials. The Department argued that there was no evidence of services rendered. However, the Tribunal found that the agreement was genuine and that similar payments were allowed in the past.The court upheld the Tribunal's decision, emphasizing that the consistency in allowing such payments in the past supported the assessee's claim. The Tribunal's finding that the commission payment was a deductible expense was affirmed.Conclusion:The court answered all three questions in the affirmative, ruling in favor of the assessee and against the Department. The rental income was classified as business income, and the commission payment to V. T. Padmanabhan and Bros. was deemed an admissible deduction based on the consistent allowance in previous years.