1993 (5) TMI 2 - HC - Income Tax

Brokerage income classified as business income not professional income under Income Tax Act

The Rajasthan HC ruled that income from brokerage constitutes business income rather than professional income. The court distinguished between activities ... Income received from brokerage - 'Professional income' Or 'business income' - terms 'broker', 'profession' and 'vocation' - HELD THAT:- In Lakshminarayan Ram Gopal and Son Ltd. v. Government of Hyderabad [1954 (4) TMI 2 - SUPREME COURT], the appellants were appointed under an agency agreement as agents of the company for a period of 30 years. Under the agreement, the appellants were to act as such agents till they carried on general management of the company subject to the control and supervision of the directors. The appellants were entitled to remuneration by way of commission of a certain percentage of the sale proceeds of the company. The question was whether the appellants were employees of the company and whether the remuneration was liable to excess profits tax. It was held by the apex court that the appellants were the agents of the company and not merely the servants of the company remunerated by wages or salary. It was further held that the appellants as agents of the company were carrying on business and the remuneration which the appellants received from the company in terms of the agency agreement was business profit. From the above judgment of the Supreme Court, the activities carried on under the agency agreement were held to be business. In the case of a broker, the activities are carried on either under a written agreement or even a verbal agreement in respect of different constituents and the activities, therefore, would amount to business. The Tribunal has proceeded only on the basis that some manual/professional skill is required for earning income from brokerage which could not be the only criteria. There should be some special qualification of a person apart from skill and ability, which is required in carrying on any activity which could be considered as profession. This could be by having education in a particular system either in the college or university or it may be even by experience. No such finding has been given by the Tribunal with regard to personal qualification and, therefore, we are of the view that the Income-tax Appellate Tribunal was not justified in coming to the conclusion that the income from brokerage should be assessed as professional income and not brokerage income. The reference is, accordingly, answered in favour of the Department and against the assessee. Issues Involved:1. Whether income from brokerage should be assessed as professional income or business income.Summary:Issue 1: Whether income from brokerage should be assessed as professional income or business income.The Income-tax Appellate Tribunal referred the question of whether income from brokerage should be assessed as professional income and not business income. The assessee derived income from brokerage of different commodities, which was initially considered business income by the assessing officer. The assessee claimed it as professional income, but this claim was rejected by the Commissioner of Income-tax (Appeals), Jaipur. The Tribunal later held that earning income from brokerage required personal skill and manual skill, thus qualifying it as professional income.The Department argued that brokerage income is business income, not professional income, as professional income pertains to fields like medicine, law, and architecture, which require specialized qualifications. The Tribunal's test of skill application was deemed incorrect by the Department.The court examined definitions of 'business' and 'profession' u/s 2(13) of the Act and various judicial interpretations. It was noted that 'business' is broader than 'profession,' which involves intellectual or manual skill controlled by intellectual skill. The court emphasized that skill and ability alone do not determine whether an activity is a business or profession; qualifications and specialized training are also necessary.The Tribunal's reliance on a judgment regarding auctioneers was found inapplicable to brokers. Definitions from Black's Law Dictionary and other legal sources were considered, highlighting that a profession involves specialized knowledge and training, which was not established for brokers in this case.The Supreme Court's judgment in Lakshminarayan Ram Gopal and Son Ltd. v. Government of Hyderabad was cited, where agency activities were deemed business. Similarly, brokerage activities, often under agreements, were considered business activities. The Tribunal's conclusion based on skill alone was insufficient without evidence of special qualifications.The court concluded that the Tribunal was not justified in assessing brokerage income as professional income. The reference was answered in favor of the Department, ruling that brokerage income should be assessed as business income.No order as to costs.