1988 (9) TMI 15 - HC - Income Tax

Rental income from cinema building operated by assessee deemed business income

The High Court determined that the rental income from a cinema building, initially let out due to licensing issues but later operated by the assessee, ... Estate Duty Issues: Determination of income derived from lease rent as business income or income from other sources, admissibility of development rebate on plant and machinery let out.Analysis:The case involved two questions referred to the High Court under section 256(1) of the Income-tax Act, 1961. The first question was whether the income derived from lease rent of a building with plant, machinery, furniture, and fixtures related to a cinema was assessable as income from business or income from other sources for the assessment years 1966-67 to 1971-72. The second question was regarding the admissibility of development rebate under section 33 of the Income-tax Act, 1961, on the cost of the plant and machinery let out for the assessment year 1966-67.The firm in question claimed rents obtained as business income for the assessment years in question but the Income-tax Officer and the Appellate Assistant Commissioner held it to be income from other sources. However, the Tribunal reversed the finding and allowed the appeal, leading to the reference of the questions to the High Court by the Revenue.The assessee had invested a substantial amount in constructing a cinema building at Shillong and intended to run the cinema. Due to the unavailability of a license, the cinema was let out to another party with certain stipulations regarding repairs and termination of tenancy. Subsequently, the assessee obtained the license and started running the cinema.The Tribunal considered the rental income from the cinema as business income based on the fact that the assessee had constructed the building, equipped it with necessary items, and had the intention to run the cinema. The High Court, relying on precedents, emphasized that the intention of the assessee was crucial in determining whether the letting of premises constituted a business activity or property exploitation.The High Court concluded that the rental income from the cinema was indeed business income, considering the assessee's initial intention to operate the cinema, the substantial investment made, and the subsequent running of the cinema after obtaining the license. Therefore, both questions were answered in favor of the assessee, and the Tribunal's decision was upheld.In summary, the judgment clarified the distinction between income from business and income from other sources based on the intention and actions of the assessee in utilizing the property, ultimately determining the nature of the rental income for taxation purposes.