Court rules rental income as business income, allows compensation as deductible expense.

The court held in favor of the appellant, ruling that the rental income should be assessed under the head 'business' rather than 'house property' as claimed by the appellant. Additionally, the compensation paid by the appellant to tenants to obtain vacant possession and increase rental income was deemed an admissible revenue deduction for business purposes. The court emphasized that the payment was not for acquiring a new asset but for enhancing existing business activities, in line with the appellant's Memorandum of Association. The appeal was allowed in favor of the appellant.

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Issues Involved:
1. Whether the Tribunal was justified in holding that the appellant could not claim the assessment of the rental income under the head 'business' because the same was all along offered for assessment under the head 'house property'.
2. Whether the rental income earned by the appellant is assessable under the head 'business' and the compensation of Rs. 53,50,000/- paid by it for obtaining possession from lessee/tenant so as to earn a higher income is an admissible revenue deduction.

Detailed Analysis:

Issue 1: Assessment of Rental Income under the Head 'Business'

The appellant, a public limited company, argued that its rental income should be assessed under the head 'business' rather than 'house property'. The appellant's Memorandum of Association specified that one of its main objects was to acquire and develop properties and deal with them by way of sale, lease, letting out, etc. The appellant had consistently declared rental income under 'house property' in previous years, but in the assessment year in question, it claimed the rental income as 'business income'. The Assessing Officer and the Tribunal rejected this claim, holding that there was no change in the facts of the case and that the appellant had consistently declared rental income under 'house property'. The Tribunal did not consider the Memorandum of Association, which permitted the appellant to carry on business by letting out properties. The court held that since there was no prior adjudication on this issue, the principle of consistency or res judicata did not apply. The rental income should be assessed under the head 'business' as per the appellant's Memorandum.

Issue 2: Admissibility of Compensation as Revenue Deduction

The appellant paid Rs. 53,50,000/- as compensation to two tenants to obtain vacant possession and earn higher rental income. The Assessing Officer disallowed this payment as capital expenditure, stating that it was for acquiring a benefit of enduring nature. The CIT(A) allowed the deduction, holding that the income from rent constituted the appellant's business income and that the compensation was laid out wholly and exclusively for business purposes on grounds of commercial expediency. The Tribunal reversed this decision, but the court held that the compensation was paid to secure higher rental income, which was a business activity permitted by the Memorandum. The payment was not for acquiring a new asset or advantage of enduring nature but was a revenue expenditure for business purposes. The court referred to several judgments supporting the appellant's claim, including CIT v. Auto Distributors and Empire Jute Co. Ltd. The court concluded that the compensation was an admissible revenue deduction.

Conclusion:

The court answered both questions in favor of the appellant, holding that the rental income should be assessed under the head 'business' and that the compensation paid was an admissible revenue deduction. The appeal was allowed.

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