High Court: Income from letting out assets classified as 'Business' not 'Other sources'

The High Court classified income from letting out plant, machinery, and building as 'Business' income rather than 'Other sources'. The Court considered the temporary lease as a business decision due to circumstances preventing the company from operating itself. The income was deemed part of business activity and taxed accordingly, following a similar precedent from the High Court of Delhi. The judgment favored the assessee, directing each party to bear its own costs.

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Issues:
Classification of income from letting out of plant, machinery, building, etc., under the head 'Business' or 'Other sources'.

Analysis:
The case involved a question regarding the classification of income from letting out of plant, machinery, building, etc., under the head 'Business' or 'Other sources'. The assessee-company, which was initially set up to operate flour mills, faced challenges in obtaining a license to run the mill. Due to these difficulties, the company leased out the mill to another party for a period of five years. The lessee obtained the necessary license and operated the mill during the lease period. Subsequently, the company obtained a license and resumed operations itself.

The Income Tax Officer (ITO) initially treated the income from the lease under the head 'Other sources'. However, the Appellate Authority and the Income-tax Appellate Tribunal held that the income constituted an element of business activity and should be taxed under the head 'Business'. The Tribunal's decision was supported by a similar judgment from the High Court of Delhi for the assessment year 1966-67.

The High Court of Allahabad, in its judgment, agreed with the Delhi High Court's reasoning. It found that the asset, i.e., the factory plant and machinery, was a commercial asset, and the decision to lease it out temporarily was a business decision due to intervening circumstances preventing the company from operating the business itself. Therefore, the lease income was rightly classified as income under the head 'Business'.

In conclusion, the High Court answered the question in the affirmative, in favor of the assessee and against the revenue. The judgment emphasized that the lease money received by the assessee constituted an element of business activity and should be taxed under the head 'Business'. Additionally, since no representation was made by the assessee, each party was directed to bear its own costs.

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