2016 (8) TMI 903 - AT - Income Tax

Property leased by assessee classified as 'Income from Business' not 'Income from House Property' following Universal Plast Ltd.

The tribunal, following the principles outlined in Universal Plast Ltd., concluded that the property leased by the assessee retained its commercial nature ... Characterisation of rental income as income from business or income from house property - Nature and character of a commercial asset - Exploitation of business asset versus enjoyment of rent - Temporary letting does not alter commercial character of asset - Dominant object test in determining head of income - Application of judicial ratio in Universal Plast. Ltd. Characterisation of rental income as income from business or income from house property - Nature and character of a commercial asset - Temporary letting does not alter commercial character of asset - Application of judicial ratio in Universal Plast. Ltd. - Whether rent and maintenance charges received by the assessee from letting its industrial/commercial premises ought to be assessed under the head 'Income from Business' or under 'Income from House Property'. - HELD THAT: - Applying the tests laid down by the Supreme Court in Universal Plast. Ltd. , the Tribunal examined whether the property retained its commercial character and whether letting was an exploitation of a business asset while the assessee continued other commercial activities. The assessee had used the Okhla property for its printing press business, shifted its branch office temporarily and let out the premises for three years while retaining some machinery and continuing other business operations. There was no evidence of sale or abandonment of business or of conversion of the asset into a mere investment. The Tribunal held that where an asset capable of commercial exploitation is let out temporarily while the assessee carries on other business, the letting constitutes exploitation of a business asset and the income therefrom is business income. The Tribunal also relied on consistent judicial authorities applying the same principle and noted that temporary cessation of personal use does not change the character of a commercial asset into house property. Applying these principles to the facts, the Tribunal concluded that the receipts in question are taxable as income from business and not as income from house property. [Paras 4, 5]Rental and maintenance income from the lease of the commercial/industrial property is taxable as income from business.Final Conclusion: The appeal is disposed by answering the issue in favour of the assessee: the lease receipts from the commercial/industrial premises are held to be business income and not income from house property. Issues Involved:1. Factual aspect of the lease agreement.2. Nature of income derived from the lease agreement.Detailed Analysis:1. Factual Aspect of the Lease Agreement:The Revenue raised an appeal following the Hon'ble High Court's directive in I.T.A.No. 1117/2008 dated 02.04.2008. The High Court observed that the tribunal had erred in reaching conclusions without discussing factual aspects, including contentions and clauses of the lease and maintenance agreements. The High Court remitted the issue to the tribunal to decide afresh, examining the nature, character, and type of letting, and applying the legal ratio from the Supreme Court's decision in Universal Plast Ltd. Vs CIT (237 ITR 454).The assessee, engaged in the business of indenting and trading timber, shifted its branch office and let out its industrial property at Okhla Industrial Area for three years to ASL Ltd. The rent received was shown under 'Income from Business,' but the Assessing Officer considered it under 'Income from House Property.' The CIT(A) and the tribunal initially upheld the assessee's contention, leading to the Revenue's appeal to the High Court, which remitted the issue back for re-verification.2. Nature of Income Derived from the Lease Agreement:The Supreme Court in Universal Plast Ltd. laid down several propositions to determine whether income falls under 'Income from Business' or 'Income from House Property.' These include:- No general principle applies to all cases; each case must be decided on its own facts.- Income classification should align with practical and reasonable notions.- The distinction between commercial exploitation and letting out for rent is narrow and fact-dependent.- Income from a commercial asset remains business income if the asset is capable of commercial use, whether used by the owner or let out.- If the asset ceases to be a commercial asset, income derived from it is 'Income from House Property.'Applying these tests, the tribunal found that the assessee had not rented out all business assets and continued trading timber. The property was let out temporarily during the branch office shift, retaining its commercial nature. The lease agreement was for a short period of three years, and the property was not leased out again after the agreement expired.The tribunal concluded that the property remained a commercial asset, and the income from letting it out should be taxed as 'Income from Business.' This conclusion was supported by judicial precedents, including decisions from the Gujarat High Court and Calcutta High Court, which held that income from letting out commercial properties should be treated as business income.Conclusion:The tribunal, respecting the judicial pronouncements and applying the tests from Universal Plast Ltd., determined that the property let out by the assessee was a commercial property. Therefore, the income earned from letting it out deserved to be taxed as 'Income from Business,' not 'Income from House Property.' The issue was resolved in favor of the assessee, and the order was pronounced on 13th July 2016.