Hindustan Machine Tools Ltd.'s Leasing Income Deemed Business Income under Income-tax Act

The income derived by Hindustan Machine Tools Ltd. from leasing out premises in its industrial estate was held to be assessable as "Income from business" under section 28 of the Income-tax Act, 1961. The courts determined that the leasing of sheds was integral to the assessee's manufacturing activities, aimed at securing a steady supply of components for its machine tools business. The income was deemed to be directly linked to the business operations, providing services to ancillary units, and not merely from property rights. Therefore, the income was assessed as business income rather than income from house property.

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Issues Involved:
1. Whether the income derived by the assessee by leasing out the premises in its industrial estate is assessable as income under the head "Income from business".

Summary:

Issue 1: Assessability of Income Derived from Leasing Premises

The core issue is whether the income derived by the assessee, Hindustan Machine Tools Ltd., from leasing out premises in its industrial estate should be assessed as "Income from business" u/s 28 or as "Income from house property" u/s 22 of the Income-tax Act, 1961. The assessee constructed an industrial estate with 50 sheds, leased out to various entrepreneurs to manufacture components required for its machine tools business. The Income Tax Officer (ITO) assessed the income under s. 22, while the Appellate Assistant Commissioner (AAC) and the Tribunal held it should be assessed under s. 28.

The Tribunal's view was that the dominant object of constructing and leasing the sheds was to secure a steady supply of components for the assessee's business, making the leasing incidental to its manufacturing activities. This was supported by a pamphlet issued by the assessee and the lease agreements, which indicated that the sheds were leased to facilitate the manufacture of components for the assessee's use.

The Tribunal concluded that the letting out of the sheds was an integral part of the assessee's business activities, not merely an act of property ownership. The Supreme Court's observations in Nalinikant Ambalal Mody v. S. A. L. Narayan Row, CIT [1966] 61 ITR 428, and Karanpura Development Co. Ltd. v. CIT [1962] 44 ITR 362, were cited to emphasize that the nature of income should be determined based on the purpose and use of the property.

The High Court of Patna and Punjab, in similar cases, held that income from leasing property to employees for business efficiency should be treated as "business income". The Madhya Pradesh High Court, in CIT v. National Newsprint and Paper Mills Ltd. [1978] 114 ITR 388, also supported this view, stating that the dominant purpose of letting out accommodation for business efficiency should be assessed under "business income".

The High Court concluded that the assessee's activity of leasing sheds was directly linked to its business operations, providing a continuous supply of components and rendering services to ancillary units. Therefore, the income derived was not merely from property rights but from carrying on its business.

Conclusion:
The income derived by the assessee from leasing out the premises in its industrial estate is assessable under the head "Income from business".

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