Business income classification for lease receipts sustained; depreciation, loss set-off and deletion of notional rent followed, with compensation amortised.

Identical lease and rental receipts from building, plant and machinery were treated as business income because the same treatment had been consistently accepted in earlier and later years on unchanged facts; consequently, depreciation and set-off of carried-forward business losses were also allowable. The proposed notional rental addition on the interest-free security deposit failed once the underlying receipts were classified as business income and the assets were accepted as business assets. Retrenchment compensation, however, fell under the statutory amortisation rule and was deductible only in the prescribed instalments, not in full in the year of payment.

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Issues: (i) whether lease and rental receipts from building and plant and machinery were assessable as business income or under other heads of income, with consequential claim for depreciation and carry forward loss set-off; (ii) whether notional rental income could be added in respect of interest-free security deposit where the underlying receipts were held assessable as business income; and (iii) whether retrenchment compensation was allowable in full or only in instalments under the applicable statutory provision.

Issue (i): whether lease and rental receipts from building and plant and machinery were assessable as business income or under other heads of income, with consequential claim for depreciation and carry forward loss set-off.

Analysis: The receipts had been offered and accepted as business income in earlier and subsequent years on identical facts. The business was treated as continuing, and the revenue had not disturbed the trading results. In the absence of any demonstrated change in facts or law, consistency required the same treatment to be followed for the year in question. Once the receipts were held to be business income, the related depreciation claim and the set-off of carry forward business losses also became allowable.

Conclusion: The rental and lease receipts were held assessable as business income, and the assessee was held entitled to depreciation and consequential set-off of business losses.

Issue (ii): whether notional rental income could be added in respect of interest-free security deposit where the underlying receipts were held assessable as business income.

Analysis: The notional addition was made only because the receipts were treated as income from other sources or house property. Once the lease receipts were held to be business income and the related assets were accepted as business assets, the basis for computing a notional rent on the security deposit did not survive.

Conclusion: The addition of notional rental income was not sustainable.

Issue (iii): whether retrenchment compensation was allowable in full or only in instalments under the applicable statutory provision.

Analysis: The retrenchment compensation was covered by the specific provision governing amortised allowance of such expenditure. The expenditure was therefore not deductible in full in the year of payment, but only in the manner prescribed by statute.

Conclusion: The retrenchment compensation was allowable only in the prescribed instalments, and not in full in the year of payment.

Final Conclusion: The appeals were allowed on the principal income-characterisation issue, with consequential relief on depreciation, loss set-off, and deletion of notional rent, while the retrenchment compensation claim was granted only to the statutory extent.

Ratio Decidendi: Where identical lease and rental receipts have consistently been accepted as business income in earlier and later years on unchanged facts, the revenue cannot depart from that position without showing a material change in fact or law; consequential claims follow the same classification.

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