1991 (5) TMI 93 - AT - Income Tax

Tribunal reclassifies income as business profits, rejecting property income assessment.

The Tribunal allowed the appeal, concluding that the income earned by the assessee-company stemmed from genuine business activities. The income was ... - Issues:Assessment of income under the head 'Income from house property' vs. 'profits and gains of business'Applicability of the principle laid down by the Supreme Court in the case of McDowell and Co.Assessment of income under the head 'income from other sources'Analysis:Assessment of income under the head 'Income from house property' vs. 'profits and gains of business':The appeal involved a dispute regarding the nature of income earned by the assessee-company. The Income Tax Officer (ITO) initially assessed the income as 'income from house property' due to the belief that the services provided by the company did not constitute a business activity. However, the CIT(A) disagreed and held that the income could not be assessed as 'income from house property' since the property did not belong to the company. The Tribunal further analyzed the activities of the company, emphasizing that the company's main objects were to provide counters and services to parties, indicating a business activity. The Tribunal concluded that the income was indeed from a business activity and should be assessed under the head 'profits and gains of business.'Applicability of the principle laid down by the Supreme Court in the case of McDowell and Co.:The CIT(A) invoked the principle established by the Supreme Court in the case of McDowell and Co., emphasizing that the company was created as an intermediary stage to receive income under the guise of service charges, potentially reducing tax burdens. However, the Tribunal determined that the principle from the McDowell case was not applicable to the present situation, as the company's activities were genuine business activities, and there was no evidence suggesting the company was a fictitious entity. Therefore, the Tribunal held that the principle from the McDowell case did not apply to the assessee-company.Assessment of income under the head 'income from other sources':The CIT(A) directed the ITO to assess the income under the head 'income from other sources' but later set aside the assessment with a direction to make a fresh assessment without providing a firm finding on this issue. The Tribunal criticized this inconsistency and clarified that the income should be assessed as 'income from business' based on the activities of the company. The Tribunal modified the CIT(A)'s order and directed the ITO to treat the income as 'income from business' for the purpose of making a fresh assessment.In conclusion, the Tribunal allowed the appeal, determining that the income earned by the assessee-company was from a genuine business activity and should be assessed under the head 'profits and gains of business.' The Tribunal rejected the application of the principle from the McDowell case and clarified the appropriate assessment category for the income in question.