Tribunal rules in favor of assessee, overturns disallowance under section 40A(3). Rental income categorized as income from house property.

The Tribunal dismissed the revenue's appeal and allowed the assessee's appeals for the assessment years 1983-84 and 1984-85. The assessee's appeal for the assessment year 1985-86 was partly allowed, with the disallowance under section 40A(3) being overturned. The Tribunal held that the rental income from the godowns should be assessed as income from house property under section 22, not as business income under section 28.

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Issues Involved:
1. Treatment of rental income from godowns as income from house property vs. business income.
2. Disallowance under section 40A(3) for assessment year 1985-86.

Issue-wise Detailed Analysis:

1. Treatment of Rental Income from Godowns:

The primary issue in the appeals was whether the rental income received by the assessee from letting out godowns should be treated as income from house property or as business income. The assessee argued that the rent received should be assessed as income from house property under section 22 of the Income Tax Act, while the revenue contended that it should be treated as business income under section 28.

The assessee claimed that it had transferred the godowns from stock-in-trade to an investment account, thus changing their nature from business assets to investment assets. The Income Tax Officer (ITO) rejected this claim, stating that the assessee was engaged in the business of constructing and selling godowns, not in investing in properties for rental income. The ITO argued that the rental income was more proximate to business income since the godowns were commercial properties used for warehousing and not for residential purposes.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the ITO's view, stating that the rental income was incidental and subservient to the assessee's main business of constructing and selling godowns. The CIT(A) referred to the decision in CIT v. National Storage (P.) Ltd., where it was held that income from letting out properties could be considered business income if the letting was incidental to the main business.

The Tribunal analyzed the facts and circumstances, noting that some properties were transferred to the investment account and then re-transferred to stock-in-trade. This indicated that the assessee's intention was not to treat the properties as investments but as stock-in-trade. The Tribunal concluded that the letting of godowns was to bridge the period between construction and sale, thus augmenting the assessee's resources.

However, the Tribunal also considered section 22 of the Income Tax Act, which states that the annual value of property consisting of any buildings or lands appurtenant thereto, of which the assessee is the owner, shall be chargeable to income-tax under the head "Income from house property." The Tribunal held that the godowns let out by the assessee could not be treated as occupied by the assessee for the purposes of its business, as the assessee was not engaged in the business of leasing or letting godowns on hire. Consequently, the rental income from the godowns was to be assessed under section 22 as income from house property.

The Tribunal distinguished the present case from the National Storage (P.) Ltd. case, noting that in the latter, the letting was incidental and subservient to the main business, which was not the case here. The Tribunal also referred to various decisions, including CIT v. Chugandas & Co., where it was held that rental income from buildings owned by an assessee engaged in the business of purchasing and selling buildings should be assessed under section 22.

2. Disallowance under Section 40A(3) for Assessment Year 1985-86:

The second issue was the disallowance of Rs. 11,946 under section 40A(3) for the assessment year 1985-86. The payment was made in cash to M/s. Gadhra Timber Mart and M/s. Jangmata Iron Works for the purchase of iron and timber. The assessee argued that these parties insisted on cash payments and that it was the first time the assessee dealt with them.

The Tribunal allowed the assessee's claim, referring to Circular No. 220 of May 1970 issued by the Board, which provided for exceptions to the disallowance under section 40A(3) in certain circumstances. The Tribunal concluded that the payments should be allowed based on the circular.

Conclusion:

The Tribunal dismissed the revenue's appeal and allowed the assessee's appeals for the assessment years 1983-84 and 1984-85. The assessee's appeal for the assessment year 1985-86 was partly allowed, with the disallowance under section 40A(3) being overturned. The Tribunal held that the rental income from the godowns should be assessed as income from house property under section 22, not as business income under section 28.

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