1984 (12) TMI 98 - AT - Income Tax

Leasehold Property Income Categorized as 'Other Sources' Not 'Business Profits'

The Tribunal determined that income from the leasehold property at 57, Park Street, Calcutta should be categorized as 'Income from other sources' under ... Dispose Of, House Property, Income From Other Sources, Profits And Gains Of Business Issues Involved:1. Classification of income from leasehold property as 'Profits and gains of business' or 'Income from other sources' under section 56 of the Income-tax Act, 1961.Detailed Analysis:1. Classification of Income from Leasehold Property:Background and Facts:- The assessment years in question are 1973-74 to 1978-79.- The assessee, a limited company, took house property at 57, Park Street, Calcutta, on lease from Karnani Properties Ltd.- The ground floor was already occupied by two tenants. After renovation, the entire ground floor was let out to Allahabad Bank for Rs. 5,000 per month.- The assessee claimed the income as business income, while the ITO classified it under 'Income from other sources'.Commissioner (Appeals) Decision:- The Commissioner (Appeals) found that the property consisted of three units and was extensively renovated.- The activities were deemed organized and commercial, leading to a significant increase in rental income.- The Commissioner (Appeals) concluded that the income should be taxed under 'Profits and gains of business or profession' and not under section 56.Department's Argument:- The department argued that the income should be classified under 'Income from other sources'.- It was contended that the assessee did not carry on any continuous and organized activity and rendered no services.- The department cited various Supreme Court cases to support their argument.Assessee's Argument:- The assessee supported the Commissioner (Appeals) decision, arguing that the property was commercially exploited.- It was pointed out that the renovation led to a substantial increase in rental income, indicating a business activity.- The assessee cited several Supreme Court cases to support their claim.Tribunal's Analysis:- The Tribunal reviewed the facts and the legal precedents cited by both parties.- It was noted that the property was renovated and sublet to Allahabad Bank, leading to an increase in rental income.- The Tribunal considered the Supreme Court cases cited, including Narain Swadeshi Weaving Mills, Sultan Bros. (P.) Ltd., and Karnani Properties Ltd.Key Legal Precedents:- Narain Swadeshi Weaving Mills: The Supreme Court held that each case must be decided on its own circumstances.- Sultan Bros. (P.) Ltd.: Whether a particular letting is business depends on the circumstances of each case.- Karnani Properties Ltd.: Services rendered continuously and in an organized manner can constitute business activities.- Lakshminarayan Ram Gopal & Sons Ltd.: Activities constituting business need not be limited to trade or commerce.- Karanpura Development Co. Ltd.: Ownership and leasing can be part of business activities depending on the objective.- National Storage (P.) Ltd.: Providing additional services and facilities can indicate a business activity.- S.G. Mercantile Corpn. (P.) Ltd.: Acquisition and subletting of property can be part of business activities.Tribunal's Conclusion:- The Tribunal found that the assessee's activities did not constitute a continuous or organized business activity.- No services were rendered by the assessee that could be characterized as trading or business activities.- The memorandum of association did not empower the assessee to commercially exploit the property.- The Tribunal concluded that the income should be classified under 'Income from other sources' and not 'Profits and gains of business or profession'.Final Judgment:- The orders of the Commissioner (Appeals) were set aside.- The ITO's classification of the income under 'Income from other sources' was restored.- The departmental appeals were allowed.Summary:The Tribunal ruled that the income derived from the leasehold property at 57, Park Street, Calcutta, should be classified under 'Income from other sources' as per section 56 of the Income-tax Act, 1961, and not as 'Profits and gains of business or profession'. The Tribunal concluded that the assessee's activities did not constitute a continuous or organized business activity, and the memorandum of association did not empower the assessee to commercially exploit the property. The departmental appeals were allowed, and the orders of the Commissioner (Appeals) were set aside.