2008 (6) TMI 267 - AT - Income Tax

Income from car hire charges reclassified; deductions allowed; colorable device claim rejected.

The Tribunal allowed the appeal, determining that income from car hire charges should be classified under 'Income from other sources' for consistency. It ... Income From Other Sources Issues Involved:1. Classification of income from car hire charges: 'Income from business or profession' vs. 'Income from other sources'.2. Consistency in tax treatment across assessment years.3. Allowability of deductions under Section 57(iii) of the Income Tax Act.4. Allegation of a colorable device to reduce tax liability.Detailed Analysis:1. Classification of Income from Car Hire Charges:The primary issue pertains to whether the income from hiring out a motor car should be classified under 'Income from business or profession' or 'Income from other sources'. The assessee filed a return declaring income from car hire charges under 'Income from other sources'. The Assessing Officer (AO) reclassified this as 'Income from business or profession', thereby disallowing the set-off of the loss against salary income due to Section 71(2A) of the Income Tax Act, 1961, which was introduced w.e.f. 1st April, 2005.The CIT(A) upheld the AO's decision, reasoning that the assessee's activity of hiring out the car was systematic and organized, thus qualifying as a business. The CIT(A) stated, 'Business can be defined as an organized activity and in the present case merely because assessee has been hiring her car to M/s Jai Prakash Associates out of borrowed funds for a long time denotes that there is systematic activity for the purposes of obtaining profit.'2. Consistency in Tax Treatment:The assessee argued that in all previous years, the income from car hiring was assessed under 'Income from other sources' and that there was no change in facts in the current year. The principle of consistency was cited, referencing the Supreme Court's decision in Radhasoami Satsang vs. CIT, which emphasized that in the absence of any material change, the Department should not deviate from its earlier stance.The Tribunal noted the consistent treatment in earlier years, stating, 'For the sake of convenience, we give below the figures of income/loss assessed under s. 143(3) in earlier years,' and listed the assessment years where losses from car hiring were set off against other income.3. Allowability of Deductions under Section 57(iii):The Tribunal examined whether the deductions claimed by the assessee, such as depreciation, car insurance, interest, and driver's salary, could be allowed under Section 57(iii). It was noted that these deductions are permissible under Section 57(iii) and that claiming such deductions does not automatically shift the income head to 'Income from business or profession'. The Tribunal stated, 'Merely because similar claims can also be made while computing income under the head 'Income from business or profession', it cannot be said that any claim or deduction which is otherwise legally permissible under s. 57(iii) would automatically shift the head.'4. Allegation of a Colorable Device:The Department argued that the assessee's classification of income was a colorable device to reduce tax liability. The Tribunal rejected this argument, stating that since the Department had accepted the classification in earlier years, it was not justifiable to change the stance without any apparent reasoning or change in facts. The Tribunal concluded, 'Once Department has accepted the position in earlier years and no corrective step has been taken then assessee could not be blamed for offering the income from car hire charges under the head 'Income from other sources'.'Conclusion:The Tribunal allowed the appeal, holding that the income from car hire charges should be assessed under 'Income from other sources' in line with the principle of consistency. The Tribunal emphasized that there was no organized business activity involved in merely hiring out one car to a fixed customer for the entire year. The deductions claimed under Section 57(iii) were deemed permissible, and the AO was directed to verify and allow the insurance charges if paid/payable during the year. The appeal filed by the assessee was thus allowed.