Rental receipts and composite lease income treated as property and other-source income, while depreciation claim was remanded for verification.

Receipts from letting out office premises and factory sheds on ordinary lease terms, without services or use in the assessee's own business, were treated as income from property because the assets were merely surplus property after closure of the earlier business. Composite rent from the Mowbreys Road shed, plant and machinery was assessed as income from other sources, as the lease was a composite letting to an independent lessee and supervisory clauses did not make it a business activity. The claim for depreciation and investment allowance on Bangalore factory plant and machinery was remitted for fresh factual verification of commencement of manufacture and actual use during the year.

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Issues: (i) Whether the receipts from letting out the office premises, factory sheds and composite plant and machinery were assessable as business income or as income from house property or other sources; (ii) Whether the assessee was entitled to depreciation and investment allowance in respect of the Bangalore factory plant and machinery.

Issue (i): Whether the receipts from letting out the office premises, factory sheds and composite plant and machinery were assessable as business income or as income from house property or other sources.

Analysis: The assessee had discontinued its earlier mosaic tile business and had shifted to a new line of manufacture at Bangalore. The office premises and the Valappanchavadi sheds were let out on ordinary lease terms without any services being rendered by the lessor, and the premises were no longer used for the assessee's own business. On those facts, the letting represented exploitation of surplus property rather than exploitation of a continuing commercial asset. In respect of the Mowbreys Road shed let to Mr. Victor, the lease was a composite arrangement covering building, plant and machinery, and the assessee had closed its earlier business; the lessee carried on his own business, while the assessee only received composite rent. The supervisory clauses did not convert the transaction into a business activity.

Conclusion: The receipts from the office premises and the Valappanchavadi sheds were rightly treated as income from property, and the composite rent from the Mowbreys Road shed and plant and machinery was rightly assessed as income from other sources. This issue was decided against the assessee.

Issue (ii): Whether the assessee was entitled to depreciation and investment allowance in respect of the Bangalore factory plant and machinery.

Analysis: The claim was rejected below without a proper verification of whether manufacturing activity had commenced and whether the machinery had in fact been used during the year. The record required factual examination on the basis of the accounts and any further evidence that the assessee might produce.

Conclusion: The matter was remitted to the ITO for fresh adjudication after giving the assessee an opportunity to adduce evidence. This issue was decided in favour of the assessee to that extent.

Final Conclusion: The appeal succeeded only in part, with the income classification sustained but the claim for depreciation and investment allowance sent back for reconsideration on the facts.

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