Income tax - Whether when assessee leases out factory and does not intent to re-start own business, rental income can still be treated as business income - NO, rules Madras HC
CHENNAI, DEC 07, 2011: THE issue before the Bench is - Whether when the assessee leases out its factory, and there is no material evidence to indicate that the assessee intends to re-start its business, the rental income can still be regarded as business income. NO, rules the HC.
Facts of the case
Notice u/s 148 was issued. It was found that the assessee had let out its factory w.e.f. 8.9.1993 with all machinery and credited the same as other income in profit and loss account and claimed the same as business income and adjusted the business losses against it. Assessee claimed that it was their practice and in the earlier assessment years 1990-91 and 1992-93 the claim of the assessee was allowed. AO assessed the income as income from other sources. CIT (A) allowed the appeal of the assessee partly holding that the lease rental income should be treated as business income and not under "other sources". ITAT also confirmed the order of the CIT (A) relying the decision of the Supreme Court in CIT (Appeals) v. Vikram Cotton Mills Ltd.
After hearing both the parties, the High Court held that,
++ no precise test can be laid down to ascertain whether the income received by an assessee from leasing or letting out of assets would fall under the head "Profits and Gains of business" and, moreover, it is a mixed question of law and fact to be determined from the point of view of businessman including true interpretation of the lease agreement and the period of lease. Exploitation of the assets by the assessee has to be looked into. In the present case, the assessee had entered into a lease agreement on 8.9.1993 for a period of 11 months. Admittedly, after a period of 11 months, the lease agreement was not renewed or the period was extended. Except the lease agreement, no material has been produced by the assessee before the AO or this Court to come to a conclusion that the assessee is likely to come back and restart the business;
++ in Vikram Cotton Mills Ltd.'s case, a particular period of lease was stipulated and when the company had gone into losses and had stopped its manufacturing activity, under the scheme evolved by the High Court under the Companies Act, the business assets were let out for ten years with an option for renewal for another ten years. But, in the case on hand, there is no material and not even a recital to the effect that the company is likely to restart its business. It is also not the case of the assessee that its company had run to loss and, therefore, it has no other alternative than to lease out the company. In such circumstances, it is not acceptable that the income arrived at by letting out its factory is to be treated as business income, when there was nothing on record to show that the assessee had only let out the same temporarily and intended to resume its business.
CHENNAI, DEC 07, 2011: THE issue before the Bench is - Whether when the assessee leases out its factory, and there is no material evidence to indicate that the assessee intends to re-start its business, the rental income can still be regarded as business income. NO, rules the HC.
Facts of the case
Notice u/s 148 was issued. It was found that the assessee had let out its factory w.e.f. 8.9.1993 with all machinery and credited the same as other income in profit and loss account and claimed the same as business income and adjusted the business losses against it. Assessee claimed that it was their practice and in the earlier assessment years 1990-91 and 1992-93 the claim of the assessee was allowed. AO assessed the income as income from other sources. CIT (A) allowed the appeal of the assessee partly holding that the lease rental income should be treated as business income and not under "other sources". ITAT also confirmed the order of the CIT (A) relying the decision of the Supreme Court in CIT (Appeals) v. Vikram Cotton Mills Ltd.
After hearing both the parties, the High Court held that,
++ no precise test can be laid down to ascertain whether the income received by an assessee from leasing or letting out of assets would fall under the head "Profits and Gains of business" and, moreover, it is a mixed question of law and fact to be determined from the point of view of businessman including true interpretation of the lease agreement and the period of lease. Exploitation of the assets by the assessee has to be looked into. In the present case, the assessee had entered into a lease agreement on 8.9.1993 for a period of 11 months. Admittedly, after a period of 11 months, the lease agreement was not renewed or the period was extended. Except the lease agreement, no material has been produced by the assessee before the AO or this Court to come to a conclusion that the assessee is likely to come back and restart the business;
++ in Vikram Cotton Mills Ltd.'s case, a particular period of lease was stipulated and when the company had gone into losses and had stopped its manufacturing activity, under the scheme evolved by the High Court under the Companies Act, the business assets were let out for ten years with an option for renewal for another ten years. But, in the case on hand, there is no material and not even a recital to the effect that the company is likely to restart its business. It is also not the case of the assessee that its company had run to loss and, therefore, it has no other alternative than to lease out the company. In such circumstances, it is not acceptable that the income arrived at by letting out its factory is to be treated as business income, when there was nothing on record to show that the assessee had only let out the same temporarily and intended to resume its business.
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