related to business income

This query is : Resolved

CA Manoj Pokharana (Querist)
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05 September 2009 The co has received the rent income during the year which is considered by them as business income and the assessee has selected for the scrutiny in the asseseement proceeding. Now the officer point out the same and said the same should be disallowed and the given the effect of such income as " income from House property" and only the deduction allowed for the 30% and the balance should be consider the income from house property , how can the assessee saved from such situation ????????? Any caselaw(please give the sitation)

Late CA Sampat Jain

Late CA Sampat Jain (Expert)
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06 September 2009 In the light of various decisions of the Supreme Court the following propositions emerge regarding taxability of income from leasing out of business assetsâ€”

(1) No precise test can laid down to ascertain whether income (referred to by whatever nomenclature, lease amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head â€˜Profits and gains of business or professionâ€™.

(2) It is a mixed question of law and fact and has to be determined from the point of view of a businessmen in that business on the facts and in the circumstances of each case, including true interpretation of the agreement under which the assets are let out.

(3) Where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back and restart the same.

(4) If only a few of the business assets are let out temporarily while the assessee is carrying out his other business activities, then it is a case of exploiting the business assets otherwise than by employing them for his own use for making profit for that business; but if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets - Universal Plast Ltd. v. CIT [1999] 103 Taxman 493/237 ITR 454 (SC).

From the decided cases the following principles emerge :

(1) In order to be a business income within the meaning of section 10 of the 1922 Act [corresponding to section 28 of 1961 Act], there must be evidence of exploitation of a commercial asset.

(2) Exploitation of a commercial asset does not necessarily mean exploitation by the assessee himself at all material times. The assessee may temporarily cause it to be exploited by another person against payment of consideration and for this purpose may also execute a lease for a fixed period even with clauses of option to renew.

(3) But in order that the income derived from the lease may be taxable it must be shown that the lessorâ€™s intention was that during the period of the lease the asset leased out must remain and treated as a commercial asset and exploited as such.

(4) This intention of the lessor referred to above has to be ascertained from the cumulative effect of all the terms of the lease and other material circumstances - Everest Hotels Ltd. v. CIT [1978] 114 ITR 779 (Cal.).