Godown Rent cannot be treated as business Income as it’s not a continuous activity from year to year

Brief of the case

In the present case the Hon’ble High Court held that Business is a continuous activity which is done year to year. Here, in this case the Assessee let out his godown and shown income as “Income from Business” instead of “Income from property” to which the Hon’ble High court do not agree and held that the income from the letting out godown will be “Income from Property” as it was not the continuous activity from year to year.

Facts of the Case

The assessee is a partnership Firm engaged in export of Tobacco. During the A.Y. 1992-93, the assessee had let out his godowns. He offered the rental income for taxation under the head income from business. It was being used by him for the business of export of tobacco, and whenever they were not in use, he had given them on lease to third parties and received rent from them. He, therefore, claimed on the basis of partnership deed, that the godowns of the firm were let out, as provided for in the said deed being a part of their business, the rent received from the lessee should be treated as income from business. For the earlier years i.e. 1990-91, 1991-92 it was assessed as income from property on the ground that no business as such was carried on by the assessee during those years.

Held by CIT(A)

The CIT(A), held that the income from letting out of the godowns should be treated as income from business.

Held by the Hon’ble Tribunal

The Hon’ble Tribunal confirmed the order of the CIT(A) and held that so long the character of the godown is retained as a godown, it should be treated as a commercial asset and its rental income must be treated as an exploitation of commercial asset in the nature of trade.

Discussion

The Hon’ble High Court before giving the Judgment discussed various case laws submitted by the parties. The Judgments are discussed as under:

• In the Judgment of Sultan Brothers Private Limited V. Commissioner of Income-Tax, Bombay City II in which the question was that how the income received as rent and hire is to be assessed and under which section of Income Tax Act, 1922, (for short 1922 Act) is it assessable? The entire income ought to have been assessed under Section 10 as the income of a business or, in the alternative, under Section 12 as the income from residuary source, that is. The appellant was a limited Company, which was owner of a certain building. The assessee had let out the building fully equipped and furnished for a term of six years. The lease provided for a monthly rent of Rs.5,950/- for the building and hire of Rs.5,000/- for the furniture and fixtures. One of the objects of the Company in Sultan Brothers Case (supra) was to acquire land and building and to turn the same into account by construction and reconstruction, decoration, furnishing and maintenance of them and by leasing and selling the same. The Supreme Court observed that the activity contemplated in the aforesaid object of the Company, assuming it to be a business activity, would not by itself turn the lease in the present case into a business deal.       The income derived by the company from shops and stalls is income received from property and falls under Section 9. After referring to the Clauses in the lease, the Hon’ble Supreme Court observed that the lease clearly established the parties intention that the furniture and fixtures and the building should be enjoyed altogether and not one separately from other. In the result the Supreme Court held that the rent from the building will be computed separately from the income from the furniture and fixtures and in the case of rent from the building the appellant would be entitled to the allowances mentioned in Sub-section (4) of Section 12 and in the case of income from the furniture and fixtures, to those mentioned in Sub-section (3) and that no part of the income can be assessed under Section 9 or under Section 10 of the 1922 Act.
• Then the Hon’ble High Court discussed the case of Commissioner of Income-Tax. v. Y.Narayana Murthy, in which the question was that whether, letting out the godowns would amount to carrying on of business within the meaning of the Partnership Act. In this case the assessee had derived income from letting out the godowns to the Food Corporation of India (F.C.I.) for the assessment years 1979-80 and 1980-81. The Commissioner had taken a view that income derived from the letting out of godowns was assessable as income from the property and not from business.       On a reference, the Hon’ble Supreme Court held that the expression business contemplates continuous activity from year to year. The assessee was not continuing the activity of construction of godowns and letting them out from year to year. There was no evidence to suggest that the assessee had undertaken any such systematic business activity of construction of godowns and letting them out as business property. Thus, it was held that the Assessing Officer rightly assessed the income derived by the assessee as that of the income from the property and not from business. Consequently, it was held that the assessee was not entitled to registration or continuation of the same in terms of Section 185 (1)(a) of the 1922 Act.

Held by the Hon’ble High Court

The Hon’ble High Court while discussing the Judgement mentioned above held that in the present case, the main business of the assessee was the export of tobacco and for that purpose they had constructed godowns. The assessee let out the godowns when they would not require the same and earn rental income. Apart from letting out the godowns, no other services, were extended by the assessee to the lessees. Merely because one of the objectives, in the partnership deed, was to let out the godowns would not mean that the assessee had undertaken the activity of construction of godowns and letting them out as business activity. It was further held that, it is not the case of assessee that letting out of the godowns was continuous activity from year to year. Therefore the income received by the assessee, by way of rent, was the income received from property and it would not fall under the head income from business. The income derived from letting out the property, in the facts of the present case, would not amount to profits or gains from the business.   From the facts of the present case, it is clear that the assessee could let out their godowns only because those were not in use at the relevant time. Therefore, the rent received by the assessee would have to be computed as income from property. Accordingly, the Appeal of the Revenue was allowed.