Income from licensing of factory premises taxable as business income if assessee intend to treat so

Brief of the case:

The Hon’ble Delhi High Court in the case of Agya Ram vs. CIT held that there is difference between lease income and license income and when the deed of agreement specifically worded that income will be license income for assessee’s factory premises given on rent then the treatment made by the assessee of considering the same as business income to be prevailed over the general view of the AO that assessee is earning rental income assessable as Income from House Property.

Facts of the case:

• The assessee was carrying on a business under the name and style of M/s. Supreme Auto Works at B-93, Okhla Industrial Area, Phase-II, New Delhi. This property is owned by him with land having been given on long term lease by the Delhi Development Authority (DDA) on which he has erected a factory premises.
• The assessee was deriving income from job work of repairs of batteries and was receiving license fee from various persons for rendering services. Since AY 1982-83 the assessee gave on licence 91% of the factory premises and was receiving licence fees.
• The case of assessee for AY 1990-91 was reopened by the issuance of a notice under Section 148 of the Act on 15th September 1994. AO in its reason for reopening provided that assessee has shown his  rental income as business income in the guise of licence fee so in resulting your having sham rental income under the Head “Business and Professional” as against the head “Income from House Property”. Higher deduction was claimed and income has escaped assessment”.
• Accordingly, AO made an addition of Rs. 2,53,886/- by assessing the license fee as Income from House Property. CIT (A) decided the case in favour of AO by holding that “the assessee was exploiting the commercial assets (factory shed) to receive licence fees as the assessee’s business was not going on probably. But income received from such exploitation can only be taken as business income and not Property income.
• However, on appeal to ITAT it was held by it that merely because the word ‘license’ has been used instead of rent will not make the difference. Be it license or be it renting the fact remains that the assessee is depending on this source of income as a substantial source of income.
• Accordingly, the appeal of AO was allowed. Aggrieved assessee is in appeal before ITAT.
  

Contention of the Assessee:

The learned counsel for the assessee submitted that in Universal Plast Ltd. v. Commissioner of Income-Tax (1999) 237 ITR 454(SC) where it is held that no precise test can be laid down to ascertain whether income received by an Assessee from licensing or letting out of asset would fall under the head profits and gains of business or profession since it was a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case.

Held by Hon’ble Delhi High Court:

• The court was of the view that the AO and the ITAT were in error in coming to a contrary conclusion. They appear to have overlooked that the Assessee had consistently treated the licence fees collected as business income since AY 1982-83.
• Court also relied on the case relied  upon by the assessee  of the Hon’ble Supreme Court in the case of Universal Plast Ltd. v. Commissioner of Income-Tax (1999) wherein it was held by the Supreme Court that no precise test can be laid down to ascertain whether income received by an Assessee from licensing or letting out of asset would fall under the head profits and gains of business or profession and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case.
• Due to specific wordings of the license deed the license fee could not be treated as rent and therefore, cannot be treated as business income as well.
• Therefore, the assessee’s treatment to be accepted. In result the appeal of assessee was allowed.