1. Income on lease of building ready for commencement of hotel business is assessable as business income

CIT vs. Mohiddin Hotels P. Ltd. [2006] 284 ITR 229 (Bom.)

The assessee before the Hon’ble High Court had constructed a building consisting ground floor plus three upper floors on a peace of land at the town Vasco da Gama in Goa. The building was ready for commissioning the hotel business. However, the assessee entered into an agreement dated 1-2-1987 and agreed to lease the building and appointed the lessee as managers to manage, run and carry on the business of hotel for a period of 20 years commencing from 1-2-1987. The Assessee filed returns declaring loss and treating the lease rentals as business receipts. The Assessing Officer treated the income received by the assessee in the form of guarantee income as income from “house property”. The assessee being aggrieved by the assessment order preferred an appeal before CIT(A). The CIT(A) treated the same as income from other sources under section 56 of the Act. The matter travelled to the Appellate Tribunal. The Appellate Tribunal held that the guarantee income is business income under section 28 of the Act.

The Department filed an appeal before the High Court under section 260A of the Act. The Hon’ble Court upheld the order of the Appellate Tribunal after analyzing the guidelines laid down by the Apex Court in the case of Universal Plast Ltd. vs. CIT (1999) 237 ITR 454. In the light of the same the Hon’ble Court observed that from the facts found by the Tribunal as well as the agreement dated February 1, 1987, it was more than clear that the agreement between the assessee and lessee related to the building that was ready for the purposes of commencing the hotel business. The agreement did not relate to a bare tenement but was in respect of the hotel. That the said hotel was complete with fittings and fixtures and ready for commencing the business was apparent from the agreement. The fact that all licences, permissions and no objection certificates required for running hotel were to be obtained in the name of the assessee was a pointer to the aspect that the assessee intended to exploit the business asset (the hotel). The income received on account lease of the building in the hands of the assessee was income from business under section 28 of the Income-tax Act, 1961.

2. Property brought in by partner as capital contribution – Income from property assessable as business income

CIT vs. Gaekwad and Co. [2006] 284 ITR 382 (Guj.)

The assessee was a firm. As per clause 5 of its partnership deed, the assessee was constituted for running a hotel at Baroda or at any other place or places and to run any other business or businesses as may be mutually agreed upon by the partners thereto. The firm consisted of five partners. For the assessment years 1977-78 and 1978-79 the Assessing Officer assessed the income from the property as “income from house property”. The Tribunal found that the property in question was brought into the partnership business by one of the partners for its exploitation as a business asset. That right from the inception of the firm, the income from the said property had been assessed under the head “Business” and that the firm had been granted registration/renewal under section 185 of the Income-tax Act, 1961, despite the fact that in the earlier years the only source of income of the assessee was from exploitation of the said property. It held that the income was assessable as business income.

The Hon’ble High Court held that the Tribunal had arrived at a finding of fact after appreciation of the evidence on record. It was right in law in directing the Income-tax Officer to treat the income from property under head “Business”.

3. Interest earned on amount set apart for import of machinery by investing in short-term inter– corporate deposits as business income

CIT vs. Indo Swiss Jewels Ltd. and Another [2006] 284 ITR 389 (Bom.)

The assessee was a company engaged in the business of manufacture of industrial jewels. For the assessment year 1990-91, the assessee filed its return and disclosed an income of Rs. 24,53,870/- after claiming deduction under sections 80HH and 80-I of the Income-tax Act, 1961. The Assessing Officer treated interest income as income from other sources and denied benefit of deductions available under Chapter VIA of the Act. On an appeal for the appellate authority in the facts of the case and in the light of the material placed by the assessee on record, was satisfied that the funds were kept by the assessee in the various companies for short terms for payment for imported machinery. The Appellate authority was satisfied with the explanation put forth by the assessee. The Commissioner (Appeals) and the Tribunal held that the interest was assessable as business income.

The Hon’ble High Court upheld the order of the Appellate Tribunal on the ground that the inter-corporate deposits were made by the assessee from the surplus funds that were set apart for payment for imported machinery. The interest earned on the short-term deposits of the money kept apart for the purposes of business had to be treated as income earned from business and could not be treated as income from other sources.

4. Loss due to confiscation of foreign currency is deductible as business loss

CIT vs. Anil M. Gehi [2006] 284 ITR 338 (Bom.)

The assessee was engaged in smuggling. He was proceeding to Hong Kong on August 8, 1981. He was apprehended by the Customs authorities at Bombay airport and foreign currency equivalent to Rs. 4,56,980/- was seized from his custody. The Customs authorities questioned the assessee and his companion. The Additional Collector of Customs by order dated August 16, 1982, confiscated the foreign currency seized from the assessee and further imposed fine of Rs. 1,50,000/- on the assessee for contravening the Foreign Exchange Regulation Act. The Income-tax Officer treated Rs. 4,56,980 as assessable income but rejected the claim to deduct the loss. The Tribunal directed that the confiscated foreign currency of Rs. 4,56,980 be allowed as a loss to the assessee.

The Hon’ble High Court upheld the order of the Appellate Tribunal and observed that the assessee was treated as a smuggler, and his subsequent detention under the COFEPOSA Act confirmed that he was treated as a smuggler and the foreign currency recovered from a co-conspirator of the assessee was the amount involved in the smuggling activity and the confiscation of the amount was therefore business loss suffered by the assessee in conducting his business of smuggling. It was not the case of the Revenue that the assessee was carrying on any other business, lawful or otherwise, for which the foreign currency was being illegally transported out of the country. The confiscation of foreign currency equivalent to Rs. 4,56,000/- was a loss of stock-in-trade of the assessee. The Revenue while bringing to tax the sum of the assessee of the benefit of treating the said amount as a business loss. The assessee was entitled to the benefit of treating the sum of Rs. 4,56,980/- confiscated from him as a business loss.

5. No notice under section – 143(2) within twelve months for completion reassessment proceedings

CIT vs. C. Palaniappan [2006] 284 ITR 257 (Mad.)

The assessee, by name, C. Palaniappan, is a co-owner of a building called “Kannammai Building”. On notice under section 148 of the Act, the assessee filed a return which was processed under section 143(1)(a) of the Act. Later, after issue of notice under section 143(2) of the Act, the assessment was completed under section 143(3) read with section 147 of the Act.

The assessee challenged the validity of assessment order as the notice u/s. 143(2) was served beyond twelve months. The Appellate Tribunal quashed the reassessment order. On an appeal by the Department to the High Court it was held that in the case of a reopened assessment, issue of notice under section 143(2) of the Income-tax Act, 1961, within twelve months is statutory. Reopening of assessment under section 147, and completion of assess-ment without issue of notice under section 143(2) within twelve months is not valid.

6. Wealth Tax – Valuation of house property on the basis of subsequent agreement to sell is not justified

CIT vs. R. R. Patel [2006] 284 ITR 315 (Guj)

The assessee who was a partner of a firm filed his returns for the assessment years 1980-81, 1981-82 and 1982-83. The firm was the owner of an immovable property and the said property was valued at Rs. 21,641/- in each of the three years. The basis for arriving at this value was the fact that the property was wholly rented property fetching yearly gross rent of Rs. 2,064 only. The Commissioner initiated action under section 25(2) of the Wealth-tax Act, 1957, on the ground that the property had been incorrectly valued because on September 3, 1981, the firm had entered into an agreement for sale of the said property for a price agreed at Rs. 11,25,000/- and in November 9, 1982, the property had been sold at that price. The Tribunal held that it was not in dispute that the property had been acquired in 1960 and had remained since then a tenanted property; that there were disputes between the landlord and the tenants regarding eviction and on the respective valuation dates, the matter of eviction of the tenants was sub judice in revisional proceedings before the competent court. Thus, according to the Tribunal, the best method of valuation of such property would be the rental method only. The Tribunal set aside the order of revision.

On a reference at instance of the Department it is held that the Tribunal had found as a matter of fact that the price at which the agreement for sale was entered into and subsequently the property was sold, did not represent the fair market value of the property in question on the relevant valuation dates. The Revenue had not been able to point out any material on record to dispute the said finding of fact. The Tribunal was right in law and on the facts in cancelling the order made by the Commissioner under section 25(2).