VALLABHDAS KANJI LTD. Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE appellant is engaged in manufacture and export of spices and allied products. During the assessment year relevant for 1996 -97, the appellant took on lease certain machinery, storage tank, etc. for the purpose of the business. The total lease rent payable was Rs. 19,09,748. The assessee could not utilise the leased equipments for their own use for the whole year and therefore sub -leased some of the items which earned them an income of Rs. 5,98,774. In the computation of business income the assessee reduced the earning on sub -lease from the lease rent payable and remitted only the net lease rent paid. Based on this, the assessee computed their eligibility for deduction under s. 80HHC of the IT Act on the export incentives. However, while making the assessment, the AO held that the income earned on sub -lease is in the nature of income from other sources assessable under s. 56 of the Act. Consequently, the entire lease rent payable by the appellant was set off against the business income and accordingly computed the business income. Thereafter, income from other sources was separately assessed under s. 56 of the Act. The assessee filed appeal against the assessment and having failed, has approached this Court by filing appeal under s. 260A of the Act.

(2.) WE have heard Shri K.R. Sudhakaran Pillai, learned counsel appearing for the appellant, and learned standing counsel appearing for the respondent.

(3.) LEARNED counsel appearing for the appellant contended that the rental received on sub -lease goes to reduce appellant's liability towards lease charges and therefore the appellant rightly debited net lease rentals in the P&L a/c while computing business income. According to the learned counsel, if sub -lease rentals have gone to reduce their liability in the computation of business income, no income is left to be assessed under s. 56 of the Act. Learned standing counsel for the respondent, on the other hand, contended that sub -lease income is income from other sources under s. 56 of the Act and therefore, the same is rightly assessed under the Act and upheld by two appellate authorities including the Tribunal. According to him, the appellant was not justified in reckoning the sub -lease rentals in the computation of business income. While learned counsel for the appellant relied on the decision of the Supreme Court in CIT vs. Rajendra Prasad Moody 1978 CTR (SC) 141 : (1978) 115 ITR 519 (SC), learned standing counsel for the respondent relied on the decision of the Supreme Court in CIT vs. Dr. V.P. Gopinathan (2001) 166 CTR (SC) 504 : (2001) 248 ITR 449 (SC). Admittedly, the rented equipments were leased out by the appellant for business purposes and all the equipments were in fact used in the relevant previous year for the business of the appellant. The appellant was therefore entitled to deduction of entire lease rentals against business income. In fact, the officer has allowed the entire lease rentals paid in the computation of business income. We are of the view that the appellant was not justified in reckoning sub -lease rentals received in the computation of business income, though for all practical purposes and in effect, sub -lease rentals went to reduce appellant's liability towards lease rentals. The rent received by the appellant on sub -lease is certainly an income in the hands of the appellant and appellant has no case to the contrary. Therefore, the question to be considered is as to what is the nature of income and on this question also, there can be no dispute that it is income from other sources. When the AO treated the income received on sub -lease of equipments as income from other sources, necessarily the appellant was entitled to get eligible deductions. In fact, proportionate lease rent paid by the appellant should have been allowed while computation of income from other sources, as provided under s. 57(iii) of the Act. However, in this case, we find that the appellant did not maintain the accounts to justify such a claim. In fact, if the appellant had furnished such details, the AO was bound to make proportionate disallowance of lease rent in the computation of business income and such amount should have been set off against the income from other sources. At this stage, we are not in a position to order any set off of the lease rent paid by the appellant against the income assessed under income from other sources, because there is nothing on record to prove the rent paid which are attributable to the income earned on sub -lease. Both the decisions cited above by the parties do not deal with the same issue, even though the decisions may have a bearing on the question raised. Therefore, we find that the assessment of sub -lease rentals received by the appellant as income from other sources, is perfectly justified and we answer the question raised accordingly. The appeal is therefore dismissed as devoid of any merit.