COMMISSIONER OF INCOME TAX Vs. ARVINDKUMAR ODHAVJI

JUDGEMENT

(1.) By this reference filed under section 256(1) of the Income -tax Act, 1961, at the instance of the Revenue, the following question has been referred : 'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the rent income received from the Vijaya Bank as per lease agreement for 15 years was liable to be assessed as 'business' income and not as income from 'other sources' for the assessment year 1976 -77 ?'

(2.) THE assessee is an individual who had income from property as well as business. The assessee carried on business in partnership with others in rented premises. According to the assessee, the assessee was not doing well in the business carried on in partnership as a result whereof, the assessee suffered substantial losses and in order to save the losses and reduce the indebtedness, the assessee thought of letting out the premises where the business was carried on, on sub -lease. The assessee entered into an agreement dated October 17, 1973, with the Vijaya Bank Ltd. for leasing out the said premises to the Vijaya Bank Ltd. for a period of 15 years on lease amount of Rs. 6,000 per month. The said agreement also contained a clause for renewal of the lease for a period of five years. The Vijaya Bank Ltd. (for short, 'the said bank') had agreed to advance a loan of Rs. 5 lakhs to the partnership firm on interest at the rate of ten per cent. per annum and the lease rent payable by the said bank was to be adjusted against the interest payable by the partnership firm on the loan amount. Clause 11 of the said agreement which is relevant for the purpose of the controversy involved, reads as under : '11. The licensees have as agreed advanced a loan to the licensors of a sum of Rs. 5,00,000 with ten per cent. as interest thereon, which amount is paid on the following terms : (a) The loan amount will be debited in the 'Messrs. Odhavji Lavji and Co.'s loan account in the licensees' books of account. (b) The loan and interest will be repaid by adjustment by crediting the monthly licence fees amount of Rs. 6,000 payable by the licensees to the licensors at the end of each current month. (c) Interest at the rate of ten per cent. per annum as provided above will be payable with six months' rests on the loan amount or the balances thereof remaining due each month.'

(3.) THE rental income received in respect of the said premises was assessable as part of the assessee's total income. The question, however, was under which head of income the rent amount was to be assessed for purpose of computation of total income of the assessee. Originally, for some period, the assessee showed the income received by way of rent in respect of the said premises as 'income from other sources'. Later on, the assessee claimed such income as 'income from business'. The Income -tax Officer assessed such income as 'income from other sources'. The Appellate Assistant Commissioner treated it as business income. The Tribunal accepted the assessee's contention and directed the assessment of rental income as business income. Mr. Jetley, learned counsel for the Revenue, has submitted that the Tribunal's decision is erroneous in law. In his submission, sub -letting or giving of the said premises on licence basis was not the business of the assessee as the said partnership firm carried on business in aerated water and as such, the rental income received by the assessee during the previous year relevant to the assessment year was not 'income from business'. In support of his submission, Mr. Jetley has relied upon the judgment of this court in the case of Baijnath Brijmohan and Sons Pvt. Ltd. v. CIT : [1986]161ITR234(Bom) . Mr. Trivedi, learned counsel for the assessee, has submitted that sub -letting of the said premises by the assessee to the said bank was an integral part of the said agreement under which the said bank had advanced a loan of Rs. 5 lakhs to the said partnership firm at the concessional rate of ten per cent. per annum and that it being a case of exploitation of a commercial asset by the assessee, the rental income derived therefrom was to be treated as 'income from business'. In support of his submissions, Mr. Trivedi has relied upon judgments in CIT v. Northern India Theatres Pvt. Ltd. : [1981]128ITR497(Delhi) , CIT v. B. Nagi Reddy : [1984]147ITR337(Mad) , CIT v. Vikram Cotton Mills Ltd. : [1988]169ITR597(SC) and CIT v. Anand Rubber and Plastics (P.) Ltd. .