1. Rental Income is Business Income if Memorandum and Articles of Association permitted it to carry on business of letting out properties
2. Absence of adjudication on the question of payment of compensation takes the matter out of the ambit of the principle of consistency
3. Compensation paid to tenant to vacate the property in view to earn higher income is an allowable deduction
1. The appellant is a public limited company within the meaning of the Companies Act, 1956. The main objects specified in its Memorandum of Association (for short “Memorandum”) is to acquire and develop properties and to deal with the same by way of sale, lease, letting out, etc
2. The appellant acquired premises No.6, Royd Street, Kolkata (hereinafter referred to as “the said premises”) comprising land and buildings. The appellant raised two new constructions on the said premises at a substantial cost after demolishing some of the existing buildings. One of the new constructions was sold to different buyers and the profit and loss arising therefrom was assessed under the head “business”. Portions of the second new construction were let out to different tenants
3. Lessee refused to increase the rent on the ground of business difficulties
4. The said lessee offered to vacate in favour of NIIT Limited provided the appellant paid adequate compensation
5. Upon the said lessee handing over possession to the appellant, the appellant was to pay compensation of Rs.50,00,000/-. The appellant paid the compensation and obtained possession
6. One Gope R. Vaswani was a tenant in one of the old buildings at the said premises paying a monthly rent of Rs.150/- for an area of 1284 sq.ft. The said tenant was depositing the rent in the office of the Rent Controller. The said tenant agreed to vacate the portion occupied by him against payment of compensation of Rs.3,50,000/-. The appellant duly made the said payment and obtained possession
7. The appellant in its accounts for the financial year ended March 31, 1996 treated the said payments aggregating to Rs.53,50,000/- as revenue expenditure and claimed the same as deduction. However, the Assessing Officer rejected the said claim and disallowed the said payment as capital expenditure
8. Being aggrieved, the appellant preferred an appeal before the Commissioner of Income Tax (Appeals). The CIT(A) by an order dated April 07, 2004 allowed the same holding that the income from rent constituted the appellant’s business income and that the compensation amount of Rs.53,50,000/- was expenditure laid out wholly and exclusively for the purposes of business on grounds of commercial expediency and had resulted in having a higher income
9. Against the said order the revenue preferred appeal before the Tribunal. The Tribunal by the impugned order dated December 14, 2004 allowed the appeal of the revenue
10. Assessee moved to the High Court and following questions of law were framed -
a. "Whether the Tribunal was justified in law in holding that the appellant could not claim the assessment of the rental income under the head ‘business’ because the same was all along offered for assessment under the head ‘house property’"
b. "Whether the rental income earned by the appellant is assessable under the head ‘business’ and the compensation of Rs.53,50,000/- paid by it for obtaining possession from lessee/tenant so as to earn a higher income is an admissible revenue deduction and the purported findings of the Tribunal to the contrary are arbitrary, unreasonable and perverse?"
11. Honb. High Court after hearing both parties decided the case in favour of the assesse
The finding by the Assessing Officer and Tribunal that declaring the rental income under the head “income from house property” precludes the appellant from calming deduction cannot be accepted as Memorandum permitted it to carry on business of letting out properties and
indisputably it was carrying on business in letting out properties and in carrying on such trading activity had paid compensation. The observation of the Tribunal that the appellant had all along, including in this assessment year, had shown the income under “Income from house property” cannot be a ground for denial of the deduction as in the earlier assessment years never an occasion arose for adjudication or decision on the said issue. Had there been an adjudication on the said issue, the submission of the Revenue would have been acceptable. Thus, the application of the principles of consistency or res judicata does not arise. Moreover though the principles of res judicata are not applicable in tax proceedings, issue would have been different had there been an adjudication in the earlier assessment years including on the issue of payment of compensation. Absence of adjudication on the question of payment of compensation takes the
matter out of the ambit of the principle of consistency.
Cases referred to
10) Chennai Properties and Investments Ltd. v. CIT (2015) 373 ITR 673 (SC)