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August 19, 2022

Income from hiring of inseparable factory building and plant & machinery taxable as income from other sources

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Income from hiring of inseparable factory building and plant & machinery taxable as income from other sources

Facts and Issues of the case

The assessee being resident corporate assessee is stated to be engaged in the business of die-casting. The assessee started operations in the early 1990’s and acquired land and constructed a building which was used for fabrication business. However, due to slump in business, the assessee shut down its operations and entered into two agreements to lease out machinery as well as factory building. The rental income from factory building was offered as ‘Income from house property’ against which the assessee claimed statutory deduction of 30%. The rental income from Machinery was offered as business income against which various business expenditures were claimed. The assessee reflected loss of Rs.44.76 Lacs in the return of income.

The AO held that income under both streams would be assessable as Income from other sources. The depreciation on factory building as well as Machinery was allowed to the assessee while arriving at income of Rs.83.97 Lacs.

Observations by the Court

The undisputed facts that emerge are that the assessee has ceased its business operations and leased out factory building and Plant & Machinery to one lessee under two separate agreements. However, the terms and conditions of both the leases are pari-materia the same. The terms of the lease agreements led to formation of belief that the intention of the assessee was to lease out both the assets together to the same person and for the same period. The separate agreements could only be considered as the deeds of convenience deigned to suit the requirements. As long as the Machinery was housed in the factory building and that too in operational condition, the building could not be let out to some other person.

Considering this factual matrix, CIT (A) reached a conclusion that the letting of the two assets was inseparable. The CIT (A) has tabulated the lease tenure and lease rental to the received under the two agreement. The perusal of the same would show that the terms and conditions go hand-in-hand which would support the conclusion that the intention of the assessee was to lease out both the assets to the same lessee and the usage of the two assets was inseparable. Therefore, the conclusion of CIT (A) could not be faulted with.

The income earned by the assessee, under both the streams, have rightly been held to be assessable u/s 56(2)(iii) which provide for assessment of income as Income from other sources where the assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income- tax under the head” Profits and gains of business or profession”.

Conclusion

The income from letting of inseparable building and machinery is taxable under the head of ‘Income from other sources’ and not income from ‘Profit from business or Profession’.

Flotherm-Engineers-Private-Limited-Vs-DCIT-ITAT-chennai

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