Income from Licencing part of the factory premises should be treated as “Business Income”: Delhi HC [Read Judgment]

Finance Act - Delhi High Court - taxscan

The Delhi High Court in a recently ruling held that the income earned by the assessee from licencing the parts of his property is liable to be treated as “Business Income” and not as “income from house property” since the licence agreement clearly provides that the consideration received by the assessee is in the nature of “license fee” and not “rent”. The Court was considering an appeal filed by the assessee in the instant case against the order of the Income Tax Appellate Tribunal, in which the said income was held as “income from house property.”

Coming to the facts of the case, the assessee has erected a factory premises in his own property and the said land was leased out to Delhi Development Authority and derived income from job work of repairs of batteries and was receiving license fee from various persons for rendering services.Since AY 1982-83 the Assessee gave on license 91% of the factory premises and was receiving license fees. Thereafter, due to health reasons, the assessee stopped his business and the income from license fee remained his sole source of income. The assessee had filed returns showing the said income as business income.The Assessing officer initiated re-opening proceedings u/s 148 by observing that the assessee has escaped income by showing his rental income as “business income”.Accordingly, the assessing officer passed an order by treating the above income as “income from house property”and stated that the licence fee was nothing but rent for use of the part of the premises of which the Assessee was the owner and as such it was assessed under the head „income from house property. Consequently, various deductions allowed under the head “business income” were disallowed.

The Commissioner of Income Tax (Appeals), on appeal filed by the assessee held in favour of the assessee by holding that the licence fee received by him ought to be taxed as income from business and not as income from house property.The CIT(A) further observed that “the Assessee was exploiting the commercial assets (factory shed) to receive licence fees as the Assessee‟s business was not going on probably. But income received from such exploitation can only be taken as ‘Business income’ and not ‘Property income’.”

Being aggrieved, the Revenue approached the Tribunal through appeal, in which the observations of the AO was upheld and the order of the CIT(A) was set aside. The Tribunal opined that “Merely because the word ‘license’ has been used instead of rent will not make the difference. Be it license or be it renting the fact remains that the assessee is depending on this source of income as a substantial source of income.”The assessee, thereby preferred an appeal before the High Court against the order of the Tribunal.

The division bench comprising JJ. Muralidhar and Najmi wazirianalysed the legal position in the light of various judicial decisions. The Court noticed the decision in Quadarat Ullah v. Municipal Board, Bareilly AIR 1974 SC 396, in which the terms “license” and “lease” are distinguished by the Court by observing that “if an interest in immovable property, entitling the transferee to enjoyment, is created, it is a lease; if permission to use land without right to exclusive possession is alone granted, a licence is the legal result.”

The division bench relied upon the decision in Commissioner of Income Tax v. Neo Poly Pack (P) Ltd. (2000) 245 ITR 492 (Del)which is similar to the present case. In this case the Court applied the rule of consistency and held that licence fee earned by the owner of the property ought to be treated as business income and not as income from house property.

In the light of the above decisions, set aside the order of the Tribunal and held that income derived by the appellant from licencing part of the premises is to be assessed under the head “Profit & Gains From Business and Profession.”

Read the full text of the Judgment below.