Business expenditure – Capital or revenue – A. Y. 1996-97 – Assessee carrying on business of letting out properties – Payment to tenant for vacating premises – Rental income earned by the assessee is assessed 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 higher income is an admissible revenue deduction

The
assessee was the owner of the property and was carrying on the business
of letting out. The assesee had paid compensation of Rs. 53,50,000/- to
obtain possession from the lessee/tenant so as to earn a higher rental
income. For the A. Y. 1996-97, the assessee offered the rental income as
business income and claimed the deduction of compensation of Rs.
53,50,000/- as revenue expenditure. The Assessing Officer and the
Tribunal held that the rental income is assessable as house property
income and disallowed the claim for deduction.

On appeal by the assessee, the Calcutta High Court reversed the decision of the Tribunal and held as under:

“i) Though in earlier assessment years the assessee had shown rental income as “income from house property”’ however, in this assessment year it has claimed rental income as business income, in view of the object as set out in clause 4 of its Memorandum of association. Since the object in the said memorandum permitted the assessee to carry on business in letting out properties and as 85% of the income of the assessee was by way of deriving rent and lease rentals, the income from rent constituted business income.

ii) Observations of the Tribunal that the assesssee had all along shown the income under the head “income from house property” cannot be a ground for treating the income as business income.

iii) Rental income earned by the assessee was 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 higher income is an admissible revenue deduction.”