The main legal point established in the judgment is the interpretation of Sections 22 and 28 of the Income Tax Act in the context of letting out residential properties to employees of a sister concern.

P.D. Dinakaran, J.

The appeal is directed against the order dated .6.2003 made in I.T.A.No.83/Mds/96 on the file of Income Tax Appellate Tribunal, Chennai Bench 'A', holding that the residential properties of the respondent/assessee let out to the employees of the sister concern of the respondent/ assessee are treated as business assets and that the income from letting out the property should be treated as business income in the hands of the assessee and allowing depreciation for the same, on the following substantial questions of law.

(i) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the residential properties let out to employees of sister concerns are to be treated as business assets and depreciation allowed? and

(ii) Whether in the facts and circumstances of the case, the Tribunal was right in holding that income from letting out of property should be treated as business income in the hands of the assessee?

2.1. In brief, the properties at No.18, Jawahar Road, Madurai, and 20, Cenotaph Road, Madras, were under the occupation of the respondent subsidiary company M/s. Southern Roadways Limited and Sundaram Industries Limited respectively. That apart, the properties at 20A and 20B, D'sylva Road, Madras, are let out to Dr. Rangarajan and Mr. Srikant Ramanujam of Brakes India Limited respectively, who are employees of the sister concern of the respondent/assessee. These assets of the respondent/ assessee since were let out to third parties, even though they are employees of the sister concern, taking into consideration that these properties or portion of these properties were not in occupation of the respondent/assessee for the purpose of business or any profession carried on by the respondent/assessee, the appellant/revenue assessed those properties under Section 22 of the Income Tax Act (in short the "Act") as an income from the house property, of course, taking the estimated annual value of the property into consideration in the assessment order dated 26.5.1995.

2.2. Aggrieved by the said assessment order, an appeal was preferred before the Commissioner of Income Tax (Appeals) contending that these assets are commercial assets of the respondent/assessee and the properties were since let out to the employees of the sister concern, they are deemed to be in occupation for the purpose of business of the respondent/assessee and therefore, the said rental income from the said assets has to be assessed as profits and gains of business under Section 28 of the Act, but not as an income from the house property under Section 22 of the Act.

2.3. Per contra, the appellant/revenue contended that the contention of the respondent/assessee is not tenable, in view of the clear language employed in Sections 22 and 28 of the Act, particularly, since it is not in dispute that the respondent/assessee is the owner of the property in question; that they are not in occupation of the premises for the purpose of business of the respondent/assessee; and that they have rented out the properties to the employees of the sister concern and receiving the rental income which has to be construed only as the income from house property falling under Section 22 of the Act, but not as the profits and gains of the business falling under Section 28 of the Act.

2.4. The appellate authority, by order dated 9.11.1995 refused to accept the contention of the respondent/assessee and appreciating the stand of the appellant/revenue dismissed the appeal.

2.5. However, on further appeal before the Tribunal, at the instance of the respondent/assessee, the assessment order of the assessing authority as well as the order of the appellate authority dated 9.11.1995, referred to above, were set aside, charging the rental income received by the respondent/assessee from the said properties as profits and gains of business under Section 28 of the Act and allowing depreciation thereon. Hence, the present appeal.

3. The learned counsel