The main legal point established in the judgment is that the treatment of lease income depends on the intention behind letting out the property, whether for commercial exploitation or for enjoying rental income.

Ajay Kumar Mittal, J.

1. This appeal has been preferred by the appellant-assessee under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 15.5.2009, Annexure A.1 passed by the Income Tax Appellate Tribunal, Chandigarh Bench 'A', Chandigarh (in short, “the Tribunal”) in ITA No.133/CHANDI/2009, for the assessment year 2005-06. It was admitted by this Court vide order dated November 23, 2010 to consider the following substantial question of law :-

“Whether the ITAT was justified in reversing the order of CIT(A) and upholding the order of Assessing Officer, while treating the lease income out of leasing out commercial property to concern engaged in parallel business activities as income from House property and not income from business when the appellant has to provide various basic facilities as that to franchisee?”

2. A few facts relevant for the decision of the controversy involved as narrated in the appeal may be noticed. The appellant-assessee is a company engaged in the business of running a hotel and also earning income from house property. It filed its return of income for the assessment year 2005-06 on 30.10.2005 declaring nil income. The return was selected for scrutiny and notice under Section 143(2) of the Act was issued to the assessee on 30.10.2006. The assessee appeared before the Assessing Officer and filed reply. The appellant submitted that it was earning income by way of rent but was providing various facilities like 60 ton AC, 100% power backup, false ceiling, front elevation with glazing and flooring, sanitary facilities as per brand requirements etc. The lease was for a total period of 12 years but subject to the condition as per clause (3) of Memorandum of Understanding (MOU) that the lease rent will be subject to increase of 15% after completion of every three years. The tenant 'Pizza hut' was in the business of running Pizza Hut which had the potential of advertising the business of the assessee and introducing new customers and therefore, was beneficial for the business of the assessee and for this reason only, the assessee had offered the space to it on lease as it was not having a restaurant in its hotel which was required for running the hotel business efficiently and profitably. The tenant left the premises in a short period. The assessee submitted before the Assessing Officer that the collaboration with Pizza Hut as lease agreement was to tide over the financial crunch period, to gain edge in business and to exploit the business opportunity in the best possible way. After examining the matter, the Assessing Officer held the income from lease of commercial property declared as business income as income from house property vide order dated 28.12.2007, Annexure A.3. Aggrieved by the order, the assessee filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 18.11.2008, Annexure A.2, the CIT(A) partly allowed the appeal and decided the issue in favour of the assessee. Not satisfied with the order, the revenue filed appeal before the Tribunal. Vide order dated 15.5.2009, Annexure A.1, the Tribunal partly allowed the appeal and decided the issue in favour of the revenue and against the assessee while distinguishing the judgment of this court in CIT vs. Anand Rubber and Plastics (P) Limited, (1989) 178 ITR 301. Hence the instant appeal by the appellant-assessee.

3. Learned counsel for the appellant-assessee submitted that the Tribunal erred in reversing the order passed by the CIT(A) and upholding the order passed by the Assessing Officer. Primary reliance was placed on judgment of this Court in Anand Rubber and Plastics (P) Limited's case (supra). On the other hand, learned counsel for the respondent-revenue supported the impugned order.

4. We have heard learned counsel for the parties.

5. Admittedly, the assessee was owning a building in which it was running a hotel and restaurant business. A portion of the said property was leased ou