The central legal point established in the judgment is that the classification of income from leasing out business assets depends on the nature of the transactions, the intention of the parties, and the duration of the lease. The principle of consistency cannot be applied blindly, and each lease deed must be examined based on its unique facts and circumstances.

S.J. VAZIFDAR, J.

This is an appeal against the order of the Tribunal allowing the Department’s appeal against the order of the Commissioner of Income Tax (Appeals). The matter pertains to the Assessment Year 2004-05.

2. The appeal was admitted on the following substantial question of law:-

Whether in the facts and circumstances of the case, the income arising out of the leasing out of the business assets is business income or income from other sources? The other questions that are sought to be raised by the appellant relate to this question.

3. The appellant/assessee filed a return declaring a loss of about Rs.48.46 crores. The return was processed under Section 143(3). The question is whether the amount of Rs.30 lakhs per annum received by the assessee from M/s United Breweries Limited (hereinafter to be referred to as “UB Ltd.”) as lease rent is assessable under the head “Profits and gains from business” or under the head “Income from other sources”.

4. The assessee is the owner of plant and machinery, fixtures and fittings and equipment and apparatus installed in a building constructed on land admeasuring about 10 acres also owned by it. The assessee had been manufacturing its products from this property and with its equipment for about 20 to 30 years.

5. To determine the question, it is necessary to refer to two lease agreements entered into between the assessee and UB Ltd. in detail.

6. The assessee and UB Ltd. entered into a Lease Deed dated 01.04.1998 (hereinafter referred to as “the first lease deed”) wherein the assessee and UB Ltd. are referred to as the lessor and the lessee, respectively. The recitals in the lease deed inter alia state that UB Ltd. required large quantities of malt for brewing its products; that it had been purchasing the malt from various suppliers; that it was facing difficulty in procuring the right quality and quantity of malt and that it was facing difficulties. Clause-1 stated that the lease was for a period of five years commencing from 1st April, 1998 and at an annual consideration of Rs.25 lakhs for the first two years and thereafter of Rs.30 lakhs. Under clause-2, the assessee undertook to make available the entire malting facility capable of producing 12,000 MT of malt per month along with the entire plant and machinery and storage spaces of the requisite capacity. Routine minor repairs were to the account of UB Ltd. and major repairs and replacement of assets which had become obsolete, redundant and irreparable were on the assessee’s account. Clause-7 of the agreement read as under:-

“7. The LESSEE shall utilise the services of such employees on the rolls of the LESSOR as on 31.3.1998 during the term of this Agreement. These employees shall continue to be on the rolls of the LESSOR and in no manner shall it be construed or deemed that such employees have been taken or transferred to LEESSEE’s rolls. The LESSEE shall reimburse the LESSOR all the costs in connection with the salaries and other costs including all statutory dues under all statutes/laws including inter alia Provident Fund, ESI, Bonus and such other laws as are applicable, on behalf of the employees of the LESSOR on a monthly basis irrespective of variation in level of production. The LESSOR undertakes to pay all statutory dues in respect of their employees under all Statutes/laws including inter alia, labour laws, Provident Fund, ESI and such other laws as are applicable. The LESSOR shall keep the LESSEE indemnified at all times in the event of any action taken or prosecution initiated against the LESSEE in connection with any of the LESSOR’s employees. However, additional expenses incurred on festival occasions on its employees and others on whose rolls the employees are working shall be borne by the LESSOR.”

7. The lease rental received pursuant to the first lease deed dated 01.04.1998 was assessed as business income. It is not open to challenge the same today. Indeed, the Department fairly did not challenge the same ei