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There is often a dispute on whether an income earned from a commercial asset would fall under the head business or other sources given that the operation of such asset in assigned to a third party under some arrangement. Before the Delhi Tribunal in Rohit Kapur v CIT (2020) 80ITR(Trib) (SN) 7 there was a case of an asessee engaged in whole time employment with a company in India and also held interest in certain LLCs and hotel outside India. In the relevant year he incurred a loss from such commercial assets and returned it as other sources and further went on to set off such loss against salary income.

But naturally the department resisted due to embargo clause in section 71 (2A) .

The assessee succeeded in this case on the ground that the assesseee had neither any control of any sort over the property constituting the hotel units nor the assessee have any say or role in the management and conduct of the hotel operation. The arrangement in this case was that the assessee having made investment in one unit of a property in the USA developed as a hotel entity by some other entrepreneurs which is called ‘Hotel Trump International’. The arrangement for investment was that the assessee would be allotted a unit in that complex which along with several other similar units (total number 160) belonging to a huge number of others would be developed, operated, maintained and run professionally as a hotel. Periodically, the net income of the hotel was divided and defrayed to the unit owners by the US enterprise operating the hotel. The assessee could establish his case before the ITAT on the following three counts:

  1. that he had he was a whole-time Director of the company in India that forbade him from engaging in any other activity elsewhere;
  2. that the hotel business was located in USA out of India and the assessee could not be there at all due to the exigencies of his employment in India; and
  3. that  the Asseseee was the owner of only a fraction of the hotel property.

In another case before the FB of the Patna High Court in CIT v H D Agarwals and Sons (1988) 169ITR617 involved an arrangement whereby the owner had given a power of attorney to a contractor to run the colliery against a consideration in the form of rent /royalty against the coal produced. The High Court emphasized on the two basic aspects, namely, in order to carry on the business, one must have the control, even if not all-pervasive, yet the ultimate power to direct the working and conduct of such a business. Unless such control or authority to direct is manifest, a person cannot be said to be carrying on such a business. The other thing rightly highlighted is that both the statute and the concept of business in the commercial sense inevitably imply a participation or sharing of the profits and, if not otherwise provided for, the losses of such business as well. The Court held an analogy that if here is neither control nor direction of the activity of a business nor a direct nexus with its gain or profit, then a person or an assessee cannot possibly be said to have carried on such a business. In other words in either of the two scenarios a person can be assessed to tax under the business.

The High Court held that the assessee was merely deriving rent or royalty irrespective of the profits or losses and of the actual working of the business by the managing contractor the Court held that the proprietor of the colliery, by abdicating all control of its business in favour of its managing contractor by a renewable fixed term lease of ten years on the terms of an annual minimum guaranteed amount and royalty on the quantum of coal raised and manufactured, cannot be said to be carrying on the business of the said colliery within the meaning of section 28(i).

Later however the Supreme Court reversed the FB High Court decision in 236ITR432 on so pointing to a finding in this case by the Tribunal in earlier years that the managing contractor was carrying on the colliery business under the effective control and guidance of the assessee, that the relationship between the contractor and the assessee was not of lessor and lessee and that the assessee was carrying on its business through its agent, the managing contractor. Therefore in finality the income received by the assessee was held assessable as “income from business” no matter the payment of royalty/profit at certain rate on the amount of coal raised and soft and hard coke manufactured subject to a minimum guaranteed amount.

In the matter before the Delhi Tribunal there is a finding that the assessee derived share on the net profit or loss of the business of hotel. That aspect perhaps got less attention of the Delhi bench in Rohit Kapur case in the above.

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