2011 (6) TMI 681 - AT - Income Tax

Business income or capital gain - Temporary ceasement of business - Intention of assessee - Held that - the refinery was to be managed and operated by the assessee and the assessee had the final say on the raw edible oil products that were to be used. Refined edible oils were to be marketed under the brand name of the assessee only. In other words the assessee was intimately involved in the business though not directly doing it. Clause 4 of the above agreement also mentions that personnel employed by the assessee would automatically get deputed to the licencee. It is thus in our opinion exploitation of a commercial asset by the assessee as the licencee was not given a permanent right of use. It is clear that the validity of the licence was only up to December 31 2009 and if any renewal was to be there it had to be done on mutually acceptable terms - revival would be possible only if support was forthcoming from the lenders during the implementation of the rehabilitation plan. Nevertheless it is also mentioned by the directors at paragraph 2 of their report that they were confident of succeeding in the appeal before the appellate authority for industrial and financial reconstruction which would facilitate revival of assessee-company s business operations. The assessee had filed an appeal before the appellate authority for industrial and financial reconstruction challenging the rejection of its reference before BIFR on January 17 2006. Hence contemplation of the assessee was always to revive its business and not to let its premises out permanently. The accounts were also prepared by them on a going concern basis. The assessee also had current assets which included inventory of Rs. 174.57 lakhs as seen from schedule 7 of its audited accounts statement for the relevant previous year. Such inventory included raw materials of Rs. 53.75 lakhs work in process of Rs. 26.34 lakhs finished stock Rs. 64.35 lakhs. No doubt these were held at the same value from the previous financial year ended on March 31 2006. But had the intention of the company been to discontinue its business then it would not have held on to such inventory without disposing of them. The intention as seen in the holding of inventory also was to resume its operation as soon as possible - asses-see had an intention to resume and it was not a case where business had never started. The assessee s brand names were used by the licencee its personnel were used by the licencee and it had control over the quality of raw materials also. We cannot say that there was a stoppage of the bussiness as a whole but the fact of the matter was that the business was being continued by the assessee in a different manner. Even if we presume that there was a temporary stoppage there was a clear intention to resume - Following decision of Commissioner of Income-Tax Lucknow Versus Vikram Cotton Mills Limited 1987 (12) TMI 1 - SUPREME Court and Commissioner of Income-Tax Versus Podar Cement Pvt. Limited And Others 1997 (5) TMI 2 - SUPREME Court - Decided against Revenue.

Summary

Issues Involved:
1. Classification of income from letting out business assets.
2. Assessing Officer's treatment of income as "Income from house property."
3. Commissioner of Income-tax (Appeals)'s treatment of income as "Income from business."
4. Intention to resume business operations.
5. Applicability of relevant case laws.

Detailed Analysis:

1. Classification of Income from Letting Out Business Assets:
The primary issue was whether the income received by the assessee from letting out its business assets should be classified as "Income from business" or "Income from house property." The assessee argued that the income should be treated as business income because the assets were let out temporarily due to financial constraints, with an intention to resume business operations once the rehabilitation plan was approved by the BIFR.

2. Assessing Officer's Treatment of Income:
The Assessing Officer treated the licence fee received by the assessee as "Income from house property." The rationale was that the assessee had stopped its business activities since 2002-03 and had no intention to restart the business. The lease agreements indicated a long-term letting out of assets, thus justifying the classification as "Income from house property."

3. Commissioner of Income-tax (Appeals)'s Treatment of Income:
The Commissioner of Income-tax (Appeals) held that the income should be treated as "Income from business." The Commissioner noted that the assessee had let out the facilities temporarily due to financial difficulties and had no intention to permanently discontinue its business. The decision was based on the fact that the assessee was still involved in the business through a third party and had retained possession of the business assets.

4. Intention to Resume Business Operations:
A crucial factor in the judgment was whether the assessee had an intention to resume business operations. The assessee's arguments and evidence, including the licence agreement and the annual report, indicated a clear intention to resume operations once financial rehabilitation was approved. The agreement showed that the refinery would continue to be managed by the assessee, and the personnel would be deputed to the licencee, indicating ongoing business involvement.

5. Applicability of Relevant Case Laws:
The Revenue cited the decisions of the apex court in Universal Plast Ltd. v. CIT and CIT v. Podar Cement P. Ltd., arguing that the income should be treated as "Income from house property." However, the Commissioner of Income-tax (Appeals) and the Tribunal found that the facts of the assessee's case were more akin to the decision in CIT v. Vikram Cotton Mills Ltd., where the business was temporarily halted with an intention to resume. The Tribunal noted that the decision in Vikram Cotton Mills Ltd. was not overruled by Universal Plast Ltd. and that the principles laid down in Universal Plast Ltd. supported the assessee's case, given the intention to resume business.

Conclusion:
The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision to treat the income from letting out business assets as "Income from business." The appeal filed by the Revenue was dismissed, affirming that the income should be classified based on the assessee's intention to temporarily let out the assets and resume business operations. The judgment emphasized the importance of the assessee's intention and the temporary nature of the letting out in determining the classification of income.