2016 (6) TMI 1292 - AT - Income Tax

Determination of head of income - Treatment of income received/accrued under an agreement - business income or income from other sources - as submitted the appellant has leased the plant and machinery along with the labour, responsibility for repair and maintenance, insurance, compliance with labour law, etc. the same is akin to a wet lease and should be regarded as business income - Held that - Scheme envisaged joint operation of the plant on an irrecoverable lease of eight years in consideration of lease rentals; which has been extended from time to time. There was thus no intention of letting out the plant, building, machinery and licence to anyone. The setup of the business for carrying on the business. Further, when appellant entered the arrangement with Apollo, the intention was not to lease. The intention was to exploit the commercial assets through its expertise and derive income. There is no sale of assets or retrenchment of employees or even surrender of any licenses, registration etc. As per the agreement, it was the responsibility of the assessee to recruit labour for running the plant and meet all the labour law requirement in respect thereof, to purchase fuel and power required for running the plant, ensure the plant is properly insured, maintain the plant in working condition, undertake its repair and maintenance etc. The express so incurred by the appellant for the said responsibilities, were reimbursed by Apollo to it on actual basis. The production now by the appellant is in the name of Apollo and that too, to retain commercial viability in the operations and augment the financial position and at the same time bring about modernization and expansion in the plant. We are also of the opinion that disclosure in the financial statement as other income or there is one segment of the assessee is an irrelevant consideration. It is well settled principle that treatment in books of accounts is not determinative of the nature and taxability of income as held in the case of Tuticorin alkali Chemicals and Fertilizers Ltd. v. CIT (1997 (7) TMI 4 - SUPREME Court) Thus the income should fall under the head profits and gains of business and not from income from other sources . Accordingly, the ground raised by the assessee is allowed. Disallowance of expenditure incurred and claimed u/s 37(1) - Held that - The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer - CIT(A) has positively held that the business was set up and had commenced. The said finding is accepted. The respondent-assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the CIT(A) - Decided in favour of assessee Disallowance of expenditure incurred towards interest paid on loans raised for investment in subsidiary company - Held that - Expenditure claimed is eligible business expenditure u/s. 36(1)(iii) of the Act. Therefore, disallowance made and sustained is deleted. Ground raised by the assessee is allowed. Disallowance of gift of equity shares of Artemis Health Sciences ltd. ( AHSL), a wholly owned subsidiary company to CEO of AhSl - CIT(A) confirmed the disallowance only on the ground that there is no business income - Held that - While adjudicating Ground 1 held that income from lease rent of ₹ 25 crores is assessable as business income; and thus exconsequenti the foundation of disallowance ceases to exist and, therefore expenditure is eligible for deduction u/s. 37(1) of the Act. However, we would have ended the matter at that, but, we cannot resist but to state that absence of income alone is not a relevant test for allowability of claim of expenditure either u/s. 37(1) of the Act or even section 57(iii) of the Act. The setting up of subsidiaries wherein assessee has a 100% controlling interest engaged in healthcare business, tantamount to carrying on business by the assessee company; and, expenditure incurred in the course of the said business is also business expenditure eligible for deduction u/s. 37(1) of the Act irrespective of the income from such business.- Decided in favour of assessee.

Issues Involved:
1. Treatment of lease rent income.
2. Allowability of professional charges expenditure.
3. Disallowance of interest expenditure.
4. Disallowance of expenditure on transfer by way of gift of shares.

Issue-wise Detailed Analysis:

1. Treatment of Lease Rent Income:
The primary issue was whether the lease rent income received by the assessee from Apollo Tyres Ltd. should be treated as "Income from Business" or "Income from Other Sources." The assessee argued that the income should be classified as business income, citing joint operations and substantial expenses incurred under the agreement. The Tribunal had previously classified similar income as business income for earlier years but changed its stance from AY 2007-08 onwards, treating it as income from other sources due to the lack of intention to revive the business.

In the current judgment, the Tribunal revisited the facts and agreements, noting significant expenses incurred by the assessee, which were reimbursed by Apollo, indicating joint operations rather than a simple lease. The Tribunal concluded that the income should be treated as business income, emphasizing the continuous business activities and the systematic exploitation of commercial assets. This conclusion was supported by various legal precedents and the nature of the agreement, which involved more than just leasing the plant and machinery.

2. Allowability of Professional Charges Expenditure:
The assessee claimed professional charges as business expenditure, which the Assessing Officer disallowed, stating they were related to the subsidiary company. The Tribunal found that the expenses incurred for consultancy services provided by Vrinda Software Pvt. Ltd. and Mednet Asia Ltd. were for the business purposes of the assessee and thus allowable under section 37(1) of the Act. The Tribunal also noted that even if the lease rent income were treated as "Income from Other Sources," the expenditure would still be allowable under section 57(iii) of the Act, following the principle that expenditure incurred for earning income is deductible.

3. Disallowance of Interest Expenditure:
The assessee incurred interest on loans taken for investment in its subsidiary company and claimed it as business expenditure. The Assessing Officer disallowed the interest, invoking section 14A, arguing that the investments were made to earn exempt income. The Tribunal, however, noted that no exempt income was earned during the year, and following various judicial precedents, held that section 14A could not be applied in the absence of exempt income. The Tribunal also emphasized that the investment in the subsidiary was for business purposes, and the interest expenditure was allowable under section 36(1)(iii) of the Act.

4. Disallowance of Expenditure on Transfer by Way of Gift of Shares:
The assessee gifted shares of its wholly-owned subsidiary, AHSL, to Dr. Kushagra Katariya, arguing it was for commercial consideration and business expediency. The Assessing Officer and CIT(A) disallowed the expenditure, stating it was not related to the assessee's business. The Tribunal, however, found that the gift was made for business purposes, recognizing the significant contribution of Dr. Katariya to the subsidiary's business. The Tribunal held that the expenditure was allowable under section 37(1) of the Act, as it was incurred for the business purposes of the assessee. The Tribunal also noted that even if the lease rent income were treated as "Income from Other Sources," the expenditure would still be allowable under section 57(iii) of the Act.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the lease rent income should be treated as business income, and the expenditures on professional charges, interest on loans, and the gift of shares were allowable under the relevant provisions of the Income Tax Act. The judgment emphasized the importance of considering the business purpose and commercial expediency of the expenditures incurred by the assessee.

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