2015 (6) TMI 638 - AT - Income Tax

Leave and licence income - assessability under income from other sources or profits and gains of business or profession - Held that - Assessee, in furtherance of its object of Memorandum of Association, had leased out the premises, which in turn was subleased on leave and licence basis, thus the intention of the assessee was to exploit the asset leased by it, by way of letting out the same, then such letting out activity is in furtherance of assessee s intention to carry out the business in a systematic and organized manner. Consequently we hold that the rental income declared by the assessee is to be assessed as income from house property. Another aspect to be kept in mind is that similar income offered by the assessee on account of similar rent received from same tenant in earlier years were assessed as income from business in the hands of the assessee. Another aspect to be kept in mind is that during the year under consideration, i.e. at the close of the year on 31.03.2003 the agreement with American Express Bank had come to an end and the assessee entered into a fresh agreement with British High Commission again establishes the case of the assessee, that it is involved in a systematic and organized activity of leasing out its premises, which in turn are not owned by the assessee. In the totality of the above facts and circumstances we hold that the lease rent received by the assessee is assessable as income from business in the hands of the assessee and the related expenditure has to be allowed in the hands of the assessee. The AO shall accordingly compute the income in the hands of the assessee in line with our directions after affording reasonable opportunity of hearing to the assessee. This ground of appeal, which was restored back to the file of the Tribunal by the Hon ble High Court is allowed. - Decided in favour of assessee. Disallowance of recruitment and staff training expenses and salary paid to Shri Naval Kumar - Held that - As decided in assessee s own case relating to assessment year 2003-04 it is held an overall appreciation of the evidence and explanation submitted on behalf of the assessee, we are of the view that the assessee has failed to explain and substantiate that the expenditure on staff training and salary pad to Mr. Naval Kumar was wholly and exclusively for the purpose of business of the assessee. We, therefore, confirm the orders of revenue authorities - Decided against assessee.

Summary

Issues Involved:
1. Assessability of leave and license income as "profits and gains of business" or "income from other sources."
2. Disallowance of expenses on account of staff recruitment and staff training.

Issue-wise Detailed Analysis:

1. Assessability of Leave and License Income:

The core issue in both appeals was whether the leave and license income received by the assessee should be assessed under "profits and gains of business" or "income from other sources." The Tribunal initially upheld the orders of the authorities below, treating the income as "income from other sources," as the activity of subletting was not conducted in a systematic and organized manner to constitute a business. The Hon'ble High Court remanded the matter back to the Tribunal, noting that the assessee had consistently treated similar income as business income in previous years, which was accepted by the Revenue under section 143(3) of the Act.

Upon reconsideration, the Tribunal observed that the assessee's Memorandum of Association permitted the business of taking on lease and earning income from the same. The assessee had leased premises to American Express Bank Ltd. since October 1992, and the income from this lease was previously assessed as business income. The Tribunal referred to the Supreme Court's decision in Chennai Properties & Investment Ltd. vs. CIT, which held that income from letting out properties, as per the object clause of the Memorandum of Association, should be treated as business income. The Tribunal concluded that the lease income was assessable as business income, considering the systematic and organized activity of subletting in line with the assessee's business objectives. Consequently, the related expenditure was to be allowed as a deduction.

2. Disallowance of Staff Recruitment and Training Expenses:

The second issue pertained to the disallowance of expenses on account of staff recruitment and training of Rs. 15,27,872/-. The assessee had incurred these expenses for sending Shri Naval Kumar abroad for training. The Tribunal, in an earlier order, upheld the disallowance, noting that the assessee failed to substantiate that the training was for the benefit of its business. The Hon'ble High Court affirmed this decision, observing that the assessee could not demonstrate the relevance of the training to its business activities.

In the present appeal, the Tribunal reiterated its earlier findings, emphasizing that the expenditure was not proven to be wholly and exclusively for the business purposes of the assessee. Consequently, the Tribunal upheld the disallowance of the recruitment and training expenses, dismissing the related ground of appeal.

Conclusion:

The Tribunal allowed the ground of appeal regarding the assessability of leave and license income as business income and directed the AO to compute the income accordingly. However, the Tribunal dismissed the ground of appeal related to the disallowance of staff recruitment and training expenses, upholding the CIT(A)'s order. The appeal was thus partly allowed.