2015 (6) TMI 1160 - AT - Income Tax

Assessability of leave and licence income received - to be assessed as profit and gains of business or as income from other sources - Held that - As discussed the director s report dated 26/08/2003 with respect to licence fee with American Express Bank which came to an end on 31/03/2003 after which a new licence agreement was entered into by the assessee with British Deputy High Commission ratio laid down in Sultan Brother Pvt. Ltd. (1963 (12) TMI 4 - SUPREME COURT) Karanpura Development Company Ltd. vs CIT (1961 (8) TMI 7 - SUPREME COURT) identical fact in the case of Chennai properties 2015 (5) TMI 46 - SUPREME COURT laid down the proposition that where as per the object clause in the Memorandum of Association was to acquire and hold properties which in turn were let out then the income arising from such letting out was assessable in the hands of the assessee as income from business - decided in favour of the assessee. Claim of expenses on account of staff recruitment/ training expenses - Held that - The issue arising in the present appeal is squarely covered against the assessee in view of the order of the Hon ble High Court in the case the assessee. 2015 (6) TMI 638 - ITAT MUMBAI as 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. Set off of unabsorbed depreciation - rectification of mistake u/s 154 - Assessing Officer opined that in view of section 32(2) of the Act such unabsorbed depreciation is not allowable to be set off of against the income of assessment year 2007-08 - Held that - The decision in Mepco Industries Ltd. (2009 (11) TMI 24 - SUPREME COURT) Soora Subramanian (2009 (10) TMI 579 - MADRAS HIGH COURT) and Sri Ram Chits (Bang.) Ltd. (2013 (12) TMI 481 - ITAT HYDERABAD) held that the assessment based upon the Supreme Court decision cannot be rectified on subsequent retrospective amendment of law. Thus order of rectification u/s 154 of the Act for AY 1998-99 levying interest for the first time 234B is not valid and since it was a debatable issue no rectification u/s 154 of the Act is permissible. We are in agreement with the conclusion drawn by the ld. Commissioner of Income Tax (Appeals) because in Mepco Industries Ltd. held that debatable issue cannot be rectified u/s 154 of the Act thus the order of rectification dated 14/10/2011 was rightly quashed by the ld. Commissioner of Income Tax (Appeals). We find no infirmity in the order thus appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Classification of license fee income as 'income from other sources' vs. 'business income'.
2. Disallowance of expenses on account of staff recruitment/training.
3. Set off of unabsorbed depreciation.

Issue-wise Detailed Analysis:

1. Classification of License Fee Income:
The primary issue pertains to whether the license fee received by the assessee should be treated as 'income from other sources' or 'business income'. The assessee argued that the issue is covered in its favor based on previous Tribunal orders for AY 2003-04 and 2005-06. The Tribunal had previously held that the leave and license income should be considered as 'income from other sources' because the assessee was merely subletting the property without any systematic business activity. However, the Hon'ble High Court directed the Tribunal to reconsider its decision, noting that similar income had been assessed as 'business income' in earlier years without any distinguishing features justifying a different treatment for the assessment year in question. The Tribunal, upon reconsideration, noted that the assessee's object clause permitted it to lease properties and earn income, which was a systematic and organized activity. Thus, the Tribunal concluded that the rental income should be assessed as 'business income', aligning with the Supreme Court's ruling in the case of Chennai Properties & Investment Ltd. Consequently, the Tribunal decided this issue in favor of the assessee.

2. Disallowance of Staff Recruitment/Training Expenses:
The second issue involves the disallowance of expenses related to staff recruitment and training amounting to Rs. 7,81,609/-. The assessee conceded that this issue had been decided against it in a previous Tribunal order. The Tribunal referenced its earlier decision, which was upheld by the Hon'ble High Court, where it was determined that the assessee failed to substantiate that the training expenses were for the benefit of its business. The Tribunal reiterated that the assessee could not demonstrate the relevance of sending an employee abroad for training to its existing business activities. Therefore, this ground was decided against the assessee, and the disallowance of the expenses was upheld.

3. Set Off of Unabsorbed Depreciation:
The third issue pertains to the set-off of unabsorbed depreciation from AY 1997-98 against the income of AY 2007-08. The Assessing Officer (AO) disallowed the set-off, citing section 32(2) of the Act. However, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed the set-off, referencing Supreme Court decisions which held that debatable issues cannot be rectified under section 154 of the Act. The Tribunal agreed with the CIT(A), noting that the issue was debatable and thus not subject to rectification under section 154. Consequently, the Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s decision allowing the set-off of unabsorbed depreciation.

Conclusion:
- The appeal of the assessee was partly allowed, with the Tribunal ruling in favor of the assessee regarding the classification of license fee income as 'business income'.
- The disallowance of staff recruitment/training expenses was upheld against the assessee.
- The appeal of the Revenue was dismissed, and the set-off of unabsorbed depreciation was allowed in favor of the assessee.

This order was pronounced in the open court on 30/06/2015.