2018 (7) TMI 1083 - AT - Income Tax

Income received by the appellant from sub-leasing a pert of the sub-licensing capacity alongwith part of the manufacturing unit - business income or income from other sources - Held that - Hon ble Supreme Court in case of Shri Laxmi Silk Mills Ltd. 1951 (9) TMI 1 - SUPREME COURT also held that the yield of income by a commercial asset is the profit of the business irrespective of the manner in which that asset is exploited by the owner of the business. The Hon ble Apex Court further held that the owner is entitled to exploit to his best advantage and he may do so either by using it himself personally or by letting it out to somebody else. DR s contentions that the assessee intends to lease out the Unit on a continuous basis and hence, the same should be treated as Income from Other Sources appears to be incorrect as the manufacturing activity of the assessee is going on till date. Income from resale of raw and packing material - Held that - The same is also business income as the raw and packing material belongs to the assessee irrespective of whether it is used for the manufacturing activities conducted by the assessee or not. Thus, the same is part and parcel of the business activity of the assessee. Assessing Officer as well as the CIT(A) was not correct in disallowing this by holding that it is income from other sources. Ground No. 3 of the Assessee s appeal is allowed. Allowance of deduction u/s 57 (iii) - Held that - There is no dispute regarding the genuineness of the above expenses by the Assessing Officer. These expenses were incurred for running the business operations of the assessee including various packaging services provided to M/s. Jagatjit Industries Ltd.. Entire expenses were incurred wholly and exclusively to earn the business income. Salary and wages including PF, ESI, Bonus etc. were paid to labour and the executives of the assessee working for last many years with the assessee. Similarly, administrative and selling expenses were incurred for running the day-to-day business operations of the assessee company. Being so such expenditure are allowable as business expenditure under section 37(1) of the Act, as allowed in earlier years. Thus, the personnel expenses and administrative & selling expenses, having been incurred by the assessee for earning income by way of lease rent, from provision of packaging services to M/s Jagatjit Industries Limited and carrying out its own manufacturing and business activities, should be allowed as deduction as per section 37(1) as also under section 57(iii) of the Act. Addition marketing expenses - Held that - Marketing expenses was paid to Mr. J. Jaiswal who is senior employee of the assessee company stationed at Delhi as well as experienced personnel in liquor business and was looking for the business affairs of the assessee company in respect of the Delhi based company M/s. Jagatjit Industries Ltd. Thus, the expenditure incurred by the assessee is allowable under the provisions of Section 37(1) of the Act.

Summary

Issues Involved:
1. Classification of income from sub-leasing of manufacturing unit.
2. Classification of income from packaging services.
3. Classification of income from resale of raw and packing materials.
4. Allowance of deduction under section 57(iii) of the Act.
5. Proportionate disallowance of personnel, administrative, and selling expenses.
6. Disallowance of marketing and welfare expenses.

Detailed Analysis:

1. Classification of Income from Sub-Leasing of Manufacturing Unit:
The assessee argued that the income from sub-leasing a part of its manufacturing unit should be classified as 'business income.' The assessee had a long-standing business of manufacturing Indian Made Foreign Liquor (IMFL) and had entered into a sub-licensing agreement with JIL due to changes in the excise policy. The assessee continued its business activities, albeit in a varied form, and thus, the income should be considered as business income. The Tribunal agreed with the assessee, noting that the business activities continued, and the income derived from sub-leasing was part of the manufacturing business. Therefore, the income from sub-leasing was classified as 'business income.'

2. Classification of Income from Packaging Services:
The assessee provided packaging services to JIL and declared the income as 'business income.' The Assessing Officer and CIT(A) treated it as 'income from other sources,' arguing that packaging services were not part of the assessee's regular business. The Tribunal found that the packaging services were integral to the assessee's business operations and facilitated its own business. Therefore, the income from packaging services was classified as 'business income.'

3. Classification of Income from Resale of Raw and Packing Materials:
The assessee argued that income from the resale of raw and packing materials should be classified as 'business income.' The Assessing Officer and CIT(A) treated it as 'income from other sources,' stating that the resale was not connected to the regular business. The Tribunal held that the resale of raw and packing materials was part of the assessee's business activities and thus, the income was classified as 'business income.'

4. Allowance of Deduction under Section 57(iii) of the Act:
The assessee contended that if the income was classified as 'income from other sources,' then deduction under section 57(iii) should be allowed for expenses incurred to earn that income. The Tribunal, having classified the income as 'business income,' did not need to address this issue separately. However, it noted that the expenses were genuine and incurred for business operations, thus deductible under section 37(1).

5. Proportionate Disallowance of Personnel, Administrative, and Selling Expenses:
The Assessing Officer disallowed a proportionate amount of personnel, administrative, and selling expenses, attributing them to 'income from other sources.' The Tribunal found that these expenses were incurred wholly and exclusively for the assessee's business operations and thus were allowable as business expenses under section 37(1).

6. Disallowance of Marketing and Welfare Expenses:
The assessee incurred marketing expenses paid to a senior employee, Mr. J. Jaiswal, for business affairs in Delhi. The Assessing Officer disallowed these expenses, questioning their commercial expediency. The Tribunal found that the expenses were incurred for business purposes and were allowable under section 37(1).

Conclusion:
The Tribunal concluded that the income from sub-leasing, packaging services, and resale of raw and packing materials were all part of the assessee's business activities and should be classified as 'business income.' Consequently, the related expenses were deductible under section 37(1). The appeal of the assessee was allowed in full.