2020 (7) TMI 216 - AT - Income Tax

Correct head of income - lease rent received by the assessee - Business of assessee taken over by the another Company as was running as JV - assessed under the head income from business or income from other sources - rehabilitation scheme - HELD THAT - Appellant commenced the business but on account of poor financial viability the appellant company incurred losses and, eroded the entire net worth and was declared sick company under the Sick Industrial Companies Act, 1956. A rehabilitation scheme was prepared and sanctioned by Board for Industrial and Financial Reconstruction. 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 set up 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 expenses 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. In view of section 56(2)(ii) coupled with the judgments of the VIKRAM COTTON MILLS LIMITED 1987 (12) TMI 1 - SUPREME COURT 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.

Issues Involved:
1. Whether the lease rent received by the assessee should be assessed under the head 'income from business' or 'income from other sources'.

Issue-wise Detailed Analysis:

1. Whether the lease rent received by the assessee should be assessed under the head 'income from business' or 'income from other sources':

Facts of the Case:
The assessee company, incorporated on 29.10.1999, was engaged in the business of manufacturing tyres. Due to poor financial viability, the company incurred losses and was declared a sick company under the Sick Industrial Companies Act, 1956 (SICA). A rehabilitation scheme was sanctioned by the Board for Industrial and Financial Reconstruction (BIFR), under which Apollo would take over the assessee-company by subscribing to its equity shares and operating the plant on an irrecoverable lease of eight years for a lease rental of ?45.50 crores. This arrangement was renewed under various agreements, with the lease rent revised periodically.

Assessment Year 2014-2015:
For the assessment year 2014-2015, the lease rent was received under the agreement dated 14.11.2007 and revised lease rent agreement. The assessee declared this lease rent as 'income from business'. However, the Assessing Officer assessed it as 'income from other sources' under Section 56(2)(ii) of the Income Tax Act.

CIT(A) Decision:
The CIT(A) allowed the assessee's appeal, directing the Assessing Officer to assess the lease rent as 'income from business'. The CIT(A) relied on the order of the ITAT in the assessee's own case for the preceding assessment years (2011-2012 to 2013-2014).

Revenue's Appeal:
The Revenue filed an appeal before the Tribunal, arguing that the CIT(A) erred in holding the lease rent as 'income from business', overlooking the fact that the assessee's business ceased to exist. They contended that the ITAT had previously held the lease rent as 'income from other sources' for assessment years 2004-2005 to 2009-2010, and the Revenue did not accept the findings of the Tribunal for assessment years 2011-2012 to 2013-2014, with appeals pending under Section 260A.

Tribunal's Decision:
The Tribunal considered the rival submissions and perused the material on record. Identical issues were considered by the Cochin Bench of the Tribunal in the assessee's own case for assessment years 2011-2012 to 2013-2014, where the Tribunal decided in favor of the assessee, holding that the lease rent should be assessed as 'income from business'. The Tribunal noted that the arrangement with Apollo was for joint operation of the plant, with substantial expenditure incurred by the assessee reimbursed by Apollo, indicating commercial exploitation of assets.

Legal Precedents:
The Tribunal referred to several legal precedents, including the Apex Court's judgment in Rayala Corporation (P) Ltd. vs. ACIT (386 ITR 500) and Chennai Properties and Investments Ltd. vs. CIT (373 ITR 673), which held that rental income should be treated as 'business income' if the leasing activity is part of the business operations. The Tribunal also noted that Section 56 of the Act, being the residuary head of income, can be resorted to only if an income is not chargeable under any other specific head of income.

Conclusion:
The Tribunal concluded that the assessee was engaged in the business of commercial exploitation of its assets through joint operation with Apollo, and there was no intention to exit the business. Therefore, the lease rent should be assessed as 'income from business' and not 'income from other sources'. The appeal filed by the Revenue was dismissed.

Order:
The Tribunal upheld the CIT(A)'s decision, directing the Assessing Officer to assess the lease rent as 'income from business'. The appeal by the Revenue was dismissed, and the order was pronounced on 06th July 2019.

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