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2021 (11) TMI 636 - HC - Income TaxCorrect head of income - Lease rent received - to be treated as business income or as income from other sources - Assessee was declared as a sick company under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). Thereafter, a scheme for rehabilitation and revival was prepared, which obtained the approval of the Board for Industrial and Financial Reconstruction (BIFR) on 17.04.1995. The scheme provided for an arrangement between M/s.Apollo Tyres Ltd. ATL and the assessee - HELD THAT - We find that the assessee had never been an active participant of ATL. Though the revival was contemplated within a limited span of time, that did not happen, even though the net worth turned positive. There was no attempt to exploit the commercial assets of the company and instead the assessee merely renewed rental arrangement and received rent as a passive receipt. Therefore, we answer the first question in favour of the revenue and hold that for the assessment year 2004-05, the rental income received by the assessee from ATL ought to be treated as income under the head income from other sources .
Issues Involved:
1. Classification of lease rent as business income or income from other sources. 2. Treatment of penalty paid under the Kerala General Sales Tax Act as an expenditure. 3. Deductibility of quality loss claimed by the assessee. 4. Rectification under Section 154 of the Income Tax Act for disallowance of expenditure on stores and spares. Issue-wise Detailed Analysis: 1. Classification of Lease Rent: The primary issue was whether the lease rent received by the assessee from M/s. Apollo Tyres Limited (ATL) for the assessment years 2004-05 to 2009-10 should be treated as business income or income from other sources. The court noted that the assessee, a tyre manufacturing company, had leased its plant and machinery to ATL under a scheme approved by the Board for Industrial and Financial Reconstruction (BIFR) for 8 years, which was later extended annually without BIFR’s approval. The court distinguished the assessment years 1995-96 to 2003-04 from the subsequent years, emphasizing that the assessee had not shown any intention to revive its business, thus treating the lease rent as income from other sources. The court cited precedents like Universal Plast Ltd. v. Commissioner of Income Tax and concluded that the assessee's passive receipt of rent without active business involvement warranted the classification of the lease rent as income from other sources. 2. Treatment of Penalty as an Expenditure: The court addressed whether the penalty of ?52 lakhs paid under section 45A of the Kerala General Sales Tax Act could be treated as an expenditure. The assessing officer disallowed the claim, and the Tribunal upheld this disallowance, finding no compensatory element in the penalty. The court referenced decisions such as Commissioner of Income Tax v. Chemical Constructions and Malwa Vanaspati & Chemical Co. v. Commissioner of Income Tax, which allowed only the compensatory portion of penalties as deductible. In the absence of evidence showing any compensatory element, the court affirmed the disallowance of the penalty as an expenditure. 3. Deductibility of Quality Loss: The court examined the claim of ?1.25 Crores under the head ‘quality loss’ paid to ATL. Both the assessing officer and the Tribunal rejected this claim, noting that the assessee had no role in the manufacturing process, which was entirely undertaken by ATL. The court agreed with this assessment, stating that any quality loss was attributable to ATL, not the assessee. Thus, the claim for quality loss was disallowed. 4. Rectification under Section 154: The appeal ITA No.227 of 2013 involved the rectification of an omission to add back a disallowance of ?60,07,162/- for stores and spares. The court upheld the Tribunal's decision that the rectification was justified since the assessee was not engaged in any manufacturing activity, and the expenditure on stores and spares was correctly disallowed. Conclusion: The court dismissed all the appeals, affirming that the lease rent received by the assessee should be treated as income from other sources for the assessment years 2004-05 to 2009-10. The penalty paid under the Kerala General Sales Tax Act was not deductible as an expenditure, and the quality loss claimed by the assessee was not allowable. The rectification under Section 154 for disallowance of expenditure on stores and spares was also upheld.
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