2021 (12) TMI 1213 - HC - Income Tax

Correct head of income - nature of receipt from lease/ rent - assessee moved BIFR for rehabilitation scheme - rental income received by the assessee from Apollo Tyres Ltd. - whether constitutes business income or income from other sources? - HELD THAT - AO preferred to decide the contemporaneous activity undertaken by the assessee by referring to the lease agreement and absence of a clause in the lease agreement about the revival of business of assessee. This consideration throughout weighed with AO for reaching the final conclusion. The fallacy in this behalf is further evident that the AO, inspite of noticing that all the terms and conditions are governed by the scheme sanctioned by the BIFR, declines to give effect to the working of scheme by observing that the scheme is not clear on what would happen after the expiry or completion of lease period. Under the scheme, the assessee has reduced its overhead expenditure by closing down the head office, sales and marketing offices. With the closure of these divisions, there is no chance of revival of business of the assessee as Tyre manufacturer. These observations are very centric or influenced the conclusion. We are, prima facie, of the view that there is no objective consideration of the modus operandi or working of the scheme, the statutory obligation under which the assessee had come by filing an application before BIFR. The subtle difference between a voluntary arrangement between parties and arrangement approved as part of a statutory consideration for revival is not noticed by the AO, while concluding that the lease rental income shall be computed under the head income from other sources. The Appellate Authority has confirmed the order of AO and the dismissal of first appeal resulted in filing of appeal before the Tribunal. Tribunal in the impugned order first appreciated the scheme approved by BIFR, agreement between parties for irrevocable lease for 8 years of assessee's plant, machinery, land etc. and held that inspite of the agreement with ATL the assessee continues to exist as a corporate entity. The additional investment of 110 crores by ATL for eight years is to modernise the plant and again to make the manufacturing viable, the induction of a few directors from ATL in Board of the assessee is merely change in administration and of administrative officers, such changes could not be understood as the existence of assessee as corporate entity has disappeared or the assessee ceases to exist. The taking over of the manufacturing activity by ATL is not to take over the assessee company. The consideration of future happening of reviving the business by assessee is not a circumstance in the facts of the case. Finding is recorded that the lease rental receipt is income of business of the assessee. Case for revival and rehabilitation of its business before BIFR - The assessee, under approved scheme is obligated to exploit the business assets, earn income, adjust/get off accumulated losses/unadjusted depreciation, and turn as a positive company. Any other view in a situation as the present is unavailable and again counterproductive to an approved scheme under Act, 1985. Sequentially enquired, it transpires that the assessee was obligated to work under a statutory approved scheme; the lease of eight years is to ATL, which is into the same business and lease was for utilising the Plant, Machinery etc. for manufacturing tyres; the actuals are reimbursed to assessee by ATL; the work force of assessee has been deployed for manufacturing tyres; the total production from the assessee unit is taken over by ATL; over all affairs of assessee company are made viable by entering into settlement etc; at this juncture, we are convinced that coupled with all other primary circumstances, the assessee employed commercial assets to earn income. Unless and until the income is treated as business income, the scheme does not result on expected lines for losses; unavailed depreciation etc. will continue to be present in the accounts of assessee. The scheme is appreciated as one providing a solution to business problem of the assessee. From the above discussion we are convinced that the claim of lease rental receipt as income of business is justifiable for the subject assessment years and the findings of the Tribunal even if treated as mixed question of law and fact, we hold that the findings are justifiable and warranted in the circumstances of the case. Hence substantial question as answered in favour of the assessee and against the revenue

Summary

Issues Involved:
1. Reopening of assessment under Section 147 of the Income Tax Act.
2. Classification of rental income from Apollo Tyres Ltd. (ATL) as business income or income from other sources.

Detailed Analysis:

Issue 1: Reopening of Assessment under Section 147
Relevant Substantial Questions of Law:
1. Whether the reassessment completed within four years is in accordance with law.
2. Whether the Tribunal should have applied the ratio of the Supreme Court decision in CIT v Forainer France.

Analysis:
The court decided to first address the substantial questions related to whether the rental income should be classified as business income or income from other sources. This decision would render the consideration of the questions regarding the reopening of assessment either unnecessary or academic. Therefore, detailed analysis on this issue was not provided in the judgment.

Issue 2: Classification of Rental Income
Relevant Substantial Questions of Law:
3. Whether the Tribunal was correct in holding that the assessee "is existing" and "continues to exist" and the lease for a limited period of 8 years.
4. Whether the Tribunal was correct in holding that "there is nothing on record to show that the assessee had no present intention to revive its business at an appropriate time."
5. Whether the Tribunal was correct in holding the rental income as business income.

Analysis:
1. Background and Facts:
- The assessee, a company engaged in the manufacture and sale of tyres, had suffered business losses and applied for a rehabilitation scheme under the Sick Industries (Special Provisions) Act, 1985.
- The Board for Industrial and Financial Reconstruction (BIFR) approved a rehabilitation scheme which included leasing the plant to ATL for 8 years, with ATL paying lease rentals and taking over production.
- The assessee filed returns treating the lease rental as business income, which was initially accepted by the Assessing Officer (AO) but later reassessed as income from other sources.

2. Arguments by Revenue:
- The revenue argued that the lease rental income should be classified as income from other sources because the assessee was not actively manufacturing tyres but merely leasing its facilities to ATL.
- The revenue cited the Supreme Court decision in Universal Plast Limited to support their claim that the income was passive and should not be considered business income.

3. Arguments by Assessee:
- The assessee contended that the lease rental was business income as it was part of a statutory rehabilitation scheme aimed at reviving the company.
- The assessee argued that the arrangement with ATL was a commercial exploitation of its assets, and the income derived was integral to its business operations.

4. Tribunal's Findings:
- The Tribunal held that the lease rental received by the assessee under the rehabilitation scheme should be treated as business income.
- The Tribunal considered the statutory rehabilitation scheme, the nature of the arrangement with ATL, and the fact that the assessee continued to exist as a corporate entity.

5. Court's Conclusion:
- The court agreed with the Tribunal's findings, emphasizing that the rehabilitation scheme approved by BIFR aimed at reviving the assessee's business.
- The court noted that the assessee's assets were being commercially exploited for business purposes, and the lease rental income was essential for the company's revival.
- The court referenced various Supreme Court decisions, including Universal Plast Limited, to conclude that the classification of income depends on the facts and circumstances of each case, and in this case, the lease rental qualified as business income.

Final Judgment:
- The court answered substantial questions 3 to 5 in favor of the assessee, affirming that the lease rental income should be classified as business income.
- Consequently, the court dismissed the appeals filed by the revenue, including ITA No.757/2009 and other related appeals, without addressing the questions related to the reopening of assessment.