2016 (6) TMI 1292 - AT - Income Tax

Determination of “head of income” - Treatment of income received/accrued under an agreement - business income or income from other sources - as submitted the appellant has leased the plant and machinery along with the labour, responsibility for repair and maintenance, insurance, compliance with labour law, etc. the same is akin to a “wet lease” and should be regarded as business income - Held that:- 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 setup 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 express 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.

We are also of the opinion that disclosure in the financial statement as “other income” or there is one segment of the assessee is an irrelevant consideration. It is well settled principle that treatment in books of accounts is not determinative of the nature and taxability of income as held in the case of Tuticorin alkali Chemicals and Fertilizers Ltd. v. CIT (1997 (7) TMI 4 - SUPREME Court)

Thus 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.

Disallowance of expenditure incurred and claimed u/s 37(1) - Held that:- The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer - CIT(A) has positively held that the business was set up and had commenced. The said finding is accepted. The respondent-assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the CIT(A) - Decided in favour of assessee

Disallowance of expenditure incurred towards interest paid on loans raised for investment in subsidiary company - Held that:- Expenditure claimed is eligible business expenditure u/s. 36(1)(iii) of the Act. Therefore, disallowance made and sustained is deleted. Ground raised by the assessee is allowed.

Disallowance of gift of equity shares of Artemis Health Sciences ltd. (‘AHSL), a wholly owned subsidiary company to CEO of AhSl - CIT(A) confirmed the disallowance only on the ground that there is no business income - Held that:- While adjudicating Ground 1 held that income from lease rent of ₹ 25 crores is assessable as business income; and thus exconsequenti the foundation of disallowance ceases to exist and, therefore expenditure is eligible for deduction u/s. 37(1) of the Act. However, we would have ended the matter at that, but, we cannot resist but to state that absence of income alone is not a relevant test for allowability of claim of expenditure either u/s. 37(1) of the Act or even section 57(iii) of the Act.

The setting up of subsidiaries wherein assessee has a 100% controlling interest engaged in healthcare business, tantamount to carrying on business by the assessee company; and, expenditure incurred in the course of the said business is also business expenditure eligible for deduction u/s. 37(1) of the Act irrespective of the income from such business.- Decided in favour of assessee.