TMI Blog2018 (7) TMI 1083X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer in holding the income from resale of raw and packing material amounting to ₹ 63,62,660/- as income from other sources against the same being declared as business income by the appellant. 4.1. That without prejudice, the Commissioner of Income Tax (Appeals) erred on facts and in law in observing that the appellant has raised no objection in treating the income from aforesaid activities as income under the head other sources. 5. Further, without prejudice, the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that even if the above incomes are taxed as income from other sources then deduction under section 5 7(iii) of the Act should be allowed in respect of the corresponding expenditures laid out/expended wholly and exclusively for earning the said income. 6. That the Commissioner of Income Tax (Appeals) erred on facts and in law in confirming the action of the assessing officer in making proportionate disallowance of personnel, administrative and selling expense aggregating to ₹ 1,68,23,049 disregarding the fact that the said expenses were incurred wholly and exclusively for the purpose of business. That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar under consideration, the assessee declared income under the head 'profits gains of business and profession comprising of the following streams of income: a) Receipt of ₹ 11,59.728 on account of sale of own manufactured IMFL. products supplied to CSD. b) Receipts from JIL on account of the following :- 1) Rs. l.20 crores in respect of business assets including factory building, plant machinery, leased to JIL alongwith sub-lease of excise license to JIL; 2) receipt of ₹ 1.27 crores in respect of provision of packaging services; and 3) receipt of ₹ 62.32 lacs on account of resale of raw' and packaging material. The assessment was completed by the Assessing Officer vide order dated 26.10.2010 under section 143(3) of the Act, assessing the total income at ₹ 2,27.34,887 as against returned income of ₹ 21,64,391. In the assessment order, the assessing officer observed that above receipts from JIL on account of leasing of factory, plant and machinery and part of the licensed capacity, provision of packaging services and re-sale of raw and packaging material was assessable under the income from other sources against business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allow all its brands name to be used by the assessee and in the absence of own saleable brands, coupled with non-availability of viable substitute, the assessee agreed for sub-licensing part of its licensed capacity to JIL. The assessee, accordingly, entered into a sub-licensing agreement dated 05.03.2007 with JIL whereby the assessee sub-licensed its capacity to the extent of 68.5 lacs PFL capacity to produce IMFL to JIL. The assessee, vide said agreement, also sub-leased part of its IMFL manufacturing facilities including building, plant and machinery and other equipments to JIL. Since the first sub license was granted by the excise authorities on 26.09.2006, therefore, in terms of Article - 1.2 of the said agreement, the effective date of agreement was 01.10.2006. 7. The Ld. AR further submitted that for full commercial exploitation of its expertise in various aspects of liquor manufacturing, the assessee also entered into another agreement dated 19.04.2007 with JIL for providing various services including complete bottling operations consisting of shifting of all materials, washing of bottles, filling/ capping, sealing, inspection at various stages, affixing of excise adhesi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roviding them various allowances, facilities and amenities in the interest of its business. The Ld. AR thus, submitted that in view of the above and more particularly on perusal of the terms of the sub-licensing agreement and packaging services agreement, it would be noted that the sole purpose of the assessee entering into such agreement(s) was to earn on its liquor business by using maximum benefit of capital invested in the commercial assets and to carry on business at lower financial cost. Being so, the receipts from JIL constitutes business income of the assessee. 9. The Ld. AR further submitted that the various Courts in the following decisions have held that rental income should be assessed as business income where the business assets/facilities have been let out for commercial exploitation: CEPT v. Shri Lakshmi Silk Mills Limited: 20 ITR 451 (SC) CIT v. Vikram Cotton Mills Ltd.: 169 ITR 597 (SC) Universal Plast Ltd. Ors. V. CIT: 237 ITR 454 (SC) Rajendra Flour Allied Industries : 128 ITR 402 (Del.) CIT v. Northern India Iron and Steel Co. Ltd.: 211 ITR 370 (Del.) CIT v. Super Fine Cables Private Ltd.: 154 ITR 532 (Del.) CIT v. Mysore Wine Produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess; but if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets. 10. The Ld. AR further submitted that on application of the aforesaid decisions to the admitted facts of the present case, it will clearly be evident that: a) the assessee was engaged in the business of manufacture and sale of IMFL products since 1977; b) the assessee continued in the said business even after the agreement with JIL as applicable to the year under appeal; c) the business apparatus and infrastructure owned by the assessee was maintained and remained unchanged; and d) there was no intention to go out of business. Thus, the Ld. AR submitted that in view of the matter, the amounts received from commercially letting of business assets had to be treated as business income and not as income from other sources , as taken by the lower authorities. 11. As relates to Principle of consistency, the Ld. AR submitted that the sublicense agreement was effective from 01.10.2006 and the assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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. The Ld. AR further submitted that even if it is assumed for the sake of argument, though not conceding, that such receipts are to be taxed as income from other sources , then, too, deduction under section 57 (iii) of the Act should be allowed in respect of the expenses incurred by the assessee for earning such income. In the facts of the present case, the Assessing Officer, at page-7 of the Assessment Order, admitted that the above expenses are attributable to income assessable under the head income from other sources . Being so, the above 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 JIL and carrying out its own manufacturing and business activities, should be allowed as deduction in toto under section 37(1) as also under section 57(iii) of the Act. The Ld. AR relied upon the Hon ble Apex Court decision in case of CIT vs. Rejendra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut machinery, plant or furniture and also building. These components are inextricably linked and thus composite in nature. Thus, the Ld. DR submitted that it is taxable as Income from other sources . This is further evident from the facts that the intention while making the lease was that the assets leased- building and plant and machinery etc are enjoyed together. The assets could not be leased out separately as the purpose of leasing out was to allow JIL to carry out its business operations. The Ld. DR also pointed out that the lessee would not accept the lease of the one without the other asset. Hence, the Ld. DR submitted that the income received by the assessee on this account clearly falls under the ambit of income from other sources. The judgments relied upon by the assessee are clearly distinguishable on facts. In all the cases cited, the taxpayers were faced with compelling unfavorable circumstances which led to their discontinuing the business for some time. In taxpayers on account of temporary hiring out of their assets have been treated as business income. In the case under consideration, the intention of the assessee to get back into the business of manufacture of IMF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y as Business Income. The Assessing Officer has given a finding that this activity has nothing to do with the regular business of the assessee, and hence, the same should be treated as Income from Other Sources. The CIT (A) has concurred with the finding of the Assessing Officer. Before the Tribunal, the assessee has argued that these concurrent findings be reversed. In this connection, the Ld. DR submitted that to be characterized as business income, there should be a connection between any income received and the regular business of the assessee. A connection exists if it is clear that the payment of income would not have been made if the business did not exist. In the current case under consideration, the packaging services are not the regular business of the assessee. Hence, there cannot said to be a connection between the income and its regular business. 17 . In respect of Ground No. 3 regarding income of ₹ 63, 62,660/- from Resale of packaging and raw materials, the Ld. DR submitted that the assessee in the year under consideration has transferred raw and packaging material left with it subsequent to leasing out of licensed capacity. The receipts from such activit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red for the purpose of earning income falling under the head income from other sources The assessee could not establish the specific expenses incurred for earning the income from other sources. 19. In respect of Ground No. 5 regarding the proportionate disallowance of expenses, the Ld. DR submitted that in absence of any details from the assessee in respect of specific expense incurred for earning income from other sources, only proportionate expenses were allowed against the revenue from sales. 20. In respect of Ground No. 6 and 6.1 regarding the disallowance of Marketing and welfare expense of ₹ 37,47,447/-, the Ld. DR submitted that the assessee could not establish the commercial expediency of making such payments to Sh Jagatjit Jaiswal in view of the fact that the sales of the company had reduced drastically since leasing out of manufacturing unit. Further, the sales were made to a single party that is CSD. That the payment was incurred for the purpose of business has not been proved by the assessee. 21. In respect of Rule of Consistency, the Ld. DR submitted that the principle of Res judicata is not applicable to the income tax proceedings. Assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r sub licensee for part of its license capacity to M/s Jagatjit Industries Ltd. Accordingly, the assessee entered into a sub licensee agreement dated 5/3/2007 with M/s Jagatjit Industries Ltd. whereby the assessee sub license its capacity of manufacturing to the extent of 68.5 lacs proof liters to produce Indian made foreign liquor to M/s Jagatjit Industries Ltd. Vide said agreement, the assessee also sub lease part of its Indian made foreign liquor manufacturing facilities including building, plant and machinery and other equipments to M/s Jagatjit Industries Ltd. Since the first sub license was granted by the Excise authorities on 26/9/2006, therefore, in terms of Article 1.2 of the said agreement, the effective date of the agreement was 1/10/2006. Further, from the documents it can be seen that for full commercial exploitation of the assessee s expertise in various aspect of liquor manufacturing, the assessee entered into another agreement dated 19/4/2007 with M/s Jagatjit Industries Ltd. for providing various services including complete bottling operation consisting of shifting of all materials, washing of bottles filling/ capping, sealing, inception at various stages, affixing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of the assessee is going on till date. Thus, case laws relied upon by the Ld. DR as well as the ratio applied by the CIT(A) and Assessing Officer of various decisions does not apply as in those cases the manufacturing activities were not continued. Thus, Ground No. 1 and 1.1 of the assessee s appeal is allowed. 23. As relates to Ground No. 2, since the income from packaging services amounting to ₹ 1,27,77,784 is a business income which is based on the packaging agreement between assessee and M/s Jagatjit Industries Ltd. The assessee has not given up at any point of time its own manufacturing activities but was facilitating M/s Jagatjit Industries Ltd. for the benefit of assessee s own business. Therefore, Assessing Officer as well as the CIT(A) was not correct in disallowing packaging services to the assess by holding that it is income from other sources . Ground No. 2 of the Assessee s appeal is allowed. 24. As relating to Ground No. 3, income from resale of raw and packing material amounting to ₹ 63,62,660/-, 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 activ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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