TMI Blog2021 (11) TMI 636X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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 . - I.T.A. Nos.193 of 2012, 185, 200, 206, 207, 227 of 2013, 92 & 93 of 2014 - - - Dated:- 22-7-2021 - Honourable Mr.Justice S.V.Bhatti And Honourable Mr. Justice Bechu Kurian Thomas For the Appellant : Advs. Sri.Joseph Markos (Sr.), Sri.V.Abraham Markos, Sri.Binu Mathew, Sri.B.J.John Prakash, Sri.Mathews K.Uthuppachan, Sri.Terry V.James, Sri.Tom Thomas Kakkuzhiyil For the Respondent : Sri.Jose Joseph, Sc For Income Tax JUDGMENT BECHU KURIAN THOMAS, J. This batch of appeals relates to the assessment years 2004-05 till 2009-10. The issues raised in all these appeals are similar if not identical and hence we heard these appeals together. Except in two appeals, the questions raised are all the same. In those two appeals, additional questions of law have been raised. We, therefore, proceed to consider ITA No.185 of 2013 as the first and lead case. The remaining appeals are considered one after the other in this judgment itself. I.T.A. No.185 of 2013 (AY 2004-05) 2. Though this appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ewed yearly. 5. The assessing officer held that for the assessment year 2004-05, the rental income received by the assessee from ATL could not be treated as income from business but is to be assessed as 'income from other sources, as the assessee had not carried out any manufacturing activity. It was also found that the deduction of ₹ 52 lakhs claimed under the head Sales Tax Written Off cannot be treated as an expenditure for the year 2004-05 since the dispute had not attained finality. The assessing officer also disallowed the claim for ₹ 1,25,12,348/- towards quality loss, stating that the assessee had no role in the manufacture of tyres or its sale and that if any quality loss had occurred, the same was the responsibility of ATL and not that of the assessee. 6. On appeal, the First Appellate Authority held that the lease rent received is to be treated as business income as in the preceding year. It also held that the penalty of ₹ 52 lakhs was actually compensatory and hence was liable to be allowed as business expenditure. The claim of quality loss was rejected after finding that the loss was attributable to ATL and not to the assessee. 7. Both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as The Commissioner of Excess Profits Tax, Bombay City v. Shri Lakshmi Silk Mills Ltd . (AIR 1951 SC 454). In the said decision, it was held that each case had to be decided on the circumstances arising in that case and that it was part of the normal activities of an assessee s business to earn money by making use of its machinery either by employing it in its own manufacturing concern or temporarily letting it to others for making a profit for that business, when for the time being it could not run by itself. 12. Much later, in another case, after referring to several decisions on the question, the Supreme Court in Universal Plast Ltd. v. Commissioner of Income Tax, Calcutta [(1999) 5 SCC 189], laid down four propositions to identify whether the rental income received by an assessee could be treated as business income or not. The prepositions are relevant for the present case and are as follows: 1. no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, lease amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head profits and gains of business or profession ; 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are at a loss to gather instances that can reflect an attempt on the part of the assessee to revive the business during the assessment year in question. 14. Further, the claim of the assessee that it was all along a joint participant in the manufacturing activity of ATL is not borne out by any of the factual situations available on hand. The assessee had never taken any element of risk in the alleged business activity except for labour supply. Therefore, the Tribunal s finding that the assessee had no intention to revive its business activity cannot be faulted. We concur with the said findings and affirm that there was no intention for the assessee to carry out any manufacturing activity for the year in question. 15. Yet another material circumstance is that ATL had infused substantial amounts for the plant and machinery to the tune of around ₹ 80 Crores. In spite of infusion of such a large amount by ATL, they continued to pay rental income to the assessee. 16. In the above situation, the intention has to be gathered as to whether the assessee had commercially exploited the asset or whether it was intended to be used by merely letting it out. If the intention was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment of ₹ 52 lakhs cannot be termed as an expenditure and affirmed the order of the assessing officer disallowing the said payment from being deducted as an expenditure. 20. It is not in dispute, as held in the decision in Commissioner of Income Tax v. Chemical Constructions [(2000) 243 ITR 858 (Mad.)] and in Malwa Vanaspati Chemical Co. v. Commissioner of Income Tax [(1997) 225 ITR 383 (SC)] that when penalty is paid, comprising of elements of compensation and penalty, only that part of the penalty which is compensatory, is allowable as an expenditure under section 37(1) of the Act. 21. There is nothing on record to indicate that there is any element of compensation involved. Even after granting opportunities to the assessee to show the existence of any compensatory element in the penalty, the assessee could not show the existence of such an element in the penalty. In fact, the Tribunal had also observed that the working sheets showing payments were not filed before it. In the absence of any material to show that any element of compensation is involved in the penalty imposed under section 45A, we are of the view that the disallowance of the amount of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the instance of the assessee. 25. This appeal was admitted on the following substantial questions of law. (i) Whether on the facts and in the circumstances of the case the Appellate Tribunal was right in law in sustaining the action of the Assessing Officer in making an addition of ₹ 60,07,162/- on account of stores and spares by invoking section 154? (ii) Whether on the facts and in the circumstances of the case the Appellate Tribunal was right in law in sustaining the order of rectification passed by the Assessing Officer on 16.10.2008 when the CIT(A) had already recorded a fining that the appellant had continued its business during the year and no mistake was apparent from record on the date of the rectification order? 26. We have already held in this judgment (in I.T.A. No.185 of 2013) that the assessee had not been carrying on any manufacturing activity for the assessment year 2004-05, and the rental income received by the assessee for the said year cannot be treated as business income. In view of the said finding, the disallowance of the expenditure on stores and spares by the assessing officer was correct. The omission of the assessing officer to make the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal disallowing the quality loss claimed for that year was confirmed by us. 31. For the assessment year 2005-06 also, we had noticed that there was no change of circumstances. The assessee did not carry out any manufacturing activity for the year 2005-06 also. No change of circumstances have been brought to our notice to vary the findings on the manufacturing activity. The rental income received by the assessee for the assessment year 2005-06 was also held to be treated as income from other sources . 32. In the aforesaid circumstances, the finding of the Tribunal regarding the disallowance of the expenditure claimed as quality loss is only to be confirmed. The question of law raised in this appeal is found against the assessee. The appeal is therefore dismissed. ITA 200 of 2013 (AY 2006-07) 33. This appeal arises from the assessment year 2006-07. The questions of law raised in this appeal were similar to those raised in I.T.A. No.185 of 2013. Hence, we reframed the questions into a solitary one as follows: (i) Whether the rent received by the assessee for the year 2006- 07 from Apollo Tyres Ltd is to be treated as business income or as income from other sources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is appeal is answered against the assessee. Accordingly, the order of the Tribunal shall stand confirmed, and this appeal is dismissed. ITA No.93 of 2013 (AY 2009-10) 39. This appeal arises from the assessment year 2009-10. The question of law raised in this appeal is similar to question No.(i) in I.T.A. No.185 of 2013 and is as follows: (i) Whether the rent received by the assessee for the year 2009- 10 from Apollo Tyres Ltd. is to be treated as business income or as income from other sources? 40. For the assessment year 2009-10 also the assessee renewed the lease agreement with ATL for a further period of 12 months. The terms of the lease are almost identical as in the earlier years. No change of circumstances has been brought to our notice to vary the finding on the absence of any manufacturing activity conducted by the assessee. In the above perspective and in view of our conclusions in ITA 185 of 2013, the questions of law raised in this appeal are answered against the assessee. Accordingly, the order of the Tribunal shall stand confirmed and this appeal is dismissed. Conclusion 41. In view of the above discussions, the questions of law raised in thes ..... 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