Rental earned from P&M given on lease under rehabilitation scheme is taxable as business income: HC

Case Details: CIT v. Premier Tyres Ltd. - [2021] 133 taxmann.com 432 (Kerala)

Judiciary and Counsel Details

• • S.V. Bhatti and Bechu Kurian Thomas, JJ.
  • P.K.R. Menon, Sr. Counsel and Jose Joseph, SC for the Appellant. 
  • K.P. Abdul Azees, V. Abraham Markos, Binu Mathew, Advs., Joseph Markose, Sr. Adv., B.J. John Prakash, Mathews K. Uthuppachan, Terry V. James and Tom Thomas Kakkuzhiyil, Advs. for the Respondent.

Facts of the Case

Assessee was a company engaged in the manufacture and sale of tyres. The assessee had a business loss over the paid-up capital. Thus, it presented a case for the revival and rehabilitation of its business before the Board for Industrial and Financial Reconstruction (BIFR). BIFR approved/sanctioned arrangement between assessee and Apollo Tyres Ltd. (ATL) and plant and machinery (P&M) were given on lease by the assessee to ATL for eight years.

The assessee filed a return of income and treated income received from ATL as income from the business. However, the Assessing Officer (AO) treated said receipt as income from other sources. On appeal, the CIT(A) upheld the order of AO. Later, the Tribunal reversed the order of AO, and revenue filed an instant appeal before the High Court.

High Court Held

The Kerala HC held that the assessee under the approved rehabilitation scheme was obligated to exploit business assets, earn income, adjust/set off accumulated losses/unadjusted depreciation and turn into a positive company.

Under the approved rehabilitation scheme, the assessee was obligated to work and lease out Plant, Machinery etc., to ATL for manufacturing tyres that were in the same business. Further, the workforce of the assessee had been deployed for manufacturing tyres, and ATL took over the total production from the assessee unit. Thus, it can be concluded that the assessee employed commercial assets to earn income.

The rehabilitation scheme is appreciated as one providing a solution to the business problem of the assessee. Thus, unless and until income was treated as business income, the scheme could not result on expected lines as losses, unavailed depreciation, etc., would continue to be present in the assessee’s accounts.
Accordingly, the assessee’s claim of lease rental receipt as income of business was justifiable.

Case Review

• • Premier Tyres Ltd. v. Asstt. CIT [2005] 3 SOT 556 (Cochin.) (para 17) affirmed.

List  of Cases Referred to

• • Universal Plast Ltd. v. CIT [1999] 103 Taxman 493/237 ITR 454 (SC) (para 9)
  • Commissioner of Excess Profits Tax v. Shri Lakshmi Silk Mills Ltd. [1951] 20 ITR 451 (SC) (para 10)
  • CIT v. Vikram Cotton Mills Ltd. [1988] 36 Taxman 1/169 ITR 597 (SC) (para 10)
  • Rayala Corporation (P.) Ltd. v. Asstt. CIT [2016] 72 taxmann.com 149/243 taxman 360/386 ITR 500 (SC) (para 10)
  • Chennai Properties & Investments Ltd. v. CIT [2015] 56 taxmann.com 456/231 taxman 336/373 ITR 673 (SC) (para 10)
  • CIT v. Oberon Edifices & Estates (P.) Ltd. [2019] 103 taxmann.com 413/263 Taxman 377 (Ker.) (para 10)
  • CIT v. Mysore Wine Products Ltd. [2014] 49 taxmann.com 332/226 Taxman 132 (Mag.)/[2015] 370 ITR 102 (Kar.) (para 10).