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

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  • Last Updated on 13 February, 2022

Income-tax Act 1961; Business income; Chargeable as Rental income

Case Details: CIT v. Premier Tyres Ltd. - [2021] 133 432 (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 AzeesV. Abraham MarkosBinu Mathew, Advs., Joseph Markose, Sr. Adv., B.J. John PrakashMathews K. UthuppachanTerry 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

List  of Cases Referred to

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