Business income – Meaning of business – Lease rent whether business income – Tests for determination of question – Assessee-company incurring losses – Scheme sanctioned by BIFR to help assessee – Scheme providing for lease of entire production unit of assessee – Lease rent constituted business income

Business income – Meaning of business – Lease rent whether business income – Tests for determination of question – Assessee-company incurring losses – Scheme sanctioned by BIFR to help assessee – Scheme providing for lease of entire production unit of assessee – Lease rent constituted business income

The assessee was a company engaged in the manufacture and sale of tyres. Since the assessee had a business loss in excess of the paid-up capital, it moved an application u/s 15 of the Sick Industries (Special Provisions) Act, 1985 before the Board for Industrial and Financial Reconstruction (BIFR) for framing a scheme under the 1985 Act. The BIFR, through its order dated 17th April, 1995, approved a scheme for the rehabilitation and revival of the assessee. While sanctioning the rehabilitation scheme for the assessee, the BIFR approved the arrangement between the assessee and ATL, viz., that ATL under an irrevocable lease of eight years would operate the plant and pay a total lease rental of Rs. 45.5 crores over the period of rehabilitation to the sick industrial company, i.e., the assessee, and that ATL would take over the production made at the assessee plant. The assessee made over the plant operation to ATL for manufacturing tyres. Thus, the plant and machinery were given on lease by the assessee to ATL for eight years stipulated in the scheme. For the A.Y. 1996-97, the assessment was completed treating the lease rent received from ATL amounting to Rs. 6,61,75,914 as income from business of the assessee. Thereafter, the A.O. issued notice and reopened the assessment u/s 148 and through the reassessment order treated the receipt from ATL as income from other sources.

The Tribunal held that the lease rental received by the assessee from ATL under the rehabilitation scheme came within the meaning of business income especially in the circumstances of the case.

On appeal by the Revenue, the Kerala High Court upheld the decision of the Tribunal and held as under:

‘i) The word “business” in section 14 is not a word of art but a word of commercial implication. Therefore, in any given year or situation, the activity claimed by the assessee is neither accepted through interpretative nor expressive narrative of the activity claimed by the assessee, nor is the claim for business income refused through the prism of the Revenue. The bottom line is the availability of assets, activities carried out for exploiting the assets, that the assessee is not a mere onlooker at the activities in the company or a passive recipient of rent for utilisation of facilities other than business assets. The net income of business presupposes computation of income after allowing permissible expenses and deductions in accordance with the Act. Therefore, denying eligible deductions or expenses treating business activity as any other activity, and on the other hand allowing deductions or expenses without just eligibility is equally illegal. The circumstances therefore are weighed in an even scale by the authority or court while deciding whether the activity stated by the assessee merits inclusion as income from business or other sources. These controversies are determined not only on case-to-case basis but also on year-to-year basis as well.

ii) The assessee was obligated to work under a statutorily approved scheme; the lease of eight years was to ATL, which was in the same business, and the lease was for utilising the plant, machinery, etc., for manufacturing tyres; the actuals were reimbursed to the assessee by ATL; the work force of the assessee had been deployed for manufacturing tyres; the total production from the assessee unit was taken over by ATL; the overall affairs of the assessee company were made viable by entering into the settlement; coupled with all other primary circumstances, the assessee employed commercial assets to earn income. The scheme was for providing a solution to the business problem of the assessee. The claim of lease rental receipt as income of business was justifiable for the assessment years.’