2014 (6) TMI 501 - AT - Income Tax

ITAT affirms capital receipt treatment, allows claimed loss, classifies lease rental income as business income.

Dy. Commissioner of Income-tax Versus M/s. Leather Industries Development Corporation of AP. Ltd., Hyderabad

The ITAT upheld the CIT(A)'s decisions, ruling that the grant received by the assessee was a capital receipt not subject to tax, the claimed loss was ... Grant from Govt. of AP – Capital receipt or not - Uplifting the poor cobblers to a higher standard of living above the poverty line – Held that:- The character of the subsidy would depend on the purpose for which the same is given - If it is for promoting setting up of new Industries, then it is capital in nature - The method of determining the subsidy and the mode of distribution does not matter - the Government of AP had taken a decision to develop leather industrial parks in the state which will result in huge employment generation potential - the State government declared the Assessee as the Nodal Agency to act as a facilitator and for setting up Leather Industrial parks all over AP - Merely because a portion of the grant is paid to enable the Assessee to meet the expenses, it would not alter the character of the grant - it is the overall purpose of the grant that determines the character of the grant - The method of determination of the quantum of subsidy will not matter, similarly the various heads under which the grants were actually spent is immaterial as such expenses are only part of the overall object and purpose for which grant has been given - even if the amount of Rs. 2.03 given by the State Government is treated as grant/ subsidy, the same is a capital receipt not taxable – thus, the order of the CIT(A) is upheld – Decided against Revenue. Allowability of claim of loss – Held that:- The figures of sale of goods, purchase and figures of opening and closing balances of stocks, the CIT(A) agreed with the plea of the assessee that there was no stoppage of business activity, and the AO mistook the plea of the assessee that the manufacturing activity was stopped as admission of stoppage of business activity - No material to the contrary has been brought on record by the Revenue – thus, there was no infirmity in the conclusion of the CIT(A) – Decided against Revenue. Treatment of lease rental – Business income or property income – Held that:- The assets that yielded the rental income are the business premises, plant and machinery of thee assessee, which were hitherto used by the assessee for its own business activity, and such leasing out was done in view of the stoppage of manufacturing activity by the assessee, just to use the idle assets for income generation purposes - No evidence has been brought on record by the Revenue to contradict these findings – thus, there was no infirmity in the order of the CIT(A) – Decided against Revenue. Issues Involved:1. Taxability of the grant received by the assessee from the Government of Andhra Pradesh.2. Allowability of the loss claimed by the assessee.3. Classification of lease rental income as business income or property income.Issue-wise Detailed Analysis:1. Taxability of the Grant Received by the Assessee:The first issue revolves around whether the grant of Rs. 2,03,00,000 received by the assessee from the Government of Andhra Pradesh is a capital receipt not subject to tax. The assessee, a Public Sector Undertaking, received this subsidy to set up leather industrial parks. The Assessing Officer (AO) treated this subsidy as revenue in nature, arguing it was meant to cover salaries and thus taxable. However, the CIT(A) concluded that the grants were capital receipts, citing the purpose of the subsidy and relying on various case laws and the Comptroller and Auditor General's report. The ITAT upheld the CIT(A)'s decision, emphasizing that the subsidy was for setting up industrial parks, thus making it a capital receipt. The ITAT referenced several Supreme Court and High Court decisions, which established that subsidies for setting up or expanding businesses are capital in nature, regardless of how they are distributed or utilized.2. Allowability of the Loss Claimed by the Assessee:The second issue concerns the disallowance of the business loss claimed by the assessee. The AO disallowed the loss, arguing that the assessee had stopped manufacturing activities and thus had no business activity. The CIT(A) overturned this, noting that while manufacturing had ceased, the assessee continued trading in finished goods, evidenced by sales and purchases during the year. The ITAT agreed with the CIT(A), stating that the continuation of trading activities indicated ongoing business operations, thus allowing the claimed loss.3. Classification of Lease Rental Income:The third issue addresses whether lease rental income should be classified as business income or property income. The AO treated the lease rental income as property income, allowing a 30% deduction under Section 24 and disallowing depreciation on leased assets. The CIT(A) reversed this, classifying the rental income as business income, given that the assets leased were originally used for business purposes. The ITAT upheld the CIT(A)'s decision, noting that leasing out the assets was a business decision to generate income from idle assets, thus justifying the classification as business income.Conclusion:The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all issues. The cross-objection by the assessee, being supportive of the CIT(A)'s order, was deemed redundant and rejected. The judgment reinforced the principle that the purpose of subsidies and the nature of income generation activities are crucial in determining taxability and classification.