Tribunal classifies license fee income as 'business income', allows set-off of unabsorbed depreciation

The Tribunal ruled in favor of the assessee, classifying the license fee income as 'business income' based on the systematic and organized activity of leasing properties. However, the disallowance of staff recruitment/training expenses was upheld against the assessee. The Tribunal allowed the set-off of unabsorbed depreciation from AY 1997-98 against the income of AY 2007-08, dismissing the Revenue's appeal.

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Issues Involved:
1. Classification of license fee income as 'income from other sources' vs. 'business income'.
2. Disallowance of expenses on account of staff recruitment/training.
3. Set off of unabsorbed depreciation.

Issue-wise Detailed Analysis:

1. Classification of License Fee Income:
The primary issue pertains to whether the license fee received by the assessee should be treated as 'income from other sources' or 'business income'. The assessee argued that the issue is covered in its favor based on previous Tribunal orders for AY 2003-04 and 2005-06. The Tribunal had previously held that the leave and license income should be considered as 'income from other sources' because the assessee was merely subletting the property without any systematic business activity. However, the Hon'ble High Court directed the Tribunal to reconsider its decision, noting that similar income had been assessed as 'business income' in earlier years without any distinguishing features justifying a different treatment for the assessment year in question. The Tribunal, upon reconsideration, noted that the assessee's object clause permitted it to lease properties and earn income, which was a systematic and organized activity. Thus, the Tribunal concluded that the rental income should be assessed as 'business income', aligning with the Supreme Court's ruling in the case of Chennai Properties & Investment Ltd. Consequently, the Tribunal decided this issue in favor of the assessee.

2. Disallowance of Staff Recruitment/Training Expenses:
The second issue involves the disallowance of expenses related to staff recruitment and training amounting to Rs. 7,81,609/-. The assessee conceded that this issue had been decided against it in a previous Tribunal order. The Tribunal referenced its earlier decision, which was upheld by the Hon'ble High Court, where it was determined that the assessee failed to substantiate that the training expenses were for the benefit of its business. The Tribunal reiterated that the assessee could not demonstrate the relevance of sending an employee abroad for training to its existing business activities. Therefore, this ground was decided against the assessee, and the disallowance of the expenses was upheld.

3. Set Off of Unabsorbed Depreciation:
The third issue pertains to the set-off of unabsorbed depreciation from AY 1997-98 against the income of AY 2007-08. The Assessing Officer (AO) disallowed the set-off, citing section 32(2) of the Act. However, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed the set-off, referencing Supreme Court decisions which held that debatable issues cannot be rectified under section 154 of the Act. The Tribunal agreed with the CIT(A), noting that the issue was debatable and thus not subject to rectification under section 154. Consequently, the Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s decision allowing the set-off of unabsorbed depreciation.

Conclusion:
- The appeal of the assessee was partly allowed, with the Tribunal ruling in favor of the assessee regarding the classification of license fee income as 'business income'.
- The disallowance of staff recruitment/training expenses was upheld against the assessee.
- The appeal of the Revenue was dismissed, and the set-off of unabsorbed depreciation was allowed in favor of the assessee.

This order was pronounced in the open court on 30/06/2015.

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