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Tax Publishers Asstt. CIT v. PTL Enterprises Ltd. [ITA No. 84/Coch/2020, dt. 6-7-2020] : 2020 Taxpub(DT) 2798 (Coch.-Trib.) Income from business or other sources -- Cessation of business as sick company and leasing of assets in joint operation -- Res judicata principles *Facts:* Assessee a sick company arising out of a BIFR revival scheme was to be leased operationally by Apollo Tyres Ltd. (ATL) for 8 years from 1-4-1995 to 31-3-2003. The terms of lease by ATL was that the operations and all licensing, sales tax and operational risk will be all of assessee which will be reimbursed by ATL besides a fixed lease rent. This lease rent was offered as business income citing that there is a possibility of anytime revival of the operations by assessee which was accepted by the ITAT for the said 8 assessment years. Subsequently from 1-4-2003 to 31-3-2014 the operating lease stood renewed with ATL vide various lease agreements with increase in lease rent as well. The said lease rent was held as taxable as income from other sources under section 56(2)(ii) by assessing officer and which was upheld by ITAT from assessment year 2004-05 until assessment year 2009-10. The reasoning of ITAT given in its change of opinion was the test of whether revival of business by assessee was to be done yearly besides since earlier 8 year agreement the assessee has not manifested in actually reviving the business. The lease rent was held as income from business once again by ITAT for assessment year 2011-12 to 2013-14. Thus it was a yo-yo of two divergent stands which ITAT took in the said set of assessment years. In the said assessment year assessment year 2014-15 of appeal again the assessing officer held the lease rent as income from other sources which was reversed by the Commissioner (Appeals). Aggrieved the revenue went in higher appeal to ITAT - Held by the ITAT against the revenue that lease rent receipt from ATL was business income -- 1. The ITAT took cognisance of the operating risk borne by assessee holding it was a joint operation by assessee and ATL. 2. The heads of expenses which were reimbursed by ATL indicated core operations being performed by assessee. 3. The intent to revival need not be only by sole operation even joint operation can bring in a revival. 4. The registration for sales tax and other licences were all in assessee's name with those risks also borne by assessee. 5. Principle of res judicata is not applicable in tax proceedings. Nonetheless law of precedence needs to be considered on merits. The possibility is to seek a higher bench to adjudicate the same in the event of a conflict. This was not warranted considering fresh set of facts which were not thought over or not considered by earlier benches of ITAT which were the above points. *Read into:* Rayala Corporation (P) Ltd. v. ACIT (2016) 386 ITR 500 (SC) : 2016 TaxPub(DT) 3682 (SC) Chennai properties and Investments Ltd. v. CIT (2015) 373 ITR 673 (SC) : 2015 TaxPub(DT) 2180 (SC) *Applied and Upheld :* SG Mercantile Corpn. (P) Ltd. v. CIT (1972) 1 SCC 465 : 1972 TaxPub(DT) 0378 (SC) CEPT v. Shri Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC) : 1951 TaxPub(DT) 0124 (SC) CIT v. Vikram Cotton Mills Ltd. (1988) 169 ITR 597 (SC) : 1988 TaxPub(DT) 0877 (SC) CIT v. Mysore Wine Products Ltd. (2015) 370 ITR 102 (Kar) : 2015 TaxPub(DT) 0247 (Karn-HC) In SG Mercantile case supra it was held residual head under section 56 can be perused only after exhausting the rest of the heads. *Editorial Note:* The shift in ratio decidendi being in different assessment years is noteworthy. Certain paras are under worth noting in this judgment. 8.19 Thus the ratio decidendi of the aforesaid judgment is that rental income is assessable as business income if the only income is from leasing of property even if leasing is not the main business of assessee. 8.21 Moreover it is also seen that the assessing officer has invoked section 56(2)(ii) of the Act and not section 22 of the Act which reads as under :-- "56(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :-- (ii) income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head "Profits and gains of business or profession". " 8.22 Section 56 of the Act being the residuary head of income under the frame work of the Act, can be resorted to only if an income is not chargeable under any other specific head of income. Section 56 of the Act which comes into play only if all other heads of income are excluded specifically. 8.23 The Apex Court has delved upon the issue in series of judgments. In the case of CEPT v. Shri Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC) : 1951 TaxPub(DT) 0124 (SC) the facts were that assessee company was a manufacturer of silk cloth and as a part of its business, it installed a plant for dyeing silk yarn. During the chargeable accounting period, 1-1-1943 to 31-12-1943, owing to difficulty in obtaining silk yarn on account of the war, it could not make use of this plant and it remained idle for some time. In August, 1943, it was let out to "a" person on a monthly rent. The question was whether such sum representing the rent for five months realized by the assessee was chargeable to excess profits tax as profits of business or was income from other sources and was, therefore, not chargeable to excess profits tax. It was held by the Apex Court that it was a part of the normal activities of the assessees business to earn money by making use of its machinery by either employing it in its own manufacturing concern or temporarily letting it to others for making profit for that business when for the time being it could not itself run it and that the dyeing plant had not ceased to be a commercial asset of the business and the sum representing the rent for five months received from the lessee by the assessee was, therefore, income from business and was chargeable to excess profits tax. It was thereafter concluded as under: "If a commercial asset was not capable of being used as such, then its being let out to others did not result in an income which was the income of the business, but it could not be said that an asset which was acquired and used for the purpose of the business ceased to be a commercial asset of that business as soon as it was temporarily put out of use or let out to another person for use in his business or trade. The yield of income by a commercial asset was the profit of the business irrespective of the manner in which that asset was exploited by the owner of the business. He was entitled to exploit it to the best advantage and he might do so either, by using it himself personally or by letting it out to somebody else. The view that in order to constitute business income, the commercial asset must at the time it was let out be in a condition to be used as a commercial asset by the assessee himself was not correct." On res judicata vs. law of precedence the ITAT commented as under especially on the change of views in different assessment years in this case -- 8.27 For the sake of completeness, it is stated that it is well settled law that if there is a new ground or a material change in the factual and legal position precedents do not have binding character. In the case of Bharat Sanchar Nigam Ltd. v. UOI, WP (Civil) 183/2003 (SC), it was noted as under: "Even if the said orders are passed under the same provisions of law, it may theoretically be open to the part to contend that the liability being recurring from year to year, the cause of action is not the same; and so even if a citizens petition challenging the order of assessment passed against him for one year is rejected, it may be open to him to challenge a similar assessment order passed for the next year. In that case, the court may ultimately adopt the same view which had been adopted on the earlier occasion; but if a new ground is urged, the court may have to consider it on merits, because, strictly speaking the principle of res judicata may not apply to such a case. That in fact, is the effect of the decision of this court in the Amalgamated Coalfields Ltd. & Anr. v. The Janapada Sabha, Chhindwara (1963) Supp. 1 SCR 172. In our opinion, the said general observations must be read in the light of the import fact that the order which was challenged in the second writ petition was in relation to a different period and not for the same period as was covered by the earlier petition." But as far as a challenge to the same assessment order is concerned, it was held:- "that if constructive res judicata is not applied to such proceedings a party can file as many writ petitions as he likes and take one or two points every time. That clearly is opposed to considerations of public policy on which res judicata is based and would mean harassment and hardship to the opponent. Besides, if such a course is allowed to be adopted, the doctrine of finality of judgments pronounced by this Court would also be materially effected. We are, therefore, satisfied that the second writ petition filed by the appellant in the present case is barred by constructive res judicata". 8.28 It was finally concluded as under: "15. The decisions cited above have uniformly held that res judicata does not apply in matters pertaining to tax for different assessment years because res judicata applies to debar courts from entertaining issues on the same cause of action whereas the cause of action for each assessment year is distinct. The courts will generally adopt an earlier pronouncement of the law or a conclusion of fact unless there is a new ground urged or a material change in the factual position. The reason why the courts have held parties to the opinion expressed in a decision in one assessment year to the same opinion in a subsequent year is not because of any principle of res judicata but because of the theory of precedent or the precedential value of the earlier pronouncement. Where facts and law in a subsequent assessment year are the same, no authority whether quasi-judicial or judicial can generally be permitted to take a different view. This mandate is subject only to the usual gateways of distinguishing the earlier decision or where the earlier decision is per incuriam. However, these are fetters only on a coordinate Bench which failing the possibility of availing of either of these gateways, may yet differ with the view expressed and refer the matter to a Bench of superior strength or in some cases to a Bench of superior jurisdiction." 8.29 In the instant case we have already highlighted the change in factual position and also the subsequent Apex Court judgments which have persuaded has to make an departure apart from the fact that a legal plea crucially determinative of the claim of the appellant had not been considered in the orders for assessment year 2004-05 and 2007-08.

Tax Publishers

Asstt. CIT v. PTL Enterprises Ltd. [ITA No. 84/Coch/2020, dt. 6-7-2020] : 2020 Taxpub(DT) 2798 (Coch.-Trib.)

Income from business or other sources -- Cessation of business as sick company and leasing of assets in joint operation -- Res judicata principles

Facts:

Assessee a sick company arising out of a BIFR revival scheme was to be leased operationally by Apollo Tyres Ltd. (ATL) for 8 years from 1-4-1995 to 31-3-2003. The terms of lease by ATL was that the operations and all licensing, sales tax and operational risk will be all of assessee which will be reimbursed by ATL besides a fixed lease rent. This lease rent was offered as business income citing that there is a possibility of anytime revival of the operations by assessee which was accepted by the ITAT for the said 8 assessment years. Subsequently from 1-4-2003 to 31-3-2014 the operating lease stood renewed with ATL vide various lease agreements with increase in lease rent as well. The said lease rent was held as taxable as income from other sources under section 56(2)(ii) by assessing officer and which was upheld by ITAT from assessment year 2004-05 until assessment year 2009-10. The reasoning of ITAT given in its change of opinion was the test of whether revival of business by assessee was to be done yearly besides since earlier 8 year agreement the assessee has not manifested in actually reviving the business. The lease rent was held as income from business once again by ITAT for assessment year 2011-12 to 2013-14. Thus it was a yo-yo of two divergent stands which ITAT took in the said set of assessment years. In the said assessment year assessment year 2014-15 of appeal again the assessing officer held the lease rent as income from other sources which was reversed by the Commissioner (Appeals). Aggrieved the revenue went in higher appeal to ITAT -

Held by the ITAT against the revenue that lease rent receipt from ATL was business income --

1. The ITAT took cognisance of the operating risk borne by assessee holding it was a joint operation by assessee and ATL.

2. The heads of expenses which were reimbursed by ATL indicated core operations being performed by assessee.

3. The intent to revival need not be only by sole operation even joint operation can bring in a revival.

4. The registration for sales tax and other licences were all in assessee's name with those risks also borne by assessee.

5. Principle of res judicata is not applicable in tax proceedings. Nonetheless law of precedence needs to be considered on merits. The possibility is to seek a higher bench to adjudicate the same in the event of a conflict. This was not warranted considering fresh set of facts which were not thought over or not considered by earlier benches of ITAT which were the above points.

Read into:

Rayala Corporation (P) Ltd. v. ACIT (2016) 386 ITR 500 (SC) : 2016 TaxPub(DT) 3682 (SC)

Chennai properties and Investments Ltd. v. CIT (2015) 373 ITR 673 (SC) : 2015 TaxPub(DT) 2180 (SC)

Applied and Upheld :

SG Mercantile Corpn. (P) Ltd. v. CIT (1972) 1 SCC 465 : 1972 TaxPub(DT) 0378 (SC)

CEPT v. Shri Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC) : 1951 TaxPub(DT) 0124 (SC)

CIT v. Vikram Cotton Mills Ltd. (1988) 169 ITR 597 (SC) : 1988 TaxPub(DT) 0877 (SC)

CIT v. Mysore Wine Products Ltd. (2015) 370 ITR 102 (Kar) : 2015 TaxPub(DT) 0247 (Karn-HC)

In SG Mercantile case supra it was held residual head under section 56 can be perused only after exhausting the rest of the heads.

Editorial Note: The shift in ratio decidendi being in different assessment years is noteworthy. Certain paras are under worth noting in this judgment.

8.19 Thus the ratio decidendi of the aforesaid judgment is that rental income is assessable as business income if the only income is from leasing of property even if leasing is not the main business of assessee.

8.21 Moreover it is also seen that the assessing officer has invoked section 56(2)(ii) of the Act and not section 22 of the Act which reads as under :--

"56(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :--

(ii) income from machinery, plant or furniture belonging to the assessee and let on hire, if the income is not chargeable to income-tax under the head "Profits and gains of business or profession". "

8.22 Section 56 of the Act being the residuary head of income under the frame work of the Act, can be resorted to only if an income is not chargeable under any other specific head of income. Section 56 of the Act which comes into play only if all other heads of income are excluded specifically.

8.23 The Apex Court has delved upon the issue in series of judgments. In the case of CEPT v. Shri Lakshmi Silk Mills Ltd. (1951) 20 ITR 451 (SC) : 1951 TaxPub(DT) 0124 (SC) the facts were that assessee company was a manufacturer of silk cloth and as a part of its business, it installed a plant for dyeing silk yarn. During the chargeable accounting period, 1-1-1943 to 31-12-1943, owing to difficulty in obtaining silk yarn on account of the war, it could not make use of this plant and it remained idle for some time. In August, 1943, it was let out to "a" person on a monthly rent. The question was whether such sum representing the rent for five months realized by the assessee was chargeable to excess profits tax as profits of business or was income from other sources and was, therefore, not chargeable to excess profits tax. It was held by the Apex Court that it was a part of the normal activities of the assessees business to earn money by making use of its machinery by either employing it in its own manufacturing concern or temporarily letting it to others for making profit for that business when for the time being it could not itself run it and that the dyeing plant had not ceased to be a commercial asset of the business and the sum representing the rent for five months received from the lessee by the assessee was, therefore, income from business and was chargeable to excess profits tax. It was thereafter concluded as under: "If a commercial asset was not capable of being used as such, then its being let out to others did not result in an income which was the income of the business, but it could not be said that an asset which was acquired and used for the purpose of the business ceased to be a commercial asset of that business as soon as it was temporarily put out of use or let out to another person for use in his business or trade. The yield of income by a commercial asset was the profit of the business irrespective of the manner in which that asset was exploited by the owner of the business. He was entitled to exploit it to the best advantage and he might do so either, by using it himself personally or by letting it out to somebody else. The view that in order to constitute business income, the commercial asset must at the time it was let out be in a condition to be used as a commercial asset by the assessee himself was not correct."

On res judicata vs. law of precedence the ITAT commented as under especially on the change of views in different assessment years in this case --

8.27 For the sake of completeness, it is stated that it is well settled law that if there is a new ground or a material change in the factual and legal position precedents do not have binding character. In the case of Bharat Sanchar Nigam Ltd. v. UOI, WP (Civil) 183/2003 (SC), it was noted as under: "Even if the said orders are passed under the same provisions of law, it may theoretically be open to the part to contend that the liability being recurring from year to year, the cause of action is not the same; and so even if a citizens petition challenging the order of assessment passed against him for one year is rejected, it may be open to him to challenge a similar assessment order passed for the next year. In that case, the court may ultimately adopt the same view which had been adopted on the earlier occasion; but if a new ground is urged, the court may have to consider it on merits, because, strictly speaking the principle of res judicata may not apply to such a case. That in fact, is the effect of the decision of this court in the Amalgamated Coalfields Ltd. & Anr. v. The Janapada Sabha, Chhindwara (1963) Supp. 1 SCR 172. In our opinion, the said general observations must be read in the light of the import fact that the order which was challenged in the second writ petition was in relation to a different period and not for the same period as was covered by the earlier petition." But as far as a challenge to the same assessment order is concerned, it was held:- "that if constructive res judicata is not applied to such proceedings a party can file as many writ petitions as he likes and take one or two points every time. That clearly is opposed to considerations of public policy on which res judicata is based and would mean harassment and hardship to the opponent. Besides, if such a course is allowed to be adopted, the doctrine of finality of judgments pronounced by this Court would also be materially effected. We are, therefore, satisfied that the second writ petition filed by the appellant in the present case is barred by constructive res judicata".

8.28 It was finally concluded as under:

"15. The decisions cited above have uniformly held that res judicata does not apply in matters pertaining to tax for different assessment years because res judicata applies to debar courts from entertaining issues on the same cause of action whereas the cause of action for each assessment year is distinct. The courts will generally adopt an earlier pronouncement of the law or a conclusion of fact unless there is a new ground urged or a material change in the factual position. The reason why the courts have held parties to the opinion expressed in a decision in one assessment year to the same opinion in a subsequent year is not because of any principle of res judicata but because of the theory of precedent or the precedential value of the earlier pronouncement. Where facts and law in a subsequent assessment year are the same, no authority whether quasi-judicial or judicial can generally be permitted to take a different view. This mandate is subject only to the usual gateways of distinguishing the earlier decision or where the earlier decision is per incuriam. However, these are fetters only on a coordinate Bench which failing the possibility of availing of either of these gateways, may yet differ with the view expressed and refer the matter to a Bench of superior strength or in some cases to a Bench of superior jurisdiction."

8.29 In the instant case we have already highlighted the change in factual position and also the subsequent Apex Court judgments which have persuaded has to make an departure apart from the fact that a legal plea crucially determinative of the claim of the appellant had not been considered in the orders for assessment year 2004-05 and 2007-08.