M/S.PTL ENTERPRISES LTD. V. THE DEPUTY COMMISSIONER OF INCOME-TAX

ITA/185/2013

AI Insights

The case involves a series of appeals by M/s. PTL Enterprises Ltd. against the orders of the Income Tax Appellate Tribunal concerning the assessment years 2004-05 to 2009-10. The primary issues were the classification of rental income from Apollo Tyres Ltd. as business income or income from other sources, the deductibility of a penalty under the Kerala General Sales Tax Act, and the claim for quality loss. The Tribunal and the High Court found that the assessee's passive receipt of rent and lack of active manufacturing engagement did not qualify the rental income as business income. The penalty and quality loss claims were also disallowed based on the absence of compensatory elements and the lack of manufacturing activity, respectively.

• Counselvise Citation: [2021] 140 COUNSELVISE.COM (IT) 726503 (HC-KERALA)
• Appeal Type: Others
• Pronouncement Date: 22-07-2021
• Assessment Year: misc
• Other Referred Cases: The Commissioner of Excess Profits Tax, Bombay City v. Shri Lakshmi Silk Mills Ltd., Universal Plast Ltd. v. Commissioner of Income Tax, Calcutta, Commissioner of Income Tax v. Chemical Constructions, Malwa Vanaspati & Chemical Co. v. Commissioner of Income Tax, Commissioner of Income Tax, Lucknow v. Vikram Cotton Mills Limited
• Laws Referred To: Income Tax Act, 1961, Kerala General Sales Tax Act, 1963, Sick Industrial Companies (Special Provisions) Act, 1985
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: JOSE JOSEPH
• Assessee Lawyers: JOSEPH MARKOSE; V ABRAHAM MARKOS
• Keywords: Business income; Income from other sources; Lease Rent; Quality loss; Sales tax written off
• Section: 37(1); 260A; 45A

Judgement Text

"IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS THURSDAY, THE 22ND DAY OF JULY 2021 / 31ST ASHADHA, 1943 ITA NO. 193 OF 2012 AGAINST THE ORDER IN ITA 659/Coch/2010 OF I.T.A.TRIBUNAL,COCHIN BENCH, ERNAKULAM APPELLANT/RESPONDENT: M/S.PTL ENTERPRISES LTD 6TH FLOOR, CHERUPUZHPAM BUILDING, SHANMUGHAM ROAD, KOCHI-31,(PAN-AABCP 3839N) BY ADVS. SRI.JOSEPH MARKOS (SR.) SRI.V.ABRAHAM MARKOS SRI.BINU MATHEW SRI.B.J.JOHN PRAKASH SRI.MATHEWS K.UTHUPPACHAN SRI.TERRY V.JAMES SRI.TOM THOMAS KAKKUZHIYIL RESPONDENT/APPELLANT: THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4(1), ERNAKULAM 682 018. SRI.JOSE JOSEPH, SC FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 22.07.2021, ALONG WITH ITA Nos.185/2013, 200/2013, 206/2013, 207/2013, 227/2013, 92/2014 & 93/2014, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: I.T.A. No.193/12 & Conn. Cases -:2:- IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS THURSDAY, THE 22ND DAY OF JULY 2021 / 31ST ASHADHA, 1943 ITA NO. 185 OF 2013 AGAINST THE ORDER IN ITA 520/Coch/2007 & C.O. NO.36/Coch/2007 OF I.T.A.TRIBUNAL, COCHIN BENCH, ERNAKULAM APPELLANT/RESPONDENT: M/S.PTL ENTERPRISES LTD. (FORMERLY PREMIER TYRES LTD), 6TH FLOOR, CHERUPUSHPAM BUILDINGS, KOCHI-31 (PAN:AABCP 3839N) BY ADVS. SRI.JOSEPH MARKOSE (SR.) SRI.ABRAHAM JOSEPH MARKOS SRI.BINU MATHEW SRI.TOM THOMAS KAKKUZHIYIL RESPONDENT/APPELLANT: THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-2(1), RANGE-2, ERNAKULAM, PIN-682 018. BY ADV SRI.JOSE JOSEPH, SC FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 22.07.2021, ALONG WITH ITA.193/2012 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: I.T.A. No.193/12 & Conn. Cases -:3:- IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS THURSDAY, THE 22ND DAY OF JULY 2021 / 31ST ASHADHA, 1943 ITA NO. 200 OF 2013 AGAINST THE ORDER IN ITA 410/Coch/2009 OF I.T.A.TRIBUNAL, COCHIN BENCH, ERNAKULAM APPELLANT/RESPONDENT: M/S.PTL ENTERPRISES LTD. (FORMERLY PREMIER TYRES LTD), 6TH FLOOR, CHERUPUSHPAM BUILDINGS, SHANMUGHAM ROAD, KOCHI-31 (PAN:AABCP 3839N) BY ADVS. SRI.JOSEPH MARKOSE (SR.) SRI.V.ABRAHAM MARKOS SRI.ABRAHAM JOSEPH MARKOS SRI.BINU MATHEW SRI.TOM THOMAS KAKKUZHIYIL RESPONDENT/APPELLANT: THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-2(1)RANGE-2, ERNAKULAM, KOCHI-682018. BY ADV SRI.JOSE JOSEPH, SC FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 22.07.2021, ALONG WITH ITA.193/2012 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: I.T.A. No.193/12 & Conn. Cases -:4:- IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS THURSDAY, THE 22ND DAY OF JULY 2021 / 31ST ASHADHA, 1943 ITA NO. 206 OF 2013 AGAINST THE ORDER IN ITA 893/Coch/2008 OF I.T.A.TRIBUNAL, COCHIN BENCH, ERNAKULAM APPELLANT/RESPONDENT: M/S.PTL ENTERPRISES LTD. (FORMERLY PREMIER TYRES LTD), 6TH FLOOR, CHERUPUSHPAM BUILDINGS, SHANMUGHAM ROAD KOCHI-31 (PAN:AABCP 3839N) BY ADVS. SRI.JOSEPH MARKOSE (SR.) SRI.V.ABRAHAM MARKOS SRI.ABRAHAM JOSEPH MARKOS SRI.BINU MATHEW SRI.TOM THOMAS KAKKUZHIYIL RESPONDENT/APPELLANT: THE DEPUTY COMMISSONER OF INCOME TX CIRCLE-2(1), RANGE -2, ERNAKULAM, KOCHI-682018. BY ADV SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 22.07.2021, ALONG WITH ITA.193/2012 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: I.T.A. No.193/12 & Conn. Cases -:5:- IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS THURSDAY, THE 22ND DAY OF JULY 2021 / 31ST ASHADHA, 1943 ITA NO. 207 OF 2013 AGAINST THE ORDER IN ITA 899/Coch/2008 OF I.T.A.TRIBUNAL, COCHIN BENCH, ERNAKULAM APPELLANT/APPELLANT: M/S.PTL ENTERPRISES LTD. (FORMERLY PREMIER TYRES LTD), 6TH FLOOR, CHERUPUSHPAM BUILDINGS, SHANMUGHAM ROAD KOCHI-31 (PAN:AABCP 3839N) BY ADVS. SRI.JOSEPH MARKOSE (SR.) SRI.V.ABRAHAM MARKOS SRI.ABRAHAM JOSEPH MARKOS SRI.BINU MATHEW SRI.TOM THOMAS KAKKUZHIYIL RESPONDENT/RESPONDENT: THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2(1), RANGE-2, ERNAKULAM, KOCHI 682018 SRI.JOSE JOSEPH, SC FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 22.07.2021, ALONG WITH ITA.193/2012 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: I.T.A. No.193/12 & Conn. Cases -:6:- IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS THURSDAY, THE 22ND DAY OF JULY 2021 / 31ST ASHADHA, 1943 ITA NO. 227 OF 2013 AGAINST THE ORDER IN ITA 189/Coch/2009 OF I.T.A.TRIBUNAL, COCHIN BENCH, ERNAKULAM APPELLANT/RESPONDENT: M/S.PTL ENTERPRISES LTD. (FORMERLY PREMIER TYRES LTD), 6TH FLOOR, CHERUPUSHPAM BUILDINGS, KOCHI-31 (PAN:AABCP 3839N) BY ADVS. SRI.JOSEPH MARKOSE (SR.) SRI.V.ABRAHAM MARKOS SRI.ABRAHAM JOSEPH MARKOS SRI.BINU MATHEW SRI.TOM THOMAS KAKKUZHIYIL RESPONDENT/APPELLANT: THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE -2(1), RANGE -2, ERNAKULAM, PIN 682 018. SRI.JOSE JOSEPH, SC FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 22.07.2021, ALONG WITH ITA.193/2012 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: I.T.A. No.193/12 & Conn. Cases -:7:- IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS THURSDAY, THE 22ND DAY OF JULY 2021 / 31ST ASHADHA, 1943 ITA NO. 92 OF 2014 AGAINST THE ORDER IN ITA 650/Coch/2013 OF I.T.A.TRIBUNAL, COCHIN BENCH, ERNAKULAM APPELLANT/APPELLANT: M/S PTL ENTERPRISES LTD., 6TH FLOOR,CHERUPUSHPAM BUILDINGS, KOCHI 682 031 REP.BY ITS DIRECTOR MR.V.S OBEROI (PAN AABCP 3839N) BY ADVS. SRI.JOSEPH MARKOSE (SR.) SRI.V.ABRAHAM MARKOS SRI.ABRAHAM JOSEPH MARKOS SRI.ABRAHAM VARGHESE THARAKAN SRI.BINU MATHEW SRI.TOM THOMAS KAKKUZHIYIL RESPONDENT/RESPONDENT: THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-4(1), ERNAKULAM, KOCHI 682 018 SRI.JOSE JOSEPH, SC FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 22.07.2021, ALONG WITH ITA.193/2012 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: I.T.A. No.193/12 & Conn. Cases -:8:- IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR. JUSTICE BECHU KURIAN THOMAS THURSDAY, THE 22ND DAY OF JULY 2021 / 31ST ASHADHA, 1943 ITA NO. 93 OF 2014 AGAINST THE ORDER IN ITA 651/Coch/2013 OF I.T.A.TRIBUNAL, COCHIN BENCH, ERNAKULAM APPELLANT/APPELLANT: M/S. PTL ENTERPRISES LTD. 6TH FLOOR,CHERUPUSHPAM BUILDINGS, KOCHI 682 031 (PAN AABCP 3839N) BY ADVS. SRI.JOSEPH MARKOSE (SR.) SRI.V.ABRAHAM MARKOS SRI.ABRAHAM JOSEPH MARKOS SRI.ABRAHAM VARGHESE THARAKAN SRI.BINU MATHEW SRI.TOM THOMAS KAKKUZHIYIL RESPONDENT/RESPONDENT: THE JOINT COMMISSIONER OF INCOME-TAX RANGE 4, KOCHI 682 018 SRI.JOSE JOSEPH, SC FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 22.07.2021, ALONG WITH ITA.193/2012 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: I.T.A. No.193/12 & Conn. Cases -:9:- “C.R.” JUDGMENT I.T.A. Nos.193 of 2012, 185, 200, 206, 207, 227 of 2013, 92 & 93 of 2014 Dated this the 22nd day of July, 2021 Bechu Kurian Thomas, J. This batch of appeals relates to the assessment years 2004-05 till 2009-10. The issues raised in all these appeals are similar if not identical and hence we heard these appeals together. Except in two appeals, the questions raised are all the same. In those two appeals, additional questions of law have been raised. We, therefore, proceed to consider ITA No.185 of 2013 as the first and lead case. The remaining appeals are considered one after the other in this judgment itself. I.T.A. No.185 of 2013 (AY 2004-05) 2. Though this appeal was admitted on six questions of law, three main issues arise for consideration, and hence we re-framed the questions of law into three, and they are as follows: (i) Whether the lease rent received by the assessee for the year 2004-05 from M/s. Apollo Tyres Limited is to be treated as business income or as income from other sources? I.T.A. No.193/12 & Conn. Cases -:10:- (ii) Whether the penalty of Rs.52 lakhs imposed under section 45A of the Kerala General Sales Tax Act, and paid under orders of the High Court, ought to be treated as an expenditure for the assessment year, even though the dispute had not attained finality? (iii) Whether the amount of Rs.1,25,12,348/- claimed as quality loss paid by the assessee to M/s. Apollo Tyres Limited is liable to be deducted? 3. The assessee is a tyre manufacturing company, earlier known as Premier Tyres Ltd. and later renamed as M/s.PTL. It was incorporated on 29.10.1959 with the object of carrying on the business of manufacture of tyres. Over the years, the company incurred business losses, and the company’s entire net worth eroded. Assessee was declared as a sick company under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). Thereafter, a scheme for rehabilitation and revival was prepared, which obtained the approval of the Board for Industrial and Financial Reconstruction (BIFR) on 17.04.1995. The scheme provided for an arrangement between M/s.Apollo Tyres Ltd. and the assessee. The approved scheme contemplated M/s.Apollo Tyres Ltd. (for short ‘ATL’) to operate the plant and machinery of the assessee under a lease deed for eight years, i.e. 01.04.1995 till 31.03.2003, on a total rent of Rs.45.5 crores for the entire period. As per the scheme, the entire production was taken over by ATL and the expenses incurred I.T.A. No.193/12 & Conn. Cases -:11:- by the assessee, including the labour charges for operating the plant were reimbursed by ATL. 4. By the assessment year 2001-02, the assessee's net worth had turned positive. Thus, at the end of the eight years sanctioned by BIFR, the assessee could have revived and resumed its operations by itself. Instead, assessee chose to continue the lease arrangement by renewing the lease with ATL for one more year from 01.04.2003 to 31.03.2004. This arrangement was continued in the coming years too. It was submitted across the Bar that the arrangement is continuing even now, on terms that are renewed yearly. 5. The assessing officer held that for the assessment year 2004-05, the rental income received by the assessee from ATL could not be treated as income from business but is to be assessed as 'income from other sources, as the assessee had not carried out any manufacturing activity. It was also found that the deduction of Rs.52 lakhs claimed under the head “Sales Tax Written Off” cannot be treated as an expenditure for the year 2004-05 since the dispute had not attained finality. The assessing officer also disallowed the claim for Rs.1,25,12,348/- towards quality loss, stating that the assessee had no role in the manufacture of tyres or its sale and that if any I.T.A. No.193/12 & Conn. Cases -:12:- quality loss had occurred, the same was the responsibility of ATL and not that of the assessee. 6. On appeal, the First Appellate Authority held that the lease rent received is to be treated as business income as in the preceding year. It also held that the penalty of Rs.52 lakhs was actually compensatory and hence was liable to be allowed as business expenditure. The claim of quality loss was rejected after finding that the loss was attributable to ATL and not to the assessee. 7. Both assessee, as well as the department, appealed to the Tribunal. By the order impugned, the Tribunal allowed the appeals of the revenue and dismissed the cross-appeal filed by the assessee. The Tribunal held that the rental income has to be assessed under the head “income from other sources” since the assessee had no intention to revive its business activity. The Tribunal also found that the disallowance of Rs.52 lakhs was justified as the expenditure did not pertain to the year under consideration. Regarding the quality loss, it was held that assessee could not claim deduction as an expenditure since it did not carry on any manufacturing activity. In the above background, the assessee preferred this appeal under section 260A of the Income Tax Act, 1961 ('the Act' for brevity). I.T.A. No.193/12 & Conn. Cases -:13:- 8. We heard Senior Advocate Joseph Markose instructed by Adv. Abraham Markos for the assessee and Adv.Jose Joseph, the learned Senior Standing Counsel for the Income Tax Department. 9. It is relevant to mention that for the assessment years 1995- 96 till 2003-04, we had by a separate judgment in ITA.No.757 of 2009 and connected cases, allowed the assessee’s claim that the rental income received by it from ATL was liable to be treated as income from business. In those 8 years, i.e., from 1995-96 till 2003- 04, one of the salient features was the scheme approved by the BIFR to revive the assessee. 10. However, it is seen from the records produced for our consideration that, instead of reviving the business, assessee continued the rental arrangement with ATL. Fresh lease deeds were executed for different periods of one year each, for all the assessment years involved in these appeals. The assessee never approached the BIFR to continue the arrangement nor sought sanction/approval for the new arrangement it had entered into. In the absence of approval from BIFR for the fresh arrangement, the continuance of the lease for the assessment year 2004-05 was a purely private arrangement. We thus distinguish the assessment I.T.A. No.193/12 & Conn. Cases -:14:- years from 1995-96 till 2003-04 with the current assessment year 2004-05. 11. Time and again, courts have been confronted with whether the lease of plant and machinery of a business would amount to ‘business income’ or whether it would fall under the head ‘income from other sources’. One of the earliest cases that dealt with the issue under consideration was The Commissioner of Excess Profits Tax, Bombay City v. Shri Lakshmi Silk Mills Ltd. (AIR 1951 SC 454). In the said decision, it was held that each case had to be decided on the circumstances arising in that case and that it was part of the normal activities of an assessee’s business to earn money by making use of its machinery either by employing it in its own manufacturing concern or temporarily letting it to others for making a profit for that business, when for the time being it could not run by itself. 12. Much later, in another case, after referring to several decisions on the question, the Supreme Court in Universal Plast Ltd. v. Commissioner of Income Tax, Calcutta [(1999) 5 SCC 189], laid down four propositions to identify whether the rental income received by an assessee could be treated as business I.T.A. No.193/12 & Conn. Cases -:15:- income or not. The prepositions are relevant for the present case and are as follows: “1. no precise test can be laid down to ascertain whether income (referred to by whatever nomenclature, lease amount, rents, licence fee) received by an assessee from leasing or letting out of assets would fall under the head “profits and gains of business or profession”; 2. it is a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and circumstances of each case including true interpretation of the agreement under which the assets are let out; 3. where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back and restart the same. 4. if only a few of the business assets are let out temporarily while the assessee is carrying out his other business activities then it is a case of exploiting the business assets otherwise than employing them for his own use for making profit for that business; but if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets.” 13. We have to appreciate this case with the above propositions in mind. It is admitted that the net worth position of the assessee had become positive by 31-03-2000. The assessee had a further period of three financial years for stabilising its activities until the period sanctioned by BIFR came to an end. Despite the net worth turning positive, the assessee preferred to continue the lease arrangement with ATL on a year-to-year basis. Other than being a I.T.A. No.193/12 & Conn. Cases -:16:- passive observer, no active business of any nature which involved time and energy was conducted by the assessee during the year in question. ATL reimbursed to the assessee the entire expenses it incurred towards labour. Though the period of lease in this assessment year was only for 12 months, the said period cannot be viewed in isolation or be treated as a temporary one. From 1995 onwards, the lease was continuing, and throughout the period of all these appeals, the lease agreement continued based on annual renewals. Further, the assessee had retrenched its entire office staff and its machinery were wholly leased to ATL. Thus the assessee had not exhibited any intention to revive its business even though it had the opportunity to do so. A prudent business person placed in similar circumstances would have attempted to revive own business rather than continuing the lease. In these circumstances, we are at a loss to gather instances that can reflect an attempt on the part of the assessee to revive the business during the assessment year in question. 14. Further, the claim of the assessee that it was all along a joint participant in the manufacturing activity of ATL is not borne out by any of the factual situations available on hand. The assessee had I.T.A. No.193/12 & Conn. Cases -:17:- never taken any element of risk in the alleged business activity except for labour supply. Therefore, the Tribunal’s finding that the assessee had no intention to revive its business activity cannot be faulted. We concur with the said findings and affirm that there was no intention for the assessee to carry out any manufacturing activity for the year in question. 15. Yet another material circumstance is that ATL had infused substantial amounts for the plant and machinery to the tune of around Rs.80 Crores. In spite of infusion of such a large amount by ATL, they continued to pay rental income to the assessee. 16. In the above situation, the intention has to be gathered as to whether the assessee had commercially exploited the asset or whether it was intended to be used by merely letting it out. If the intention was only to merely let out the property or any part of it, the resultant income could be assessed only as an income from other sources. On the other hand, if the intention was to exploit the property by a commercial activity, then the rental income could be treated as a business income. The intention could be manifested by the assessee initiating or undertaking an element of risk in the activity of manufacture. The decision in Commissioner of Income I.T.A. No.193/12 & Conn. Cases -:18:- Tax, Lucknow v. Vikram Cotton Mills Limited [(1988) 169 ITR 597 (SC)] is also apposite in this context. 17. We had observed in I.T.A. No.757 of 2009 and connected cases that the word Business in section 2(14) is not a word of art but a word of commercial implication. The bottom line is the availability of assets, activities carried out for exploiting the assets and that the assessee is not a mere onlooker in the activities of the company or a passive recipient of rent for utilization of facilities. 18. Applying the above ratio to the facts of the present case, we find that the assessee had never been an active participant of ATL. Though the revival was contemplated within a limited span of time, that did not happen, even though the net worth turned positive. There was no attempt to exploit the commercial assets of the company and instead the assessee merely renewed rental arrangement and received rent as a passive receipt. Therefore, we answer the first question in favour of the revenue and hold that for the assessment year 2004-05, the rental income received by the assessee from ATL ought to be treated as income under the head “income from other sources”. 19. The next issue that arises is regarding the disallowance of I.T.A. No.193/12 & Conn. Cases -:19:- Rs.52 lakhs claimed under the head “sales tax written off”. A penalty of Rs.75,80,772/- for the years 1987-88 to 1993-94 was imposed in the year 1996-97 section 45A of the KGST Act, 1963. This Court, by an order on a stay petition filed by the assessee, directed payment of Rs.52 lakhs towards the penalty so imposed. The assessing officer disallowed the claim for deduction of the amount paid towards penalty, while the first appellate authority deleted the addition on the ground that the said payment pertained to the actual rate of sales tax and concessional rate of sales tax, though it was termed as a penalty. The Tribunal, on an appreciation of the facts arising, observed that the payment of Rs.52 lakhs cannot be termed as an expenditure and affirmed the order of the assessing officer disallowing the said payment from being deducted as an expenditure. 20. It is not in dispute, as held in the decision in Commissioner of Income Tax v. Chemical Constructions [(2000) 243 ITR 858 (Mad.)] and in Malwa Vanaspati & Chemical Co. v. Commissioner of Income Tax [(1997) 225 ITR 383 (SC)] that when penalty is paid, comprising of elements of compensation and penalty, only that part of the penalty which is compensatory, is allowable as an expenditure under section 37(1) of the Act. I.T.A. No.193/12 & Conn. Cases -:20:- 21. There is nothing on record to indicate that there is any element of compensation involved. Even after granting opportunities to the assessee to show the existence of any compensatory element in the penalty, the assessee could not show the existence of such an element in the penalty. In fact, the Tribunal had also observed that the working sheets showing payments were not filed before it. In the absence of any material to show that any element of compensation is involved in the penalty imposed under section 45A, we are of the view that the disallowance of the amount of Rs.52 lakhs cannot be termed as an expenditure for the year 2004-05. The second question is answered in favour of the revenue. 22. The third question raised for consideration in these appeals relates to the claim of Rs.1.25 Crores under the head ‘quality loss’. The assessing officer, First Appellate Authority as well as the Tribunal, rejected the claim. It is the admitted case of the assessee that the plant and machineries have been leased out to ATL. Dehors the finding on the absence of any business carried out by the assessee for the year 2004-05; we are of the view that in the very nature of relationship put forth between ATL and assessee, the claim for quality loss cannot be entertained. The quality loss can only arise I.T.A. No.193/12 & Conn. Cases -:21:- during the manufacturing activity carried out by ATL. Therefore the quality loss, if any, can be attributable only to ATL and not to the assessee. In the above circumstances, we answer the third question framed by us in favour of the assessee. 23. In the above circumstances, the questions of law raised in this appeal are answered in favour of the revenue. The appeal is hence dismissed. I.T.A. No.227 of 2013 (AY 2004-05) 24. This appeal arises from an order of rectification under S.154 of the Act issued for the assessment year 2004-05. The assessment order was subjected to consideration by this Court as per the judgment in I.T.A. No.185 of 2013. After the assessment order, proceedings under section 154 of the Act were initiated since the assessing officer noticed an omission to add back the disallowance of Rs.60,07,162/- while computing the total income. The aforestated amount was claimed as expenditure for stores and spares, terming it as part of the manufacturing activity of the assessee. After the assessing officer found that the assessee was not carrying out any manufacturing activity, the claim of expenditure for stores and spares was disallowed. However, in the computation, I.T.A. No.193/12 & Conn. Cases -:22:- the same was omitted to be added back. It was in such circumstances that the order of rectification was issued. On appeal by the assessee, the First Appellate Authority reversed the decision and directed deletion of the addition made by the assessing officer. However, the department’s appeal to the Tribunal was allowed after finding that the assessing authority was correct in issuing the rectification order. It is thus, this appeal, at the instance of the assessee. 25. This appeal was admitted on the following substantial questions of law. (i) Whether on the facts and in the circumstances of the case the Appellate Tribunal was right in law in sustaining the action of the Assessing Officer in making an addition of Rs.60,07,162/- on account of stores and spares by invoking section 154? (ii) Whether on the facts and in the circumstances of the case the Appellate Tribunal was right in law in sustaining the order of rectification passed by the Assessing Officer on 16.10.2008 when the CIT(A) had already recorded a fining that the appellant had continued its business during the year and no mistake was apparent from record on the date of the rectification order? 26. We have already held in this judgment (in I.T.A. No.185 of 2013) that the assessee had not been carrying on any manufacturing activity for the assessment year 2004-05, and the rental income received by the assessee for the said year cannot be treated as I.T.A. No.193/12 & Conn. Cases -:23:- business income. In view of the said finding, the disallowance of the expenditure on stores and spares by the assessing officer was correct. The omission of the assessing officer to make the said addition while computing the total income was liable to be rectified. We find no reason to interfere with the order of the Tribunal. The questions of law are found against the assessee and in the circumstances of the case, this appeal is dismissed. ITA No.206 of 2013 (AY 2005-06) 27. The four questions of law raised in the memorandum of appeal were reframed into a single one as follows: (i) Whether the lease rent received by the assessee for the year 2005-06 from Apollo Tyres Ltd. is liable to be treated as business income or income from other sources? 28. For the assessment year 2005-06 also, the assessee continued the rental arrangement with ATL on the basis of a fresh agreement entered into from 1.4.2005 to 31.3.2006. The terms of the agreement are substantially the same as that in the year 2004-05. We have already found in I.T.A. No.185 of 2013 that the rental income received by the assessee from ATL for the year 2004-05 is to be treated as income from other sources since the assessee had not carried out any manufacturing activity. No change of circumstances I.T.A. No.193/12 & Conn. Cases -:24:- have been pointed out for the assessment year 2005-06 and hence the rent received by the assessee for the year 2005-06 from ATL is to be treated as income from other sources and not as business income. Therefore, we answer the question against the assessee and dismiss this appeal. ITA No.207 of 2013 (AY 2005-06) 29. This appeal relates to the assessment year 2005-06. This appeal was admitted on the following substantial questions of law. (i) Whether the impugned order of the Tribunal is vitiated on facts and law and hence liable to be set aside? (ii) Whether on the facts and circumstances of the case the Income Tax Appellate Tribunal was right in law in sustaining the disallowance of Rs.49,00,000/- being quality loss incurred by the appellant in respect of products manufactured at appellant's plant for Apollo Tyres Ltd. which were exported by Apollo Tyres Ltd. to Apollo International Ltd. and on which Apollo Tyres Ltd. incurred a loss of Rs.49,00,000/-? 30. The quality loss disallowed by the assessing officer and confirmed by the Tribunal amounted to Rs.49 lakhs. Since we have already found in ITA 185 of 2013 that the assessee had not carried out any manufacturing activity in respect of the assessment year 2004-05, the finding of the Tribunal disallowing the quality loss claimed for that year was confirmed by us. 31. For the assessment year 2005-06 also, we had noticed I.T.A. No.193/12 & Conn. Cases -:25:- that there was no change of circumstances. The assessee did not carry out any manufacturing activity for the year 2005-06 also. No change of circumstances have been brought to our notice to vary the findings on the manufacturing activity. The rental income received by the assessee for the assessment year 2005-06 was also held to be treated as income from other sources . 32. In the aforesaid circumstances, the finding of the Tribunal regarding the disallowance of the expenditure claimed as quality loss is only to be confirmed. The question of law raised in this appeal is found against the assessee. The appeal is therefore dismissed. ITA 200 of 2013 (AY 2006-07) 33. This appeal arises from the assessment year 2006-07. The questions of law raised in this appeal were similar to those raised in I.T.A. No.185 of 2013. Hence, we reframed the questions into a solitary one as follows: (i) Whether the rent received by the assessee for the year 2006- 07 from Apollo Tyres Ltd is to be treated as business income or as income from other sources? 34. For the assessment year 2006-07 also the assessee renewed the lease agreement with ATL for a further period of 12 months. The terms of the lease are almost identical as in the earlier I.T.A. No.193/12 & Conn. Cases -:26:- years. No change of circumstances has been brought to our notice to vary the finding on the absence of any manufacturing activity conducted by the assessee. In the above perspective and in view of our conclusions in ITA 185 of 2013, the question of law raised in this appeal is answered against the assessee. Accordingly, the order of the Tribunal shall stand confirmed, and this appeal is dismissed. ITA No.193 of 2013 (AY 2007-08) 35. This appeal arises from the assessment year 2007-08. The question of law raised in this appeal is similar to question No.(i) in I.T.A. No.185 of 2013 and is as follows: (i) Whether the rent received by the assessee for the year 2007- 08 from Apollo Tyres Ltd is to be treated as business income or as income from other sources? 36. For the assessment year 2007-08 also the assessee renewed the lease agreement with ATL for a further period of 12 months. The terms of the lease are almost identical as in the earlier years. No change of circumstances has been brought to our notice to vary the finding on the absence of any manufacturing activity conducted by the assessee. In the above perspective and in view of our conclusions in ITA 185 of 2013, the question of law raised in this appeal is answered against the assessee. Accordingly, the order of I.T.A. No.193/12 & Conn. Cases -:27:- the Tribunal shall stand confirmed, and this appeal is dismissed. ITA No.92 of 2013 (AY 2008-09) 37. This appeal arises from the assessment year 2008-09. The question of law raised in this appeal is similar to question No.(i) in I.T.A. No.185 of 2013 and is as follows: (i) Whether the rent received by the assessee for the year 2008- 09 from Apollo Tyres Ltd. is to be treated as business income or as income from other sources? 38. For the assessment year 2008-09 also the assessee renewed the lease agreement with ATL for a further period of 12 months. The terms of the lease are almost identical as in the earlier years. No change of circumstances has been brought to our notice to vary the finding on the absence of any manufacturing activity conducted by the assessee. In the above perspective and in view of our conclusions in ITA 185 of 2013, the question of law raised in this appeal is answered against the assessee. Accordingly, the order of the Tribunal shall stand confirmed, and this appeal is dismissed. ITA No.93 of 2013 (AY 2009-10) 39. This appeal arises from the assessment year 2009-10. The question of law raised in this appeal is similar to question No.(i) in I.T.A. No.185 of 2013 and is as follows: I.T.A. No.193/12 & Conn. Cases -:28:- (i) Whether the rent received by the assessee for the year 2009- 10 from Apollo Tyres Ltd. is to be treated as business income or as income from other sources? 40. For the assessment year 2009-10 also the assessee renewed the lease agreement with ATL for a further period of 12 months. The terms of the lease are almost identical as in the earlier years. No change of circumstances has been brought to our notice to vary the finding on the absence of any manufacturing activity conducted by the assessee. In the above perspective and in view of our conclusions in ITA 185 of 2013, the questions of law raised in this appeal are answered against the assessee. Accordingly, the order of the Tribunal shall stand confirmed and this appeal is dismissed. Conclusion 41. In view of the above discussions, the questions of law raised in these appeals are answered against the assessee and hence these appeals shall stand dismissed. Sd/- S.V.BHATTI JUDGE Sd/- BECHU KURIAN THOMAS JUDGE vps I.T.A. No.193/12 & Conn. Cases -:29:- The last two sentences of paragraph 22 of the judgment dated 22/07/2021 in ITA No.185/2013 is corrected as “Therefore the quality loss, if any, can be attributable only to ATL and not to the assessee. In the above circumstances, we answer the third question framed by us in favour of the Revenue” vide order dated 31/03/2022 in I.A. No.1 of 2022 in ITA No.185 of 2013. Sd/- Joint Registrar APPENDIX OF ITA NO.193/2012 PETITIONER'S/S' ANNEXURES: ANNEXURE-A TRUE COPY OF AGREEMENT DATED 22.5.2006 EXECUTED BETWEEN THE APPELLANT AND M/S.APOLLO TYRES LTD. ANNEXURE-B TRUE COPY OF ASSESSMENT ORDER DATED 1.12.2009 OF THE ADDITIONAL COMMISSIONER OF INCOME TAX, RANGE-2, ERNAKULAM ANNEXURE-C TRUE COPY OF APPELLATE ORDER DATED 6.9.2010 OF THE COMMISSIONER OF INCOME TAX (APPEALS) II, KOCHI ANNEXURE-D TRUE COPY OF APPEAL DATED 7.12.2010 FILED BY THE RESPONDENT BEFORE THE INCOME TAX APPELLATE TRIBUNAL, KOCHI BENCH ANNEXURE-E CERTIFIED COPY OF ORDER DATED 3.4.2012 OF THE INCOME TAX APPELLATE TRIBUNAL, KOCHI BENCH IN I.T.A. NO.659/Coch/2010 ANNEXURE-F TRUE COPY OF ORDER DATED 27.7.2012 OF THE INCOME TAX APPELLATE TRIBUNAL, KOCHI BENCH IN M.P. NO.48/Coch/2012 IN I.T.A. No.659/Coch/2010 I.T.A. No.193/12 & Conn. Cases -:30:- APPENDIX OF ITA NO.185/2013 PETITIONER'S/S' ANNEXURES: ANNEXURE A TRUE COPY OF AGREEMENT DATED 20/06/2003 EXECUTED BETWEEN THE APPELLANT AND M/S. APOLLO TYRES LIMITED. ANNEXURE B TRUE COPY OF ASSESSMENT ORDER DATED 22/12/2006 OF THE RESPONDENT. ANNEXURE-C TRUE COPY OF APPELLATE ORDER DATED 27.3.2007 OF THE COMMISSIONER OF INCOME TAX (APPEALS) II, KOCHI ANNEXURE-D TRUE COPY OF APPEAL DATED 6.6.2007 FILED BY THE RESPONDENT BEFORE THE INCOME TAX APPELLATE TRIBUNAL, KOCHI BENCH ANNEXURE-E TRUE COPY OF THE CROSS-OBJECTIONS DATED 10.7.2007 FILED BY THE APPELLANT BEFORE THE INCOME TAX APPELLATE TRIBUNAL, KOCHI BENCH ANNEXURE-F CERTIFIED COPY OF ORDER DATED 21.12.2012 OF INCOME TAX APPELLATE TRIBUNAL, KOCHI BENCH IN I.T.A. NO.520/Coch/2007 ANNEXURE-G TRUE COPY OF DETAILS OF FIXED ASSETS AS PER SCHEDULE 4 OF THE BALANCE SHEET OF THE APPELLANT ANNEXURE-H TRUE COPY OF ANNEXURE IV OF THE TAX AUDIT REPORT OF THE APPELLANT I.T.A. No.193/12 & Conn. Cases -:31:- APPENDIX OF ITA NO.200/2013 PETITIONER'S/S' ANNEXURES: ANNEXURE-A TRUE COPY OF LEASE AGREEMENT DATED 1.5.2005 BETWEEN THE APPELLANT AND APOLLO TYRES LTD. ANNEXURE-B TRUE COPY OF ASSESSMENT ORDER DATED 12.12.2008 OF THE RESPONDENT ANNEXURE-C TRUE COPY OF APPELLATE ORDER DATED 26.3.2009 OF THE COMMISSIONER OF INCOME TAX (APPEALS) II, KOCHI ANNEXURE-D TRUE COPY OF GROUNDS OF APPEAL DATED 16.9.2009 FILED BY THE RESPONDENT BEFORE THE INCOME TAX APPELLATE TRIBUNAL, KOCHI ANNEXURE-E CERTIFIED COPY OF ORDER DATED 31.1.2013 OF THE INCOME TAX APPELLATE TRIBUNAL, KOCHI BENCH IN I.T.A. NO.410/Coch/2009 ANNEXURE-F TRUE COPY OF DETAILS OF FIXED ASSETS AS PER SCHEDULE 4 OF THE BALANCE SHEET OF THE APPELLANT ANNEXURE-G TRUE COPY OF DETAILS OF FIXED ASSETS AS PER ANNEXURE IV OF THE TAX AUDIT REPORT GIVING THE COMPUTATION OF DEPRECIATION OF THE APPELLANT I.T.A. No.193/12 & Conn. Cases -:32:- APPENDIX OF ITA NO.206/2013 PETITIONER'S/S' ANNEXURES ANNEXURE A TRUE COPY OF LEASE AGREEMENT DATED 9.7.2004 BETWEEN THE APPELLANT AND APOLLO TYRES LTD. ANNEXURE B TRUE COPY OF ASSESSMENT ORDER DATED 31.12.2007 OF THE RESPONDENT. ANNEXURE C TRUE COPY OF APPELLATE ORDER DATED 14.8.2008 OF THE COMMISSIONER OF INCOME TAX (APPEALS)-II, KOCHI. ANNEXURE D TRUE COPY OF GROUNDS OF APPEAL DATED 23.11.2009 FILED BY THE RESPONDENT BEFORE THE INCOME TAX APPELLATE TRIBUNAL, KOCHI. ANNEXURE E CERTIFIED COPY OF ORDER DATED 31.1.2013 OF THE INCOME TAX APPELLATE TRIBUNAL, KOCHI BENCH IN I.T.A NO.893/COCH/2018. ANNEXURE F TRUE COPY OF DETAILS IN FIXED ASSETS AS PER SCHEDULE 4 OF THE BALANCE SHEET OF THE APPELLANT. ANNEXURE G TRUE COPY OF DETAILS OF FIXED ASSETS AS PER ANNEXURE IV OF TAX AUDIT REPORT GIVING THE COMPUTATION OF DEPRECIATION OF THE APPELLANT. I.T.A. No.193/12 & Conn. Cases -:33:- APPENDIX OF ITA NO.207/2013 PETITIONER ANNEXURE ANNEXURE A TRUE COPY OF LEASE AGREEMENT DATED 09/07/2004 BETWEEN THE APPELLANT AND APOLLO TYRES LIMITED. ANNEXURE-B TRUE COPY OF ASSESSMENT ORDER DATED 31.12.2007 OF THE RESPONDENT ANNEXURE-C TRUE COPY OF APPELLATE ORDER DATED 14.8.2008 OF THE COMMISSIONER OF INCOME TAX (APPEALS)-II, KOCHI ANNEXURE-D TRUE COPY OF GROUNDS OF APPEAL DATED 30.9.2008 FILED BY THE APPELLANT BEFORE THE INCOME TAX APPELLATE TRIBUNAL, KOCHI ANNEXURE-E COPY OF ORDER DATED 31.1.2013 OF THE INCOME TAX APPELLATE TRIBUNAL, KOCHI BENCH IN I.T.A. NO.899/Coch/2008 I.T.A. No.193/12 & Conn. Cases -:34:- APPENDIX OF ITA NO.227/2013 PETITIONER'S/S' ANNEXURE ANNEXURE A TRUE COPY OF ASSESSMENT ORDER DATED 22.12.2006 OF THE RESPONDENT. ANNEXURE B TRUE COPY OF ORDER DATED 16.10.2008 OF THE RESPONDENT. ANNEXURE C TRUE COPY OF APPELLATE ORDER DATED 29.1.2009 OF THE COMMISSIONER OF INCOME TAX (APPEALS) II, KOCHI. ANNEXURE D TRUE COPY OF ORDER DATED 21.12.2012 OF THE INCOME TAX APPELLATE TRIBUNAL, KOCHI BENCH IN I.T.A. NO.189/COCH/2009. I.T.A. No.193/12 & Conn. Cases -:35:- APPENDIX OF ITA NO.92/2014 PETITIONER'S/S' ANNEXURE ANNEXURE A TRUE COPY OF LEASE AGREEMENT DATED 22/05/2006 BETWEEN THE APPELLANT AND APOLLO TYRES LTD. ANNEXURE B TRUE COPY OF ASSESSMENT ORDER DATED 25/11/2010 OF THE RESPONDENT. ANNEXURE C TRUE COPY OF THE APPELLATE ORDER DATED 31/07/2013 OF THE COMMISSIONER OF INCOME TAX (APPEALS)II, KOCHI. ANNEXURE D CERTIFIED COPY OF IMPUGNED ORDER DATED 03/01/2014 OF THE INCOME TAX APPELLATE TRIBUNAL, KOCHI BENCH IN ITA NO.650/COCH/2013. I.T.A. No.193/12 & Conn. Cases -:36:- APPENDIX OF ITA NO.93/2014 PETITIONER'S/S' ANNEXURES ANNEXURE A TRUE COPY OF LEASE AGREEMENT DATED 22.5.2006 BETWEEN THE APPELLANT AND APPOLO TYRES LTD. ANNEXURE B TRUE COPY OF ASSESSMENT ORDER DATED 29.12.2011 OF THE RESPONDENT. ANNEXURE C TRUE COPY OF APPELLATE ORDER DATED 31.7.2013 OF THE COMMISSIONER OF INCOME TAX (APPEALS)-II, KOCHI. ANNEXURE D TRUE COPY OF IMPUGNED ORDER DATED 3.1.2014 OF TEH INCOME TAX APPELLATE TRIBUNAL, KOCHI BENCH IN I.T.A NO.651/COCH/2013. I.T.A. No.193/12 & Conn. Cases -:37:- "