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Facts
The assessee, a cooperative society engaged in sugar manufacturing, entered into a collaboration agreement to let out its factory and assets due to financial crunch. The AO and CIT(A) treated the income from this arrangement as 'Income from Other Sources' and disallowed set off of brought forward business loss.
Held
The Tribunal held that the arrangement was a temporary letting out of assets for business purposes to tide over a crisis, and not a discontinuation of business. Therefore, the income earned is to be considered 'Business Income', and set off of business loss is allowed.
Key Issues
Whether income from temporary letting out of factory assets due to financial constraints should be treated as 'Business Income' or 'Income from Other Sources', and consequently, whether brought forward business losses can be set off against it.
Sections Cited
143(3), 250, 143(1)(a), 143(2), 142(1), VIA
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Income Tax Appellate Tribunal, PUNE BENCHES “SMC”, PUNE
Before: DR.MANISH BORAD
आदेश / ORDER
The captioned appeal at the instance of assessee pertaining to A.Y. 2015-16 is directed against the order dated 22.01.2025 of National Faceless Appeal Centre, Delhi passed u/s.250 of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) arising out of Assessment Order dated 29.11.2017 passed u/s.143(3) of the Act.
Assessee has raised following grounds of appeal :
“1. On the fact and in the circumstance of the case and in law of the learned NFAC Commissioner of Income Tax (Appeals) Delhi, has erred in disallowing and adding back an amount of ₹1,23,72,556 on account of Business loss Treat as a Income from Other Sources which is not considered Business Income of Karkhana, AO has treat as Income from Other Sources.
2. On the fact and in the circumstance of the case and in law of the learned NFAC Commissioner of Income Tax (Appeals) Delhi, has erred in disallowing and adding back an amount of ₹26,86,106 on account Loss is not carried forward to next year Rayat Sahakari Sakhar Karkhana Ltd. The appellant craves for the leave, add, alter, amend, modify and delete any or all the above grounds of appeals before or at the time of the hearing.”
Brief facts of the case are that the assessee is a Cooperative Society engaged in the business of manufacturing sugar. Nil income declared in the e-return for A.Y. 2015-16 furnished on 25.09.2015. Return processed u/s.143(1)(a) of the Act. Subsequently, case selected for Limited Scrutiny through CASS followed by serving of valid notices u/s.143(2) and 142(1) of the Act. Audited Financial statements and bank account extracts were furnished. Ld. Assessing Officer (AO) observed that assessee has entered into a partnership deed with Shree Chhatrapati Sahu Sahakari Sakhar Karkhana Ltd. (in short ‘sahu SSK’) on 27.09.2009 with an object of coming out of the financial crunch and to fully exploit the crushing capacity of the assessee society. Sahu SSK will pay ₹3.00 crore per annum to assessee as User charges and in addition to this will pay ₹75/- per Metric Ton (MT) for crushing above 3 lakh MT and ₹100 per MT for above 4 lakh MT. Ld. AO further referred to certain conditions mentioned in the partnership deed and came to a conclusion that assessee is not doing any business/manufacturing activity by using its assets and the Agreement entered into by the assessee with Sahu SSK is not a specific lease agreement but it is a partnership deed and a new Identity namely Chh. Shahu Rayat Sakhar Udyog has been created to run sugar factory and that the assessee is receiving user charges and not lease rent and the user charges cannot be considered as business receipts and therefore has to be treated as ‘Income from Other Sources’. Based on these observations, the total income of the assessee prior to setting off of the brought forward business loss which amounted to ₹26,86,106 has been treated as Income from Other Sources’ and no further
Aggrieved assessee preferred appeal before ld.CIT(A). However, ld.CIT(A) observed that the resultant activity is passive income generating activity and does not demonstrate any continuity or integration with the appellant’s primary business and therefore the loss carried forward under business income cannot be set off against income from other heads. Ld.CIT(A) dismissed the assessee’s appeal. Now the assessee is in appeal before this Tribunal.
Ld. Counsel for the assessee referred to the paper book containing 51 pages which included the Permission letter from commissioner of sugar, Pune dated 20.09.2013, Collaboration Agreement dated 19.09.2013 and the partnership deed dated 27.08.2009. He pleaded that the assessee society was running into losses and the intention behind letting out of the business is not to discontinue the business but for reconstruction of the society and that the lease rent derived from temporarily letting out the assets is part of business income and that assets of the society were wholly used for the business purposes. He also submitted that leasing of the assets was temporary and necessitated by financial constraints including poor rainfall, low sugar prices and operational difficulties and the leasing was aimed at liquidating liabilities and reconstructing the business. Reliance placed on the decision of Hon’ble Apex Court in the case of CIT Vs.Vikram Cotton Mills Ltd. reported in (1998) 36 Taxman 1 (SC) and that in the case of CIT Vs. Mohiddin Hotels Pvt. Ltd. and another (2006) 284 ITR 229.
I have heard the rival contentions and perused the record placed before me. The grievance of the assessee is that ld.CIT(A) erred in affirming the action of the AO treating the gross total income of ₹26,86,106 as ‘Income from Other Sources and not allowing the set off of brought losses and also the claim of deduction under Chapter VIA of the Act. I note that the assessee owns a sugar factory for past many years and it is engaged in the business of manufacturing sugar which includes crushing activity also. A sort of partnership deed cum Agreement has been entered into by the assessee with Chhatrapati Sahu Sahakari Sakhar Karkhana Ltd. (in short ‘sahu SSK’) on 27.08.2009. Copy of the same is placed at pages 23 to 28 of the paper book. On perusal of the deed, we notice that it is not in the nature of partnership deed but it is a Collaboration Agreement. There is no clause about sharing of profit or losses. It only talks about certain terms and conditions regarding payment of user charges, expenses to be borne by Chh. Shahu Rayat Sakhar Udyog. It also refers to the terms of the Agreement regarding operating expenses, statutory licenses, rates and taxes, hypothecation of goods produced, previous liabilities etc. All these clauses clearly indicate that it is not a partnership deed. It is an agreement under which the assessee has given its factory premises along with the assets to some other concern for carrying out the manufacturing activity and in return of the same consideration is received in the form of user charges and certain other charges which are based on the Metric Ton crushing of sugarcane. Therefore, the
Further, from perusal of the Audited Financial statements, I find that assessee has claimed expenses in the profit and loss account amounting to ₹1,54,25,209 which includes the Administrative expenses at ₹7,40,871, interest paid on loans at ₹9,08,547 and salary and wages at ₹46,000, miscellaneous other expenses and also depreciation at ₹1,37,18,857. Ld. AO has allowed the claim of these expenses against the gross receipts of ₹1,23,72,556. I also note that in the gross receipts apart from the user charges of ₹61,02,517 the other receipts include interest received on Excise loan and other interest and the element of user charges is approximately 50% of the gross receipts. I further note that huge amount of secured and unsecured loans are standing in the name of assessee which also include working capital loan outstanding at ₹9.01 crore, capital term loan approx. ₹5.93 crore and secured loans amounting to ₹24.02 crore. I note that the arrangement between assessee and Sahu SSK is with the basic intention of exploiting the full potential of the sugar factory which the assessee was not able to achieve while working on its own. Such arrangement made by the assessee is with the intention of re-construction of the assessee society and to cover up the losses incurred in the past and in no way show to discontinue the business and this temporary arrangement of letting out the assets is purely a business decision so as to maximise the returns and profits.
The ratio laid down by the Hon’ble Supreme Court in the case of CIT Vs. Vikram Cotton Mills Ltd. (supra) reads as under :
Rayat Sahakari Sakhar Karkhana Ltd. “HELD In each case the intention has to be gathered from the facts and circumstances of the case as to whether the commercial asset was intended to be exploited by the assessee or whether it was intended to be used by letting it out for a temporary period. In the present case, it was a possible conclusion that the assessee intended that there should be a temporary suspension of the business for the purpose of reconstruction of the company and for that matter there must be stoppage of the user of the machinery by the assessee. It was a temporary lease though for 10 or 19 years on renewal and after the expiry of the period the property was to revert back to the assessee. It is predominantly a matter of intention. Intention is an inference to be drawn from the relevant the machine but to lease it out for a temporary period as a part of exploitation. In such a circumstance, it facts. On that basis, applying the correct principle, the Tribunal found that the intention was not to part with could not be said that no business was carried on and the income derived from the machine letting was only a rent Income. There was a temporary suspension of business for a temporary period for an object to tide over the crisis condition. There was never any act indicating that the assessee never intended to carry on the business. In the facts and circumstances of the case so found, it could not be said that such a finding of the Tribunal was either perverse or not sustainable. Accordingly, the view taken by the High Court that the lease rent was assessable as business income was to be upheld. Decision of the Allahabad High Court in the case of CIT v, Vikram Cotton Mills Ltd. [1977] 106 ITR 829 affirmed.”
On examining the facts of the instant case in light of above judgment and other decisions relied on by ld. Counsel for the assessee, I find that it is a case of temporary letting out of the factory premises to another concern for carrying out the manufacturing activity and even from the revenue so earned by the other person the assessee will receive the user charges. It can therefore be said that assessee is still continuing its business activity and the gross receipts in question are part of the business receipts. Therefore, under the given facts and circumstances, the net income, if any, earned by the assessee society from sugar factory, in the instant case is ‘Business income’ and not ‘Income from Other Sources’ as had been treated by the Revenue authorities and further the alleged claim Rayat Sahakari Sakhar Karkhana Ltd. of set off of brought forward business loss against current year gross total income at ₹26,86,106 is hereby allowed. Finding of ld.CIT(A) is reversed. Grounds of appeal raised by the assessee are allowed as per terms indicated hereinabove.
In the result, the appeal filed by the assessee is allowed.
Order pronounced on this 05th day of December, 2025.