Hi Prem,
I am not able to reproduce this issue in either CF8 or CF801.
With all kinds of combinations.I tried your code also.
Just tell me one thing, does your #subnav# have some value.
Because the background image will come only if the cflayoutarea has
some content.
If your subnav is not returning anything, your layoutarea
will be blank and hence the image will not be displayed in the
background.
Second thing, can you change the name of either the variable
or the cflayoutarea, both are called "subnav".
If none of this work, please send us your entire cfm page
(Source).
We will help you find a solution.
Thanks,
Bhakti