2022 (12) TMI 541 - AT - Income Tax

Allowability of expenditure u/s 37(1) from Income from Business - income earned by the assessee from letting out of property - interest and processing charges on home loan as allowable expenditure - HELD THAT - As could be seen from MOA one of the main objects of the assessee company is to construct, acquire hold buildings, tenements and such other movable and immovable property and to rent let on hire and managed immovable property. Therefore, we noticed that undoubtedly the main objects of the assessee company provides to carrying on the business of letting out of properties and the assessee has let out its property during the year and earned rental income Which was offered to tax under the head Income from Business . Applying the ratio of the decisions of Rayale Corporation Ltd. 2016 (8) TMI 522 - SUPREME COURT and Chennai Properties Ltd. 2015 (5) TMI 46 - SUPREME COURT and also the other decisions referred to above, we hold that the income earned by the assessee from letting out of property is assessable under the head Income from Business . The decision of Sultan Brother 1963 (12) TMI 4 - SUPREME COURT relied upon by the Ld. AO has already been distinguished by the Apex Court in Chennai Properties (Supra). As noted above, the property was let out by the assessee as per defined business objectives and lease rent earned by the assessee is rightly disclosed as business income. As we have held that the income from letting out of property is assessable under the head Income from Business the expenses incurred by the assessee towards interest and processing charges are allowable as deduction u/s 37(1) of the Act. We sustain the order of the Ld. CIT(A) and reject the grounds raised by the Revenue.

Issues Involved:

1. Deletion of addition on account of interest and processing charges.
2. Deletion of addition on account of income from other sources.
3. Classification of rental income as business income or income from other sources.
4. Allegation of Benami transaction.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Interest and Processing Charges:

The Revenue contended that the Ld. CIT(A) erred in deleting the addition of Rs. 11,58,12,598/- made by the Assessing Officer (AO) on account of interest and processing charges. The AO observed that the property purchased by the assessee company was allegedly for the benefit of Shri Rajiv Rattan, who had a 5% stake in the property, and thus, the interest and processing charges on the home loan were not allowable as business expenses u/s 37(1) of the Act. However, the Ld. CIT(A) examined the provisions of the prohibition of Benami Property Transaction Act, the facts, and the evidences, and concluded that the transaction was bona fide and for business purposes. The Ld. CIT(A) noted that the property was let out at fair market rent, and the leave and license agreement did not replace the title of the property. Consequently, the interest and processing charges were incurred wholly and exclusively for the purpose of business and were allowable expenses u/s 37(1) of the Act.

2. Deletion of Addition on Account of Income from Other Sources:

The Revenue argued that the Ld. CIT(A) erred in deleting the addition of Rs. 5,40,00,000/- made by the AO on account of income from other sources, and in accepting the claim of the assessee that Rs. 4,50,00,000/- was income from Business and Profession. The AO treated the rental income as income from other sources, asserting that the assessee lent its name for the benefit of Shri Rajiv Rattan. The Ld. CIT(A) held that the rental income was assessable under the head "Income from Business" based on the main objects of the company, which included renting and managing properties. The Ld. CIT(A) also relied on the decisions of the Hon'ble Supreme Court in Chennai Properties and Investments Ltd. and Rayala Corporation Pvt. Ltd., which supported the classification of rental income as business income.

3. Classification of Rental Income as Business Income or Income from Other Sources:

The AO assessed the rental income under the head "Income from other sources," arguing that the property was not a commercial property of the assessee and was not used for business purposes. The Ld. CIT(A) refuted this, stating that the property was let out at fair market rent and the rental income was rightly disclosed as business income. The Ld. CIT(A) emphasized that the main objects of the company included renting and managing properties, and thus, the rental income was assessable under the head "Income from Business." The Ld. CIT(A) cited the Hon'ble Supreme Court's decisions in Chennai Properties and Investments Ltd. and Rayala Corporation Pvt. Ltd., which held that rental income should be treated as business income if the main business of the company is letting out properties.

4. Allegation of Benami Transaction:

The AO alleged that the property transaction was Benami in nature, with the assessee company acting as a Benamidar for Shri Rajiv Rattan. The AO based this on the fact that the loan was sanctioned to Shri Rajiv Rattan, media reports, and the leave and license agreement. The Ld. CIT(A) rejected this allegation, stating that the transaction did not meet the basic premises of a Benami transaction as defined under the Benami Property Transaction Act. The Ld. CIT(A) noted that the purchase consideration was paid by the assessee company, and the property was let out at fair market rent. The Ld. CIT(A) also highlighted that the AO failed to bring any evidence to prove that the transaction was Benami and relied on the Supreme Court's decisions in Mangathai Ammal vs. Rajeswari & Others and P. Leelavathi vs. V. Shankarnarayana Rao, which emphasized that the onus of proving a transaction to be Benami lies on the person alleging it.

Conclusion:

The Tribunal upheld the order of the Ld. CIT(A), dismissing the Revenue's appeal. The Tribunal agreed that the transaction was bona fide, the rental income was assessable as business income, and the interest and processing charges were allowable as business expenses. The Tribunal also concurred that the transaction was not Benami in nature, as the AO failed to provide sufficient evidence to substantiate the allegation. The Tribunal relied on various judicial precedents, including the decisions of the Hon'ble Supreme Court, to support its findings.

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