2007 (5) TMI 367 - AT - Income Tax

Summary

Issues Involved:
1. Classification of income from Bhau Mansion.
2. Applicability of section 50 of the Income-tax Act.
3. Applicability of section 112(d) to long-term capital gains.
4. Claim of loss on municipal taxes paid on vacant property.
5. Ad hoc disallowance u/s 14A.

Summary:

1. Classification of Income from Bhau Mansion:
The assessee contended that Bhau Mansion was let out and the rental income was consistently assessed under "Income from house property" for the past 20 years. The CIT(A) erred in holding that Bhau Mansion was used for business, thus changing the classification of income without any change in facts.

2. Applicability of Section 50 of the Income-tax Act:
The assessee argued that Bhau Mansion was not a depreciable asset as it was always let out and not used for business purposes. Despite this, the Assessing Officer treated the sum of Rs. 2,75,00,000 realized on the sale of Bhau Mansion as attracting the provisions of section 50, considering it a depreciable asset. The CIT(A) upheld this view, noting that depreciation had been claimed and allowed for about 40 years, making it part of a block of assets for which depreciation was allowed.

3. Applicability of Section 112(d) to Long-term Capital Gains:
The CIT(A) held that section 112(d) was not applicable to the long-term capital gains declared by the assessee. The assessee argued that the property was a long-term capital asset and the capital gain should be taxed under section 112(1)(d). However, since the property was treated as a depreciable asset, the gain was considered short-term capital gain u/s 50.

4. Claim of Loss on Municipal Taxes Paid on Vacant Property:
The assessee claimed a loss of Rs. 55,087 on municipal taxes paid on the vacant property under "Income from house property." The Assessing Officer computed the income of the property at Nil, and the CIT(A) upheld this decision, noting that since the property was sold and not let out, the ALV was Nil.

5. Ad Hoc Disallowance u/s 14A:
The Assessing Officer made an ad hoc disallowance of Rs. 25,000 u/s 14A, presuming some expenditure to earn dividend income. The CIT(A) upheld this disallowance. However, the ITAT set aside this order, directing the Assessing Officer to re-examine the details of expenses and make an honest attempt to identify any expenses incurred for earning the dividend income, in light of section 14A including sub-sections (2) and (3).

Conclusion:
The appeal was partly allowed, with the ITAT directing a fresh decision on the disallowance u/s 14A while upholding the other findings of the CIT(A).