2011 (3) TMI 1636 - AT - Income Tax

Summary

Issues Involved:
1. Classification of income from letting out premises.
2. Entitlement to depreciation and deduction of expenses.

Summary:

1. Classification of Income from Letting Out Premises:
The primary issue was whether the income received by the assessee from letting out premises should be classified as 'business income' or 'property income'. The Assessing Officer (AO) classified it as 'property income', rejecting the assessee's claim of it being 'business income'. The AO noted that the assessee was not carrying on any business activity and merely let out the premises to a sister concern under an unregistered agreement.

2. Entitlement to Depreciation and Deduction of Expenses:
The assessee contended before the Commissioner of Income Tax (Appeals) [CIT(A)] that its business involved buying and leasing properties, and this activity was authorized by its memorandum of association. The CIT(A) referred to the Apex Court's decision in Shambhu Investments Pvt. Ltd. 263 ITR 143, which classified income from letting out property as 'Income from house property'. However, the CIT(A) allowed the claim for depreciation u/s 32 for the portion of the premises used for business purposes and also allowed administrative and establishment expenses incurred in the normal course of business.

Appeal by Revenue:
The Revenue appealed, arguing that the assessee was not entitled to deductions for expenses and depreciation since no business activity was carried out during the year. The CIT(A) had noted that the assessee earned service charges and business conducting charges in subsequent years, supporting the claim of business activity.

Tribunal's Decision:
The Tribunal observed that the Revenue failed to provide necessary records and evidence to support its appeal. The Tribunal upheld the CIT(A)'s decision, stating that the assessee was engaged in business activity and was entitled to depreciation and deduction of expenses. The Tribunal dismissed the Revenue's appeal, finding no infirmity in the CIT(A)'s order.

Conclusion:
The Tribunal concluded that the assessee's income from letting out premises should be classified as 'property income', but allowed depreciation and business-related expenses for the portion of the premises used for business activities. The Revenue's appeal was dismissed due to lack of supporting evidence.