2010 (12) TMI 183 - AT - Income Tax

Expenses related to the business of the assessee but for the earning of rental income - Assessee s rental receipts is income from house property and instead of assessing accordingly as provided by the law it has been assessed as business income - AO and CIT(A) both have not considered the appropriate legal position in this behalf - assessee has not been heard in respect of treatment of so called license fee/rental income as income from house property the assessment is set aside restored back to the file of the AO to decide the same afresh in accordance with law after giving the assessee an opportunity of being heard - revenue appeal allowed

Summary

Issues:
1. Allowance of business expenditure related to sub-letted premises.
2. Disallowance of various expenses claimed by the assessee.
3. Treatment of rental income as business income.

Analysis:
1. The revenue's appeal challenged the deletion of an addition made by the Assessing Officer (AO) regarding business expenditure claimed by the assessee for sub-letted premises. The AO disallowed the expenditure, citing lack of nexus with the business of the assessee. The assessee argued that the expenses were related to overseeing and preserving the commercial asset of the business, as the assessee was the owner of the tenancy rights. The AO, however, found the explanation unsatisfactory, emphasizing that the nature and amount of expenses did not align with the business's ownership of tenancy rights. Additionally, discrepancies in the revised return raised concerns about the accuracy of the expenses claimed. Consequently, the AO added back the expenses to the assessee's income and initiated penalty proceedings for concealing income.

2. The first appeal contended that the expenses had been consistently allowed in previous years and were rightfully claimed. The Commissioner of Income Tax (Appeals) [CIT(A)] observed that the revised return corrected accounting errors and that the expenses had been previously allowed by the department. The CIT(A) further noted that the AO failed to provide sufficient justification for disallowing the expenses under section 37(1) of the Income-tax Act, 1961. The CIT(A) concluded that all additions made by the AO were unwarranted and deleted them.

3. The issue of treating rental income as business income was raised during the appeal. The revenue argued that the expenses claimed were not related to the assessee's business, as the property was sub-let without the assessee being involved in the business operations. The CIT(A) had deleted the additions without thoroughly verifying the facts. The Income Tax Appellate Tribunal (ITAT) determined that the rental income should have been assessed as income from house property, not as business income. The ITAT set aside the assessment and instructed the AO to reevaluate the treatment of rental income in accordance with the law. The issue of expenses was to be reconsidered in light of this decision.

In conclusion, the ITAT allowed the revenue's appeal for statistical purposes, emphasizing the need for a proper assessment of income and the correct categorization of rental income as income from house property. The case highlighted the importance of adhering to legal provisions and ensuring a fair assessment process.