2010 (11) TMI 379 - AT - Income Tax

Income from House Property - the assessee is share owner in property at Tilak Nagar, New Delhi for which house property income is shown at Rs. 16,480/- and 50% share in court chambers, Mumbai for which the income was shown at Rs. 6,826 - Since the assessee has offered an amount of Rs. 6,826 - In the present case the A.O. has given a finding that Rent Control Act is not applicable without referring to any particular provision or the capital of the company - It is the contention of the assessee that the property was let out in 1967 and the same rent was being allowed in the hands of the company - Since these issues require re-examination the matter is restored back to the file of the A.O. to decide accordingly Legal expenses - However, in the written submission the learned counsel submits that the fees was paid for the purpose of Customs Department at which the assessee succeeded in obtaining refund - In view of the legal principles above, the A.O. is directed to verify the purpose for which these expenses are incurred and in case the expenses are in the nature relating to the business of the assessee then the expenses are allowable under section 37(1) Appeals are allowed for statistical purpose

Summary

Issues Involved:
1. Assessment of House Property Income
2. Claim of Legal Fees

Issue-wise Detailed Analysis:

Issue of Income from House Property

The assessee, a part-owner of properties in Tilak Nagar, New Delhi, and court chambers in Mumbai, declared house property income of Rs. 16,480/- and Rs. 6,826/- respectively. The Assessing Officer (A.O.) questioned the low rent, suggesting the annual rent should be higher, particularly because the tenant was a company where the assessee was a director. The A.O. revalued the property at Rs. 3,60,000/- and determined the chargeable income at Rs. 1,26,000/-, bringing the difference to tax. This was upheld by the CIT(A).

The assessee argued that the property was rented since 1967 and rent could not be increased without tenant consent. The A.O.'s valuation was contested as excessive. The assessee relied on several case laws, including Dewan Daulat Rai Kapoor v. New Delhi Municipal Corporation and others, to support their stance.

The Tribunal noted that the A.O. did not properly examine whether the Rent Control Act applied, which would limit rent increases. The Tribunal directed the A.O. to re-examine if the property was under Rent Control. If so, the actual rent or municipal value should be accepted. If not, the A.O. could determine a reasonable annual letting value after considering the assessee's inputs. The matter was remanded to the A.O. for re-evaluation.

Issue of Legal Expenses

In A.Y. 2004-05, the assessee claimed Rs. 65,000/- in legal fees paid to an advocate for representing against an order by the Directorate of Enforcement, Mumbai, alleging contraventions of section 9(1)(c) of the Act. The assessee argued that the expense was business-related and allowable under section 37. The A.O. and CIT(A) denied the claim, stating it was related to a legal infringement.

The Tribunal reviewed the matter, noting confusion about the purpose of the legal fees-whether it was for FERA violations or customs duty issues. The Tribunal cited various legal principles, including the Supreme Court's ruling in CIT v. Hirjee, which held that deductibility of legal expenses depends on the nature and purpose of the legal proceedings relative to the business.

The Tribunal directed the A.O. to verify the exact nature of the legal expenses and their connection to the business. If the expenses were indeed business-related, they should be allowed under section 37(1). The matter was remanded to the A.O. for detailed examination of the nature of the charges, appellate orders, and pending proceedings.

Conclusion

Both appeals were allowed for statistical purposes, with directions for re-examination by the A.O. on both issues-house property income assessment and the claim of legal fees. The Tribunal emphasized the need for thorough verification and application of relevant legal principles to determine the correct tax treatment.