2011 (11) TMI 19 - HC - Income Tax

Income from property - Licence fee - management and day to day running of the properties being used as hotels etc. - Income from business and profession or under the head income from house property - Deduction of expenses from such income - Held that - CIT (Appeals) has given detailed factual finding why income earned by the assessee from the three properties is taxable under the head income from business or profession and not under the head income from house property . The reasoning given by the assessing officer is cryptic and she has not considered the relevant aspects. On the basis of findings recorded by her, it is not possible to hold that the finding of fact recorded by the CIT (Appeals)/tribunal are unfounded or unreasonable. - Decided in favor of assessee. Allow-ability of depreciation and other expenses - Held that - Once it is held that the income from the three properties is taxable under the head income from business or profession depreciation has to be allowed under the provisions of Section 32 of the Act. Similarly, disallowance of 80% from the expenses deleted by the CIT(Appeals)/tribunal has been explained and supported by cogent reasoning. Whether the tribunal was right in allowing the appeal of the assessee and deleting addition of Rs.1,89,201/- on account of business development expenses for production of Opera? - Held that - The order of the tribunal is not clear and in fact contrary to the findings of the CIT (Appeals) as it has been held that they were in agreement with CIT (Appeals) and it is further stated that we are not inclined to interfere . This aspect requires fresh consideration and decision by the Tribunal. - Decided partly in favor of revenue.

Issues Involved:
1. Taxability of income from properties under 'Income from business and profession' or 'Income from house property'
2. Deletion of 80% disallowance of expenses and depreciation
3. Deletion of addition on account of discrepancy in the rent note
4. Deletion of addition of deemed dividend under Section 2(22)(e)
5. Deletion of addition on account of business development expenses for production of Opera

Issue-wise Detailed Analysis:

A. Taxability of Income from Properties:
The primary issue was whether the income earned by the respondent assessee from properties located in Pondicherry and Ramgarh should be taxed under 'Income from business and profession' or 'Income from house property'. The assessing officer classified the income as rental income, asserting that the properties were let out to Neemrana Hotels Private Limited (NHPL), which ran them as hotels. Consequently, 80% of the expenses and depreciation were disallowed. However, the CIT (Appeals) and the Tribunal found that the properties were operated as hotels under a revenue-sharing agreement and not as rented properties. The CIT (Appeals) noted that the income varied annually based on the revenue-sharing arrangement, indicating business income rather than fixed rental income. The Tribunal upheld this view, and the High Court agreed, stating that the findings were based on substantial evidence and reasoning, thus no substantial question of law arose on this issue.

B. Deletion of 80% Disallowance of Expenses and Depreciation:
The assessing officer disallowed 80% of the expenses and depreciation, arguing that the main business was the operation of hotels, and other income should be treated as 'Income from other sources'. The CIT (Appeals) deleted these disallowances, reasoning that the expenses were related to the business of running hotels. The Tribunal upheld this deletion, and the High Court found no reason to interfere, noting that the assessing officer's basis for disallowance was unclear and unsupported by evidence.

C. Deletion of Addition on Account of Discrepancy in the Rent Note:
The assessing officer added Rs.1,34,400/- due to discrepancies in the rent note for premises No. A-58, Nizamuddin (East), New Delhi. The CIT (Appeals) found that the rent was deposited in the bank account of Dugal Brothers, and the respondent was not the owner of the property. The Tribunal affirmed this view, and the High Court dismissed the Revenue's appeal on this ground, finding the assessing officer's reasoning laconic and perverse.

D. Deletion of Addition of Deemed Dividend under Section 2(22)(e):
The assessing officer treated certain credit balances as advances, thus adding Rs.15,14,503/- as deemed dividend. The CIT (Appeals) deleted these additions, explaining that the amounts were not loans or advances but were related to business transactions. The Tribunal upheld this deletion, and the High Court dismissed the Revenue's appeal, finding no justification for the additions.

E. Deletion of Addition on Account of Business Development Expenses for Production of Opera:
The assessing officer disallowed Rs.1,89,201/- spent on producing an opera, arguing it was a personal expense related to the assessee's daughter's participation. The CIT (Appeals) upheld this disallowance, but the Tribunal allowed the expense, stating it was for business purposes. The High Court found the Tribunal's order unclear and remitted the matter for fresh consideration, directing the parties to appear before the Additional Registrar for further proceedings.

Conclusion:
The High Court upheld the CIT (Appeals) and Tribunal's findings on most issues, emphasizing that the income from properties should be taxed as business income and the related expenses and depreciation should be allowed. The Court dismissed the Revenue's appeals on these grounds but remitted the issue of business development expenses for further consideration. The appeal was disposed of with no order as to costs.

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