2011 (3) TMI 906 - AT - Income Tax

Addition - Rental income - Revised return - Assessing Officer has accepted the claim of the assessee in the subsequent year that the rental income from this property does not belong to the assessee although the property in question was registered in the name of the buyer after May, 2006 - Held that on account of rental income of Rs.4,63,388/-, the assessee is getting deduction of 30% u/s 24 and hence this tax liability is going down to this amount to Rs.1,09,184/- whereas the consequent relief from short term capital gain will be on the full amount of Rs.4,63,388 - if this amount has been declared as income by that party, than the same should not be added in the hands of this present assessee to avoid multiple consequential rectifications without any tax gain to the revenue and also because the revenue has accepted this claim in next year - Decided in the favour of assessee by way of remand Regarding disallowance of interest paid at Rs.2,51,507 - Held that the assessee has earned interest income for one month only on this basis that the bank has credited interest up to 31.1.2006 only on 4.2.2006 although there was credit balance after that also up to 31.3.2006 - , when the interest bearing borrowed funds have been utilized by the assessee for earning interest income which is taxable under the head income from other sources, deduction on account of full payment of interest is allowable to the assessee and it cannot be restricted to the extent of actual interest income only - Decided in the favour of assessee

Summary

Issues Involved:
1. Treatment of rental income for the period from December 2005 to March 2006.
2. Disallowance of interest paid to M/s DSPL.

Issue-wise Detailed Analysis:

1. Treatment of Rental Income for the Period from December 2005 to March 2006:

The assessee had rented out Unit No.206, Cyber Park, Gurgaon, and received rental income. However, in the return of income, the assessee declared rent for only five months and later revised it to seven months. The Assessing Officer (AO) treated the revised return as nonest and included the entire rental income in the assessee's taxable income, as no sale agreement was executed before the end of the financial year. The assessee claimed that the rental income for the last four months was transferred to M/s PJ Associates, the buyer, as per a mutual understanding.

The Tribunal noted that the property was registered in the buyer's name after May 2006, and under similar circumstances, the rental income for April and May 2006 was transferred to the buyer and accepted by the AO in the subsequent year. The Tribunal emphasized the principle of consistency, citing the judgment of the Hon'ble Punjab and Haryana High Court in CIT v. Reita Biscuits Co. Pvt. Ltd., which states that a different view should not be taken in the preceding year if the issue is decided in favor of the assessee in the subsequent year.

The Tribunal also considered the tax impact, noting that the revenue would not gain by rejecting the assessee's treatment due to various consequential adjustments. It was concluded that if the buyer declared the rental income in its return, the addition should not be made in the assessee's hands, and the AO should withdraw the TDS credit for the period in question. The matter was remanded to the AO for verification of whether the buyer included the rental income in its return. The burden of proof was placed on the assessee.

2. Disallowance of Interest Paid to M/s DSPL:

The assessee declared interest income after reducing the interest paid to M/s DSPL, which was incurred on a loan taken for share investment and mutual fund activities. The AO disallowed the interest payment, stating it was not allowable against interest income assessable under "Income from Other Sources." The CIT(A) partially allowed the deduction, restricting it to the interest earned from the bank.

The Tribunal held that the interest-bearing borrowed funds were utilized for earning taxable interest income, and thus, the full amount of interest payment should be allowed as a deduction. The Tribunal found that the CIT(A) erred in restricting the deduction to the extent of actual interest income and deleted the disallowance of interest expenditure.

Conclusion:

The appeal was allowed in favor of the assessee. The Tribunal directed the AO to verify whether the buyer declared the rental income and to allow the full deduction of interest paid to M/s DSPL for the borrowed funds used to earn taxable interest income. The order emphasized the principles of consistency and proper tax treatment under the Income Tax Act.