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2014 (1) TMI 82 - AT - Income TaxDisallowance of bad debts - Held that - Following CIT Vs. Shreyas S. Morakhia 2012 (3) TMI 103 - BOMBAY HIGH COURT - The commission income from clients which has been taxed in the hands of the assessee as business income, the debt or part thereof fulfils the requirements of s. 36(1)(vii) r.w.s. 36(2). Decided in favour of assessee. Notional income from house property - Held that - The flats have been held as stock in trade - Following Tuticorin Alkali Chemicals & Fertilizers Ltd. vs. CIT 1997 (7) TMI 4 - SUPREME Court - The treatment in the books of accounts, cannot be the sole basis for arriving at a conclusion - Following CIT vs. Neha Builders Pvt. Ltd. 2006 (8) TMI 105 - GUJARAT HIGH COURT - If property is used as stock-in-trade, then said property would become or partake character of stock and any income derived from stock would be income from business and not income from property - The authorities below are not justified in adding the notional rent computed in respect of the properties under the head income from house property - Decided in favour of assessee.
Issues:
1. Disallowance of bad debts claimed by the assessee. 2. Addition under the head 'income from house property' based on estimation of notional income. 3. Treatment of properties as 'capital assets' or 'business assets held as stock in trade'. Issue 1: Disallowance of Bad Debts The assessee claimed bad debts of Rs.20,51,601/- in its P&L account, which the AO disallowed partially. The AO found that the assessee acted as a commission agent, and the sales were directly effected by another company. The AO disallowed the claim as the assessee did not prove the debt had become bad. The Ld.CIT(A) confirmed the disallowance, stating that the debt had not been offered as income in the relevant year. The ITAT held that the commission due from the parties qualifies for bad debt written off under the Income Tax Act. Referring to a High Court decision, the ITAT allowed the claim of bad debt written off, stating that the commission due from the parties fulfills the requirements of the Act. The disallowance was deleted, and the appeal was allowed on this ground. Issue 2: Addition under 'Income from House Property' The AO computed notional rental income of Rs.6,66,400/- for the properties owned by the assessee, treating them as capital assets. The Ld.CIT(A) held that 8.5% should be taken of the amount invested, not the market value. The assessee contended that the properties were held as stock in trade. The ITAT observed that the assessee was engaged in buying and selling properties as part of its business. The ITAT accepted that the flats were held as stock in trade, not capital assets. Referring to legal precedents, the ITAT held that income from properties used as stock in trade is 'income from business,' not 'income from property.' The notional rent computed was deleted from the income from house property. Ground 4 was allowed, and grounds 3 and additional ground 1 were dismissed as infructuous. Issue 3: Treatment of Municipal Tax The additional ground raised by the assessee regarding not reducing municipal tax paid from gross rent while computing income from house property was partly allowed. The ITAT directed the AO to allow the municipal tax actually paid by the assessee for the properties held as income from house property. The additional ground was partly allowed in this regard. In conclusion, the ITAT partly allowed the appeal filed by the assessee, overturning the disallowance of bad debts and the addition under 'income from house property.' The ITAT held that the commission due from the parties qualified as bad debt written off and that the properties were held as stock in trade, not capital assets. The treatment of municipal tax was directed to be adjusted accordingly.
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