2014 (5) TMI 822 - HC - Income Tax

Assessment of rental income from property Income from business or Income from house property Held that - Relying upon Universal Plast Ltd. vs. Commissioner of Income-Tax 1999 (3) TMI 15 - SUPREME Court - both the properties are owned by the assessee - the appellant is carrying on his own business without any break - Only certain portion of two properties in question were let down by the assessee due to certain financial crisis - The properties were business assets and used by the assessee for his own business - the Tribunal was rightly of the view that letting out of the commercial asset was business income - whether a particular letting is a business has to be decided in the circumstances of each case and each case has to be looked into from the businessman s point of view to find out whether letting was the doing of business or exploitation of his property by an owner - letting out was for the purposes of business - the premises City Centre, the Mall, has been taken back by the assessee and further in major portion of the premises assessee is already carrying out his own business - the asessee has rightly show his income as business income Decided against Revenue. Deletion of disallowance of interest on borrowed capital Facts not properly appreciated Held that - The Tribunal was of the view that the assessee had claimed that the opening balance of advances from the customers was Rs. 36.92 lakhs as on 1.4.1996 - if the assessee has claimed the deduction of interest it has to prove that the borrowed funds have been utilized by it in its business but if part of the interest bearing funds have been diverted to other parties on which no income was being earned, the proportionate interest has to be disallowed - Revenue has to prove that the interest bearing funds have been diverted to other concerns for non-business purposes - the interest free advances with the assessee were far in excess of advances/investment made in purchasing the shares - CIT(A) was rightly appreciated the facts and deleted the addition - interest free advance with the assessee were far in excess to the investment made in purchasing the share, it is proved that borrowed funds have been utilized in business - the order of the Tribunal is upheld Decided against Revenue.

Issues Involved:
1. Whether the Income Tax Appellate Tribunal was justified in assessing the rental income as 'income from business' instead of 'income from house property'.
2. Whether the Income Tax Appellate Tribunal was justified in dismissing the Department's appeal regarding the assessment of rental income.
3. Whether the Income Tax Appellate Tribunal was justified in dismissing the Department's appeal regarding the deletion of the addition on account of disallowance of interest on borrowed capital.

Detailed Analysis:

Issue 1 & 2: Assessment of Rental Income
The first two questions are interrelated and were considered together. The core issue was whether the rental income from properties should be classified as 'income from business' or 'income from house property'. The Tribunal relied on the Supreme Court judgment in Universal Plast Ltd. vs. Commissioner of Income-Tax, which laid down principles to determine the nature of income from leasing or letting out assets. According to these principles, it is a mixed question of law and fact, and the intention of the assessee, the period of letting, and the business context are crucial factors.

The facts indicated that the assessee was using a significant portion of the properties for his own business and had let out parts temporarily due to financial crises. The Tribunal found that the letting out was a temporary measure to exploit the commercial assets, not a permanent arrangement. This was supported by the fact that the assessee resumed business activities in the rented premises. Consequently, the Tribunal concluded that the rental income was rightly treated as 'business income'.

The Tribunal's findings were consistent with the principles laid down by the Supreme Court and other relevant case laws, such as the judgment of the Punjab & Haryana High Court in Sheetal Khurana Foods (P.) Ltd. and the Madras High Court in Commissioner of Income Tax vs. Chennai Properties and Investments Ltd. These judgments emphasized that the nature of the transaction and the business context are decisive in classifying rental income.

Issue 3: Disallowance of Interest on Borrowed Capital
The third issue concerned the disallowance of interest on borrowed capital. The Assessing Officer had observed that the assessee had taken interest-bearing loans but invested in shares of its sister concern, M/s Society Motors Ltd., and thus disallowed the interest as revenue expenditure. However, the Appellate Authority found that the assessee had sufficient interest-free funds from customer advances, which were far in excess of the amount invested in shares. Therefore, the interest-bearing loans were utilized for business purposes, and the interest was allowable as revenue expenditure.

The Tribunal upheld this finding, noting that the Revenue had to prove that interest-bearing funds were diverted for non-business purposes, which was not established in this case. The Tribunal also referenced the Supreme Court's judgment in Commissioner of Income Tax vs. Rajendra Prasad Moody, which allowed deduction of interest on borrowed funds used for investment in shares, even if no dividend was received.

The Tribunal's decision was further supported by the judgment of the Gujarat High Court in Sarabhai Sons Pvt. Ltd. vs. Commissioner of Income Tax, which distinguished between investments made for earning income and those made for gaining control over another company.

Conclusion:
The High Court answered all three questions in favor of the assessee and against the Revenue. The appeal was dismissed, affirming the Tribunal's decision that the rental income was 'business income' and the interest on borrowed capital was allowable as revenue expenditure.

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