2015 (4) TMI 748 - AT - Income Tax

Treatment of rental income by giving counters/spaces/shops in Retail Mall - Income from House Property vs Profits & Gains of Business - Dis-allowance of various expenses - Allowability of interest paid to partners u/s 24(b) - Additional ground submitted before ITAT- Held that - The issue in the present case is as to whether the income earned from letting out of counters, spaces is to be considered as business income or Income from house property . We find that ld. CIT(A) after considering the detailed submissions of the Assessee has reached to a conclusion that the activity of giving counters/spaces/shops was never taken up as a business venture but was to earn rent. With respect to the allowability of interest paid to partners as interest allowable u/s. 24(b), we find that ld. CIT(A) has noted that interest allowable u/s. 24(b) cannot be equated with interest allowable u/s. 36(1)(iii) of the Act. Before us, ld. A.R. has relied on the decision in the case of Neha Builders Pvt. Ltd. 2006 (8) TMI 105 - GUJARAT HIGH COURT . However, we find that the ratio of the aforesaid decision is not applicable to the facts of the case because the rental income which was earned from the property in case of Neha Builders was held as stock in trade whereas in the case of Assessee, A.O has noted that the property was shown as capital work in progress and not as stock in trade - Taxable as income from House property - Decided against the assessee. In the case of Sane and Doshi Enterprises 2015 (4) TMI 707 - ITAT MUMBAI , we find that expenditure for claim of deduction u/s. 24(b) was allowed by following the decision of the Tribunal in assessee s own case for earlier years. Considering the aforesaid facts, we are of the view that the decisions cited and relied upon by the ld. A.R. are not applicable to the present case. Further deduction u/s. 24(b) is allowable when the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital. In the present case no material has been brought on record to demonstrate that the borrowed capital has been used for the acquisition of property. Considering the totality of the aforesaid facts, we find that no reason to interfere with the order of ld. CIT(A) and thus the grounds are dismissed. - Deduction of interest not allowed - Decided against the assessee. Set off of brought forward business loss - With respect to the additional ground we find that this ground has been taken before us for the first time and was not taken before ld. CIT(A) and therefore ld. CIT(A) had no occasion to examine the issue. In view of these facts, we are of the view that the additional ground taken by the Assessee needs to be examined at the end of ld.CIT(A). We therefore remit the issue to the file of ld. CIT(A) to decide the ground on merits after considering the submissions of the Assessee and in accordance with law. Needless to state ld. CIT(A) shall adequate opportunity of hearing to both the parties. Before the CIT(A), the assessee shall be free to produce additional documents, if so desired, subject to the fulfillment of the requirement under Rule 46A of the Income Tax Act. In the result, the ground of Assessee is allowed for statistical purposes. - Decided partly in favour of assessee.

Issues Involved:
1. Validity of assessment proceedings and service of notice under Section 143(2) of the Income Tax Act, 1961.
2. Classification of rental income as "Income from House Property" vs. "Profits & Gains of Business".
3. Disallowance of various expenses after treating rental income as "Income from House Property".
4. Deduction of interest paid to partners under Section 24(b) of the Income Tax Act.
5. Admission and consideration of additional ground regarding set off of brought forward business loss.

Detailed Analysis:

1. Validity of Assessment Proceedings and Service of Notice under Section 143(2):
The Assessee contended that the assessment proceedings and the resultant order were invalid due to the lack of a valid notice issued and served under Section 143(2) within the stipulated time. However, during the appellate proceedings, the Assessee's representative did not press this ground, leading to its dismissal by the Tribunal.

2. Classification of Rental Income:
The core issue was whether the rental income earned from letting out counters, spaces, and shops in a retail mall should be classified as "Income from House Property" or "Profits & Gains of Business". The Assessing Officer (A.O.) and the Commissioner of Income Tax (Appeals) [CIT(A)] both concluded that the income should be treated as "Income from House Property". The CIT(A) noted that the Assessee had admitted the project was not successful and, due to the lack of bookings, began renting out spaces, indicating an intention to earn rental income rather than conducting a business venture. The Tribunal upheld this view, noting that the property was shown as "capital work in progress" rather than "stock in trade", distinguishing it from cases where rental income was considered business income.

3. Disallowance of Various Expenses:
The Assessee claimed deductions for various expenses, including electricity charges, depreciation, and legal fees, totaling Rs. 20,15,236, which were disallowed by the A.O. and CIT(A) after treating the rental income as "Income from House Property". The CIT(A) emphasized that deductions for house property income are governed by Section 24, which the A.O. had already applied. The Tribunal found no merit in the Assessee's appeal on this ground, affirming the CIT(A)'s decision.

4. Deduction of Interest Paid to Partners under Section 24(b):
The Assessee argued for the deduction of interest paid to partners under Section 24(b), which was disallowed by the A.O. The CIT(A) clarified that Section 24(b) pertains to interest on borrowed capital used for acquiring or constructing property, which was not applicable here as the Assessee had not borrowed funds for the property. The Tribunal agreed, noting the lack of evidence that borrowed capital was used for property acquisition and upheld the CIT(A)'s decision.

5. Admission and Consideration of Additional Ground:
The Assessee raised an additional ground regarding the non-allowance of set off of brought forward business loss against the assessed income. The Tribunal admitted this ground, recognizing it as a legal right of the Assessee. As this issue was not previously examined by the CIT(A), the Tribunal remitted it back to the CIT(A) for consideration on merits, allowing the Assessee to present additional documents if necessary.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal upholding the CIT(A)'s decisions on the classification of rental income, disallowance of various expenses, and denial of interest deduction under Section 24(b). The additional ground regarding the set off of brought forward business loss was remitted to the CIT(A) for further examination.

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