2015 (4) TMI 882 - HC - Income Tax

Charge of rental income - business income or income from house property - Tribunal directing the Assessing Officer to tax the rental income as income from house property and to allow deduction u/s 24 - ITAT allowed the claim of expenses of ₹ 45 lakhs on account of provision for incomplete work - interest paid as capital brought in by partners - Held that - We do not think that when the Tribunal relied upon the judgment of the Hon ble Supreme Court in the case of East India Housing 1960 (11) TMI 7 - SUPREME Court , it had committed any error of law or acted perversely. Therefore, assuming that we can allow any mixed questions to be raised for the first time, raising them does not enable the Revenue to urge and contrary to what is held by the Tribunal. The position also appears to be identical in the case dealt with by the Hon ble Supreme Court in Commissioner of Income-tax v. Vikram Cotton Mills Limited 1987 (12) TMI 1 - SUPREME Court . There as well, the property came to be mortgaged and what was before the Supreme Court was the fact that the High Court, with the approval of the assessee and the creditors evolved a scheme where under the business assets of the assessee were let out to M/s. General Fibres Dealers (P) Ltd. It is in that peculiar fact situation that the Supreme Court took the view and with regard to the nature of income. We are of the view that on the essential contentions raised before the Tribunal and as elaborated or additionally proposed before us a different view than the one taken by the Tribunal is not possible.- Decided against revenue. Expenses claimed on account of incomplete work - Held that - It is an undisputed fact that in the case of project completion method the project is deemed to have been completed on its completion and sale of its 80%. The remaining portion of 20% is under either renovation or under sale. The common areas are generally renovated after the completion of the project. In this situation, making a provision for incomplete work, cannot be called to be incorrect system of accounting. More over, the claim made by the assessee were not doubted by the Assessing Officer. He has simply disallowed the claim of the assessee on the ground that the provision of incomplete work should not have been made in the impugned assessment year, without looking to the facts that same cost of incomplete work was taken in the closing stock. We are of the opinion that CIT (A) has properly adjudicated the issue in the light of given facts and circumstances of the case. We, therefore, find ourselves in agreement with the Order of the CIT (A). We do not think that the Assessing Officer s view having been interfered with in such a scenario that any substantial question of law arises for our determination and consideration. Thus, the appeals fail on these two grounds. - Decided against revenue. Deduction under section 24(b) of the IT Act as interest on borrowed capital - ITAT allowed the claim - Held that - If two conflicting views of the Commissioner were placed before the Tribunal and the Tribunal found that it had concurred with one of those views and that the view with which it concurred prevails, then, we do not think how the Revenue can raise this issue. The issue has been considered bearing in mind the typical factual background. If the entire interest paid on the partners capital was related to the premises which were let out by the assessee but the construction thereof came from the contributions of the partners, then, the interest was due and payable to them. That interest was payable not only in terms of the general principle of partnership and highlighted in the Indian Partnership Act, 1932, but also on the broad consideration under section 24(b) of the Income Tax Act, 1961. If the income is income from house property and that is a deduction which could be granted from the same we do not think that the Revenue should be permitted to raise this ground. Even otherwise, the finding being consistent with the factual position which is not disputed, then all the more even this ground cannot be considered as a substantial question of law. - Decided against revenue.

Summary

Issues Involved:
1. Classification of rental income as business income or income from house property.
2. Deduction of expenses for incomplete work.
3. Deduction of interest on borrowed capital under section 24(b) of the Income Tax Act, 1961.

Detailed Analysis:

1. Classification of Rental Income:
The primary issue was whether the rental income received by the assessee from unsold flats should be classified as business income or income from house property. The Assessing Officer (AO) treated the rental income as business income, arguing that the income was derived from the exploitation of commercial assets and the firm was engaged in the business of constructing buildings for sale, not leasing. However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) found that the income should be treated as income from house property. The Bombay High Court upheld this view, referencing the Supreme Court's judgment in East India Housing and Land Development Trust Ltd. vs. Commissioner of Income Tax, which held that income from letting out property should be classified as income from house property, regardless of the company's business objectives.

2. Deduction of Expenses for Incomplete Work:
The second issue pertained to the deduction of Rs. 45 lakhs for incomplete work. The AO disallowed this expense, arguing there was no basis for such a claim since the buildings were completed and let out. However, the CIT(A) and ITAT accepted the assessee's explanation that the provision for incomplete work was necessary and had been accounted for in the closing stock. The High Court agreed with the ITAT's conclusion that making a provision for incomplete work is a correct accounting practice, especially when following the project completion method.

3. Deduction of Interest on Borrowed Capital under Section 24(b):
The third issue involved the deduction of interest on borrowed capital under section 24(b) of the Income Tax Act. The AO and CIT(A) initially disallowed the deduction, arguing that the partners' capital contribution was for business purposes, not for acquiring property to earn rental income. However, the ITAT found that the interest on partners' capital was related to the premises let out by the assessee and thus allowed the deduction. The High Court upheld the ITAT's decision, noting that the interest paid on partners' capital was a permissible deduction under section 24(b) since the funds were used for constructing the property from which rental income was earned.

Conclusion:
The Bombay High Court dismissed the Revenue's appeals, upholding the ITAT's decision to classify the rental income as income from house property, allow the deduction for incomplete work, and permit the deduction of interest on borrowed capital under section 24(b). The Court emphasized that the character and nature of the income, rather than its treatment in the books of account, are determinative in such cases.