2015 (12) TMI 397 - AT - Income Tax

Taxing the rental income under the head income from house property as against income from other sources - Allowance of interest expenditure - Held that - In this case IOD was issued in relation to the plan that was put up on 25. 8. 2006 i. e. after entering into the development agreement. The fact is confirmed from the IOD dated 10. 1. 2007 and CC dt. 24. 4. 2007. It is found that amended plan was put up on 21. 2. 2007 and was approved on 8. 3. 2007, that construction work started in earlier assessment year and expenses were shown in the books of account from that year, that total expenditure incurred till 31. 3. 2007 was of ₹ 10, 53, 44, 733/-, that further expenses were incurred in the subsequent year and showed in the books of account, that the assessee had given details of the constructed area and the availability of certain areas free of FSI, that the certificate of the architect indicates that 3rd to7th floors were constructed later on, that the statement of the architect were not provided to the assessee though the same were relied upon by the AO, that as on 12. 4. 2008 two floors of the school building were complete. It is also found that in the case of BKF the AO has mentioned that the trust was conducting schools at Mira Road and Chembur, that there is no doubt that BKF was deducting tax at source on payment of rent to the Assessee. The AO has mentioned that instead of occupying the building the assessee might have utilised some other premises for running the school. We do not find any reason for arriving at the said inference. The evidences produced before the FAA about admission of students and their report cards for 3 academic years clearly prove that the school had commenced its activities in the year under consideration. We do not find any legal infirmity with the order of the FAA who had held that income could not be taxed as income from other sources and that interest paid had to be allowed u/s. 24 of the Act. - Decided against revenue. Allowance of expenses on account of improvement of leased premises - Held that - We find that the assessee had installed various items as per the mutual agreement entered into with the lessee, that the amount was capitalised. We have, in the earlier part of the order, held that rental income was to be assessed u/s. 22 of the Act. Therefore, we agree with the observation of the FAA that capitalisation will not make any difference.- Decided against revenue. Allowance of expenses on account of bogus purchases and proportionate interest expenditure - Held that - AO had made the disallowance on the basis of statements of Girish Sangani and Rajesh Kanakia, that both of them had admitted of accommodation entries and had made admission u/s. 132(4) of the Act with regard to these sale/purchases, that both of them had not alleged that the assessee had taken accommodation entries, that documentary evidences were produced regarding purchase of goods and same were not rebutted by the AO. In our opinion, the addition had to be restricted to the four entities who had taken the accommodation entries. As the AO has not brought on record that purchases made by the assessee were part of bogus bill transactions, so we are of the opinion that FAA was justified in deleting the addition with regard to addition made under the head bogus purchases as well as the proportionate interest disallowance - Decided against revenue. Addition made on account of accommodation entries - CIT(A) deleted the addition - Held that - While deciding ground no. 4, we have held that the AO was not justified in making the addition for alleged accommodation entries in case of the assessee. Following the same we uphold the order of the FAA - Decided against revenue. Allowance of proportionate interest expenses related to advances made towards Juhu land - Held that - FAA has given a categorical finding of fact that no interest bearing fund was utilised for purchasing the property in question, that the advances were given out of the funds received by the assessee from one of the group concerns namely Kanakia Spaces Pvt. Ltd., and it did not charge any interest from the assessee. Therefore, in our opinion disallowance was rightly deleted by the FAA - Decided against revenue.

Summary

Issues Involved:
1. Taxation of rental income under the head "income from house property" versus "income from other sources."
2. Allowance of interest expenditure of Rs. 3.26 crores.
3. Allowance of expenses of Rs. 1.92 crores on account of improvement of leased premises.
4. Allowance of expenses of Rs. 2.80 crores on account of bogus purchases and proportionate interest expenditure of Rs. 28.77 lacs.
5. Addition on account of accommodation entries amounting to Rs. 11.51 lacs.
6. Allowance of proportionate interest expenses of Rs. 80.69 lacs related to advances made towards Juhu land.

Detailed Analysis:

1. Taxation of Rental Income and Allowance of Interest Expenditure:
The primary issue was whether the rental income should be taxed under "income from house property" or "income from other sources." The AO argued that the building was not completed by the specified date and thus disallowed the interest expenditure of Rs. 3.26 crores. The FAA, however, found that the construction was completed and the school was operational, supported by various documents including admission forms and tax deductions. The Tribunal upheld the FAA's decision, confirming that the rental income should be taxed under "income from house property" and the interest expenditure of Rs. 3.26 crores should be allowed under Section 24 of the Income Tax Act.

2. Allowance of Expenses on Improvement of Leased Premises:
The AO disallowed the expenses of Rs. 1.92 crores incurred on furniture, fixtures, and infrastructure, arguing it was the school's responsibility. The FAA found that these expenses were mutually agreed upon between the parties and capitalized by the assessee. The Tribunal upheld the FAA's decision, agreeing that the capitalization of these expenses did not affect the taxable income since the rental income was assessed under "income from house property."

3. Allowance of Expenses on Bogus Purchases and Proportionate Interest:
The AO disallowed Rs. 2.80 crores related to alleged bogus purchases and proportionate interest of Rs. 28.77 lacs based on statements from Girish Sangani and Rakesh Kanakia. The FAA found no direct evidence linking the assessee to these bogus transactions and noted that the supporting documents provided by the assessee were uncontroversial. The Tribunal upheld the FAA's decision, stating that without concrete evidence, the AO's disallowance was unjustified.

4. Addition on Account of Accommodation Entries:
The AO added Rs. 11.51 lacs as unexplained expenditure under Section 69B, considering it part of bogus purchases. The FAA, referencing his earlier findings on accommodation entries, held that the purchases were genuine. The Tribunal upheld the FAA's decision, dismissing the AO's addition.

5. Allowance of Proportionate Interest Expenses Related to Juhu Land:
The AO disallowed interest expenses of Rs. 80.69 lacs related to advances made towards Juhu land, claiming they were not incurred for the property in question. The FAA found that the advances were made from non-interest-bearing funds received from Kanakia Spaces Pvt. Ltd. and were for business purposes. The Tribunal upheld the FAA's decision, confirming that no interest-bearing funds were used for these advances, and thus the disallowance was rightly deleted.

Conclusion:
The Tribunal dismissed the appeal filed by the AO, upholding the FAA's decisions on all grounds. The rental income was correctly taxed under "income from house property," and the related interest expenditures were allowed. The expenses on improvement of leased premises and alleged bogus purchases were also allowed, and the additions on account of accommodation entries and proportionate interest expenses related to Juhu land were deleted.