2016 (1) TMI 534 - AT - Income Tax

Computation of rental income - Assessing Officer treated the amount of rent as income from other sources - Held that - The assessee has in fact credited rental income of ₹ 1.62 crores to its profit & loss account. A copy of the Addendum dated 25.08.2006 to the Lease agreement has been placed at page 28 of the paper book, as per which, the Lessor agrees to give an additional rent free period of one month from the rent commencement date towards delays in handover of the premises. Lessee hereby agree to adjust ₹ 22,18,200/- out of the rent payable to the Lessor . This addendum to the agreement amply proves that the assessee allowed rent free period of one month to the lessee because there was some delay in handing over of the premises. Once no rent is received as the same stood waived because of late handing over of the possession, there cannot be any question of charging such amount as Income from other sources . We, therefore, overturn the impugned order on this score and order for deletion of this addition. - Decided in favour of assessee Disallowance on account of interest on O.D. account - Held that - The assessee claimed deduction of interest on over draft account stated to have been utilized for purchase of the furniture and fixtures and repairs and maintenance of the building which was let out on rent. The Learned AR submitted that the AO did not allow a reasonable opportunity to adduce necessary evidence and requested that one more opportunity be given to the assessee for filing necessary evidence in this regard. It is noticed that it is a case of payment of interest to bank and hence the genuineness of payment of such interest cannot be denied. The only thing which remains is to link such interest with the purpose of loan. Agreeing with the contention, we set aside the impugned order on this score and send the matter to the Assessing Officer for examining this issue afresh in the light of the evidence which the assessee proposes to adduce in support of the claim of deduction of interest.- Decided in favour of assessee for statistical purposes. Disallowance on account of interest on bank loan - Held that - Here again, the assessee could not file evidence of spending the loan amount for acquiring building etc. with the help of loan on which interest was paid and the learned AR seeks one more opportunity for adducing such evidence. Following the view taken hereinabove, we set aside the impugned order and send the matter to the Assessing Officer for deciding this issue afresh in the light of the evidence to be filed by the assessee.- Decided in favour of assessee for statistical purposes. Disallowance on account of Professional charges - Held that - It can be seen from the Profit & loss account that there is a debit of ₹ 54,827/- towards Professional charges. The learned AR contended that the Assessing Officer did not allow adequate opportunity to present evidence in support of the payment of such Professional charges. Setting aside the impugned order on this score, we remit the issue to the Assessing Officer with a direction to allow adequate opportunity to the assessee for producing necessary evidence in support of this payment and then decide as per law.- Decided in favour of assessee for statistical purposes. Disallowance on account of Processing of loan fees by treating it as capital expenditure - Held that - No substance in the view canvassed by the authorities below that the processing of loan fees is a capital expenditure. The fact that such processing fee has been paid by the assessee has not been denied by the AO. The dispute is only whether it is a capital or a revenue expenditure. We do not find any qualitative difference between interest and processing fee on loan. In our considered opinion, such processing fee cannot be capitalized and is deductible in the same manner in which the interest is deductible. We, therefore, set aside the impugned order on this issue also and send the matter to the file of the AO to consider the deductibility of such amount on the same line as that of the interest.- Decided in favour of assessee for statistical purposes. Income from house property - Rental income inclusive of service tax - whether should be deducted from the gross rental receipts? - Held that - The assessee categorically claimed before the authorities that gross rent of ₹ 2.66 crore includes service tax of ₹ 0.14 crore and only the net amount should be charged to tax. The amount of service tax is undoubtedly a part of assessee s receipt and is chargeable to tax in the same way as receipt. However, the payment of service tax is deductible in the computation of income. The authorities below have considered only the receipt aspect of the rent at ₹ 2.66 crore inclusive of service tax but have not allowed any deduction for service tax claimed to have been paid by the assessee before the due date. Under such circumstances, we hold that the gross rental income is chargeable at ₹ 2.66 crore but the assessee is also eligible for deduction of ₹ 0.14 crore towards payment of service tax.- Decided in favour of assessee Disallowance on account of brokerage charges - Held that - As AR argued that such brokerage charges were paid to commission agents for procuring tenants of the building and this brokerage was paid at the rate of 40 days rental value. He submitted that the assessee could not file evidence for the payment of such brokerage because of inadequate opportunity provided by the Assessing Officer. In our considered opinion, the ends of justice would meet adequately if the impugned order on this issue is set aside and matter is sent back to the Assessing Officer for a fresh determination - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Treatment of rental income - Income from other sources or Income from house property.
2. Disallowance of interest on O.D. account.
3. Disallowance of interest on bank loan.
4. Disallowance of professional charges.
5. Treatment of processing of loan fees as capital expenditure.

Issue 1: Treatment of Rental Income
In the assessment year 2007-08, the issue was whether rental income should be treated as 'Income from other sources' or 'Income from house property.' The Assessing Officer considered the rent as 'income from other sources' due to a mention of rent in the lease agreement. However, the appellant argued that no rent was received for one month due to a delay in handing over the premises, as per an addendum to the lease agreement. The tribunal found that the rent-free period was granted due to the delay, thus overturning the order and ordering the deletion of the addition.

Issue 2: Disallowance of Interest on O.D. Account
The appellant claimed a deduction for interest on an overdraft account used for building maintenance. The Assessing Officer disallowed it for lack of evidence. The tribunal observed that the payment of interest to the bank was genuine and directed the matter back to the Assessing Officer for re-examination based on the evidence to be provided by the appellant.

Issue 3: Disallowance of Interest on Bank Loan
Similar to the previous issue, the disallowance of interest on a bank loan was challenged by the appellant for lack of evidence of loan utilization. The tribunal set aside the order and directed the Assessing Officer to reconsider the issue based on the evidence to be submitted.

Issue 4: Disallowance of Professional Charges
The disallowance of professional charges was contested by the appellant due to insufficient opportunity to present evidence. The tribunal remitted the issue back to the Assessing Officer with a direction to allow adequate opportunity for producing necessary evidence.

Issue 5: Treatment of Processing of Loan Fees
The Assessing Officer treated processing of loan fees as capital expenditure, which was disputed by the appellant. The tribunal held that processing fees should be treated as revenue expenditure and directed the matter back to the Assessing Officer for reconsideration in line with the treatment of interest expenses.

In conclusion, the tribunal partially allowed the appeals for both assessment years, addressing various issues related to rental income treatment, interest disallowances, professional charges, and processing fees, while providing directions for re-examination based on the evidence presented by the appellant.