2014 (5) TMI 1176 - AT - Income Tax

Disallowance of business expenditure - assessee company had not commenced during the year under consideration - Held that - While deciding the appeal for, AY 2005-06 on 11.09.2013,Tribunal had held that assessee commenced its business activity in March 2004 i.e. in AY 2004-05. It was finally held that assessee had set up his business activities in earlier years. As the facts and circumstances for the year under appeal are identical to the earlier AY.s,so,respectfully following the same we decide ground no.1 & 2 against the AO. He is directed to allow the deductions to the assessee as per the provisions of law. Allowance of interest expenditure under the head Income from House Property - Held that - Referring to orders for the earlier years as held that income of the assessee for the year under consideration has to be assessed under the head Business Income ,therefore, in our opinion ground taken by the AO has to be dismissed. Tax the Miscellaneous Income,Foreign Exchange Gain and Other Income under the head Business Income - Held that - We find that AO was of the opinion that assessee had not commenced its business activity and therefore, income received under the heads miscellaneous income etc. could not be assessed as business income. But, in the earlier years it has been held by the Tribunal that income from sub-leasing of premises of the I.T.Parks was the business of the assessee and same was set up/commenced in earlier years and we have followed the order of earlier years. In these circumstances, in our opinion, FAA had rightly held that incomes from foreign exchange gain, car parking, penalty etc. were incidental to the business, carried out by the assessee. Addition on account of income from sub-lease of land and income under the head maintenance - Held that - Following our order for the earlier year, we hold that income from the sub lease of land and income under the head maintenance has to be assessed under the head Business income and not under the head Income from Other Sources. As a result, we decide first ground of appeal against the AO. Addition on account of interest paid on borrowings utilised for construction of house property under section 24 - Held that - It is not in dispute that the assessee had taken loan for construction of buildings and it had also paid interest. FAA had held that out of the interest of ₹ 2.93 Crores ₹ 2.48 Crores should be allowed as interest expenditure under the head income from house property. From the balance sheet it is clear that the assessee has interest amounting to ₹ 2.48 Crores was capitalised. Therefore, FAA was justified in holding that it represented work in progress. For the balance interest payment of ₹ 45 lakhs he held that same was allowable under either of the heads. In our opinion,if interest has been paid by an assessee; for acquiring or constructing assets that are used for earning taxable income; then his claim for interest expenditure has to be allowed. Therefore, confirming the order of the FAA - decided against revenue Treatment of maintenance income - assessed as income from other sources or business income - Held that - To be held that the income received by the assessee as maintenance income has to be assessed as business income. - decided against revenue

Issues Involved:

1. Commencement of business activities by the assessee.
2. Classification of sub-lease income.
3. Allowability of interest expenditure under the head "Income from House Property".
4. Classification of miscellaneous income, foreign exchange gains, and other income.
5. Treatment of maintenance income.

Detailed Analysis:

1. Commencement of Business Activities by the Assessee:

The primary issue was whether the business activities of the assessee had commenced. The Assessing Officer (AO) contended that the business had not commenced, citing that the development projects were still in the work-in-progress (WIP) stage. Conversely, the First Appellate Authority (FAA) and the Tribunal referenced previous assessments (AY 2006-07) where it was established that the assessee's business had commenced in AY 2004-05. The Tribunal upheld this view, confirming that the business activities had indeed started, and the income from such activities should be treated as business income.

2. Classification of Sub-Lease Income:

The AO classified the sub-lease income as "Income from House Property", while the assessee claimed it as "Business Income". The FAA and Tribunal, following precedents from earlier years, ruled that sub-leasing was part of the assessee's business activities. The Tribunal directed the AO to treat sub-lease income as business income, aligning with the assessee's claim.

3. Allowability of Interest Expenditure under the Head "Income from House Property":

The AO disallowed the interest expenditure claimed under "Income from House Property", arguing that the expenditure was not specifically identifiable to any building. The FAA, however, found that the assessee had established a nexus between the loan taken and the construction of buildings, some of which were let out. The Tribunal upheld the FAA's decision, allowing the interest expenditure under the head "Income from House Property", noting that the interest expenditure was justified and should be allowed as per the provisions of the law.

4. Classification of Miscellaneous Income, Foreign Exchange Gains, and Other Income:

The AO assessed these incomes under "Income from Other Sources", arguing that the assessee had not commenced business activities. The FAA and Tribunal, referencing earlier assessments, ruled that these incomes were incidental to the business activities and should be classified as "Business Income". The Tribunal confirmed that the miscellaneous income, foreign exchange gains, and other incomes were rightly assessed by the FAA under the head "Business Income".

5. Treatment of Maintenance Income:

The AO treated the maintenance income as "Income from Other Sources". The FAA and Tribunal, however, held that maintenance income was part of the business activities. The Tribunal, following its earlier decisions, ruled that the maintenance income should be assessed as "Business Income".

Conclusion:

The Tribunal dismissed the appeals filed by the AO for both assessment years, confirming that the assessee's business activities had commenced, and various incomes, including sub-lease, maintenance, miscellaneous, foreign exchange gains, and other incomes, should be classified under "Business Income". The interest expenditure was also allowed under the head "Income from House Property", following the provisions of the law.

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