1987 (9) TMI 428 - AT - Income Tax

Summary

Issues Involved:
1. Whether the rent received by the assessee from the bank was business income.
2. Whether the interest difference on the extra amount of Rs. 2,50,000 can be allowed as deduction.
3. Whether the remuneration to Directors was excessive.
4. Whether the amounts paid to the HUF as scooter and cycle parking charges were justified.

Issue-wise Detailed Analysis:

1. Whether the rent received by the assessee from the bank was business income:
The assessee had taken on lease a substantial portion of a building from an HUF and rented it out to a bank after making significant improvements. The ITO considered the rent as income from other sources, disallowing the set-off of unabsorbed losses. The CIT (A) held that the rent income was income from business, considering the activities undertaken by the assessee to earn this rental income. The Tribunal referred to the Supreme Court decisions in Karnani Properties Ltd. v. CIT and S.G. Mercantile Corpn. (P.) Ltd. v. CIT, concluding that the activities of the assessee were business activities and the income earned by way of rent falls under the head "Income from business." The Third Member agreed, noting that the assessee's activities constituted an adventure in the nature of business, thus confirming the CIT (A)'s order.

2. Whether the interest difference on the extra amount of Rs. 2,50,000 can be allowed as deduction:
The assessee had an agreement to advance Rs. 6 lakhs to the HUF at 6% interest but actually advanced Rs. 8,50,000, borrowing from the bank at 15% interest. The ITO disallowed the interest difference on the extra Rs. 2,50,000. The CIT (A) allowed the interest, stating that the absence of a written agreement cannot be a ground for disallowance, and the interest was paid on the basis of business expediency. The Tribunal upheld this view, emphasizing that an oral understanding suffices for such business transactions. The Third Member also agreed, stating that the additional interest paid was in the business interest of the assessee, thus confirming the CIT (A)'s order.

3. Whether the remuneration to Directors was excessive:
The ITO disallowed Rs. 12,000 out of Rs. 18,250 paid to the Directors under sec. 40C(1). The CIT (A) observed that the remuneration was within the monetary limits laid down u/s 40C and was reasonable, deleting the addition. The Tribunal agreed with the CIT (A)'s reasoning and rejected the appeal on this point.

4. Whether the amounts paid to the HUF as scooter and cycle parking charges were justified:
The ITO disallowed the excess payment made to the HUF for scooter and cycle parking charges, considering it unreasonable. The CIT (A) allowed the payment, linking it to the business activity of leasing the property. The Tribunal, however, reversed the CIT (A)'s order, stating that the payments were not part of any agreement and were unreasonable, confirming the ITO's disallowance.

Conclusion:
The appeals were partly allowed, with the Tribunal confirming the CIT (A)'s orders on the business nature of the rental income and the interest deduction, while reversing the CIT (A)'s orders on the scooter and cycle parking charges. The Third Member's opinion aligned with the Judicial Member, confirming that the rent was business income and the interest on the extra amount was deductible.