2019 (3) TMI 1877 - AT - Income Tax

Allowability of interest on loan as business expenditure - assessee is having commercial property which is rented and in order to provide the equipment and furniture assessee has taken loan from bank and the relevant interest was charged to P L A/c as business expenditure - AO has rejected the claim of the assessee and treated the consolidated receipt of rent and hire charges as income from house property - HELD THAT - We have to see the intention of the assessee whether the letting was the doing of a business or to exploitation of his property by an owner. The assessee when exploited the property to derive rental income it has to be held that the income realized by him by way of rental income from a building if the property with other asset attached to the building to be assessed as income from house property only. The only exceptions are cases where the letting of the building is inseparable from letting of the machinery plant and furniture. In such cases it has to be held that the rental would not have been realized but for the letting out of the machinery plant or furniture along with such building and therefore rental received for the building is to be assessed under the head income from other sources . In the present case on the facts of the case it is clear that the assessee as the owner of the building was only exploiting the property as owner by letting out the same and realizing income by way of rent. Such rental income was liable to be assessed under the head income from house property. The various assets let out to the tenants are incidental to letting out the building being integral part of the letting. Accordingly we reverse the order of the CIT(A) and restore that of the assessing officer. This ground of the revenue is allowed. Assessee has availed loan to arrange the relevant fixed assets in the building and incurred interest expenditure - Since the assessee was claiming them as business expenditure as the income was declared as business income. As the authorities have treated the business income as income from house property the interest expenditure is connected to the earning of income and head of income was changed due to the facts of the case the relevant expenditure is accordingly claimable u/s 24(b) of the Act. Merely accepting the income and excluding the related expenditure is not proper. Therefore we direct the AO to allow the relevant expenditure which assessee has incurred to earn the rental income. Accordingly additional ground raised by the assessee is allowed.

Summary

Issues involved:
Appeals against CIT(A) orders for AYs 2007-08 and 2010-11; Reassessment proceedings validity; Classification of income from property provision of amenities; Allowability of interest expenditure; Income categorization as business or house property.

Analysis:

Reassessment Proceedings Validity:
The appellant challenged the validity of the reassessment proceedings initiated by the Assessing Officer. The appellant contended that there were no valid reasons for initiating the reassessment and that the Assessing Officer failed to provide the reasons recorded for issuing the notice under section 148 of the Act. However, the Tribunal upheld the reassessment, emphasizing the assessing officer's discretion to look beyond documents to ascertain the true nature of the income declared. The Tribunal concluded that the assessing officer correctly bifurcated the income into rental income and hire charges for amenities, assessing the former as income from house property. The Tribunal dismissed the appellant's contentions regarding the validity of the reassessment proceedings.

Classification of Income from Property Provision of Amenities:
The primary issue revolved around the classification of income derived from providing amenities to tenants of a commercial property. The appellant declared hire charges as business income and claimed interest on loans for amenities provision as business expenditure. However, the authorities treated the hire charges as part of rental income, rejecting the interest expenditure claim. The Tribunal concurred with the authorities, emphasizing that the rental income from the property should be assessed under the head "income from house property." The Tribunal differentiated cases where letting of the building was inseparable from letting machinery, plant, or furniture, stating that such rentals would fall under "income from other sources." The Tribunal upheld the authorities' decision, affirming the rental income classification.

Allowability of Interest Expenditure:
The appellant sought the allowance of interest expenditure incurred on loans for amenities provision, claiming it as business expenditure. The Tribunal agreed with the appellant, noting that since the income was treated as income from house property, the interest expenditure connected to earning that income should be allowable under section 24(b) of the Act. The Tribunal directed the Assessing Officer to allow the relevant expenditure incurred by the appellant to earn rental income, thereby allowing the additional ground raised by the appellant.

Conclusion:
The Tribunal partially allowed both appeals, dismissing the original ground raised in the appeals while allowing the additional ground related to interest expenditure. The Tribunal's decision was based on the classification of income from property provision of amenities, the validity of reassessment proceedings, and the allowability of interest expenditure. The judgment emphasized the importance of correctly categorizing income and expenses in line with the provisions of the Income Tax Act, ensuring a fair and accurate assessment of tax liabilities.