2016 (5) TMI 263 - AT - Income Tax

Allowability of expenditure on car/s - nature of the professional expenses - whether the assessee could not establish any direct nexus of the impugned expenditure with the said business? - Held that - The firm and the partners are separate & distinct entities/persons under the Act, even as the receipt of interest and remuneration by a partner from a firm is only in nature of share in the profits of the firm and, thus, assessable as business income. This position gets further clarified after the amendments to the Act (viz. ss. 28, 40, 184, 185) by Finance Act, 1992, materially altering, firstly, the definition of income (of a partnership firm and its partners) and, secondly, the manner of its computation and bringing it to tax. On facts, assuming the car/s being used for the business purposes of the firms, why should a partner bear the expenditure of the firm, which, besides being not deductible in his hands, would only be to his own detriment. The assessee, on the other hand, stating that the firms (of which he is a partner), as being not interested in investing in a car. In fact, in case of the same (common) car being used, the expenditure would necessarily have to be appropriated between the two firms, for which the car is thus used, and the assessee (refer s. 38(2)). In other words, the expenditure would required to be split three ways, i.e., the two firms for which the car is being also used, and the assessee. That, as well as the proportionate incidental expenditure on car repairs, depreciation, and interest (on car loan), is, as afore-stated, the only expenditure that the assessee can rightly claim against the business income from the firms, with that relatable to the business purpose of the firms being deductible in their hands. Further, the assessee has nowhere specified the expenditure on the personal user of the car/s, an aspect which cannot be overlooked. We, accordingly, restore the matter back to the file of the A.O. to verify the assessee s claims and determine the expenditure on car/s deductible in his hands in accordance with law, issuing definite findings of fact. The onus, we may clarify, to establish his claims, with materials and explanations, would only be on the assessee. We decide accordingly. - Decided in favour of assessee for statistical purposes. Income assessable under the head Income from House Property - Held that - The adoption of an enhanced rate does not breach the theory of real income inas- much as what the law envisages is the estimation of the annual value, defined as the fair rent that a house property is expected to fetch from year to year (sec. 23). It is only where the actual rent exceeds the fair rental value that the same is taken as annual value u/s. 22. That the tenants are related entities, and the assessee entered into the rental arrangements (perhaps for the first time), as stated, with a view to set off the interest on loan utilized for self occupied house property (residence), is of little relevance and, if anything, rather impugns the assessee s case. We, accordingly, do not consider it as a fit case for remand. As regards maintenance charges (Rs.10,096/-) paid to the housing society, the payment thereof is certainly an expenditure that would be factored into while determining the rent, so that where paid/payable by the owner, who is legally liable therefor, the rent is increased to that extent, neutralizing its impact. Considering the totality of facts, including the nominality of the amount, we consider the assessee s claim as sustainable in law as the market rent presumably factors in such charges. The same is directed to be allowed.We, accordingly, confirm the action of the Revenue, further directing it to allow the assessee, in computing the income from house property, his claim qua maintenance charges (Rs.10,096/-) after verifying if the same is wholly in respect of the rented house property/s

Summary

Issues Involved:
1. Disallowance of car-related expenses against business income.
2. Assessment of rental income under the head 'Income from House Property'.

Issue-wise Detailed Analysis:

1. Disallowance of Car-related Expenses Against Business Income:

The assessee contested the disallowance of expenses (?1.07 lacs) related to car usage against business income derived from interest and remuneration from two firms. The Assessing Officer (A.O.) disallowed these expenses due to the lack of direct nexus between the expenses and the business activities, and the possibility of personal use of the car. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, stating that the income from interest and remuneration should be classified as income from other sources under Section 56, and that the claimed expenses had no nexus to this income.

Upon review, the Tribunal acknowledged that income from interest and remuneration to a partner is assessable as business income under Section 28(v). Thus, expenses incurred for business purposes should be allowable under Section 37(1). However, the Tribunal noted the absence of evidence showing the car was used exclusively for business purposes. The Tribunal emphasized that the firm and partners are distinct entities under the Act, and questioned why a partner would bear firm expenses. The Tribunal restored the matter to the A.O. to verify the claims and determine the deductible car expenses based on factual findings, clarifying that the onus of proof lies on the assessee.

2. Assessment of Rental Income Under 'Income from House Property':

The assessee owned a flat and two garages, rented to a company and two partnership firms, declaring the rental income as house property income under Section 22 read with Section 23(1)(a). The A.O. suspected the rental income was understated due to the close nexus between the assessee and the tenants, and estimated higher rental values based on market inquiries. The CIT(A) upheld this estimation, distinguishing it from a precedent case (CIT vs. Shiv Mohan Lal) where the properties were used for the owner's business.

The Tribunal observed that the assessee's claim of using the properties for his business was misconceived, as the entities were separate legal persons. The Tribunal noted procedural lapses, such as the assessee not being confronted with the Inspector's report, but criticized the assessee for not seeking the report or providing relevant market rent data. The Tribunal upheld the A.O.'s enhanced rental valuation, stating it aligned with the fair rent expectation under Section 23, and allowed maintenance charges of ?10,096/- as deductible, directing verification if these were related to the rented properties.

The Tribunal concluded that the decision in Shiv Mohan Lal did not support the assessee's case, as it dealt with different facts and did not address valuation issues. The Tribunal confirmed the Revenue's action but granted partial relief by allowing maintenance charges after verification.

Conclusion:

The appeal was partly allowed, with the Tribunal remanding the car expense issue back to the A.O. for verification and confirming the enhanced rental income assessment while allowing maintenance charges. The order was pronounced in open court on April 29, 2016.