2017 (10) TMI 937 - AT - Income Tax

Assessment of rental income - income from house property or business income - Held that - We note that the assessee is in the real estate business and also in the jewellery business and as such the income of the assessee is to be assessed as business income. Moreover, if the action of the AO is confirmed the assessee will be claiming additional deduction u/s 24 @ 30% in addition to the business and administrative expenses as the assessee is in the real estate business and the income of the assessee will be assessed lower than the returned income. In view of the above, we are of the view that that there is no proper justification for changing the head of income which will result in reduction of return income and accordingly the Ld. CIT(A) has rightly directed the AO to assess the rental income as business income as claimed by the assessee, which does not need any interference on our part. Disallowance under the head interest expenses, under the head salary and wages as business expenses, under the head Director s remuneration and under the head depreciation - Held that - It is an admitted fact that assessee is evidently in the real estate business and also in jewellery business and as such the assessee is eligible for deduction of all the business expenses and the depreciation etc. and accordingly, Ld. CIT(A) has rightly deleted all the additions/disallowances made by the AO, which does not need any interference on our part, hence, we uphold the same and reject the ground no. 2 raised by the Revenue. Unexplained cash credit u/s. 68 - Held that - We note that in this case the share capital money has been received through the banking channel and all the details and confirmations of the parties were submitted before the AO but the AO has selectively made the addition of ₹ 30,00,000/- in the case of two share holders only without any valid reasons, which is not permissible under the law. We further note that no material evidence has been collected against the assessee for making the selective addition of the two shareholders of the share capital of ₹ 30,00,000/-only out of total share capital of ₹ 68,30,000/- and accordingly the addition made by the AO was rightly deleted by the Ld. CIT(A), which does not need any interference on our part, hence, we uphold the same and reject the ground no. 3 raised by the revenue.

Summary

Issues Involved:
1. Classification of rental income as business income or income from house property.
2. Deletion of disallowances under various heads of business expenses.
3. Deletion of addition made under unexplained cash credit u/s 68 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Classification of Rental Income:
The primary issue was whether the rental income received by the assessee should be classified as business income or income from house property. The assessee, engaged in real estate and property development, declared rental income of ?49,20,000 as business income. The Assessing Officer (AO) treated this rental income as income from house property under Section 22 of the Income Tax Act, allowing statutory deductions under Section 24. The CIT(A) directed the AO to assess the rental income as business income, arguing that the assessee's primary business was real estate, and the rental income was part of its business activities. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's ruling in Chennai Properties & Investments Ltd. vs. CIT, which held that income from letting out properties should be taxed as business income if it aligns with the company's main objective as per its memorandum of association.

2. Deletion of Disallowances under Business Expenses:
The AO disallowed various business expenses, including interest expenses of ?38,12,230, salary and wages of ?4,20,000, director's remuneration of ?1,56,000, and depreciation of ?4,97,287, on the grounds that the assessee was not engaged in business but in investment. The CIT(A) reversed these disallowances, accepting the assessee's claim that it was engaged in real estate and jewellery businesses, thus eligible for business expense deductions. The Tribunal concurred with the CIT(A), highlighting that the assessee's activities justified the expenses claimed and that the AO's disallowances lacked valid reasons.

3. Deletion of Addition under Unexplained Cash Credit u/s 68:
The AO added ?30,00,000 as unexplained cash credit under Section 68, focusing on share capital contributions from New Creation Fuels Pvt. Ltd. and Aryan Infra Equipment Pvt. Ltd., citing unsatisfactory sources of funds. The CIT(A) deleted this addition, noting that the assessee provided all necessary details and confirmations, and the share capital was received through banking channels. The Tribunal supported the CIT(A)'s decision, emphasizing that the AO selectively added amounts from two shareholders without valid reasons and failed to gather material evidence against the assessee. The Tribunal found the AO's selective addition unjustified and upheld the CIT(A)'s deletion of the addition.

Conclusion:
The Tribunal dismissed the appeal filed by the Revenue, affirming the CIT(A)'s decisions on all issues. The rental income was rightly classified as business income, the disallowances of business expenses were correctly deleted, and the addition under unexplained cash credit was appropriately removed. The Tribunal's order was pronounced in the open court on 18/10/2017.