2017 (11) TMI 369 - AT - Income Tax

Rental income earned by the assessee - head of income selection - chargeable under the head Business Income or Income from House Property - Held that - The main objective of the assessee company was to deal in real estate of varied nature and the rental income was the main source of income for the assessee. Our view is further fortified by the cited CBDT circular No. 16/2017 and judgment of this Tribunal rendered in the case of assessee s sister concern under identical situation. Even otherwise, the revenue has accepted the stand of assessee in several other years and rule of consistency demands that similar stand be taken under identical circumstances. Therefore, we conclude that rental income earned by the assessee was chargeable under the head Business Income only as against Income from House Property taken by lower authorities. Resultantly, this ground of assessee s appeal succeeds. Disallowance of various expenditure viz. depreciation, business expenses, interest expenses etc. - These were disallowed by the lower authorities since the rental income earned by the assessee, as per their opinion, was chargeable under the head Income from house Property against which the assessee was eligible for fixed statutory deduction of 30% - Held that - Since, we have already allowed assessee s appeal qua head under which rental income would be assessable, we deem it fit to restore the matter of allowance of various expenditure to the file of jurisdictional Assessing Officer with a direction to re-appreciate the same and verify their allowability as per law. The assessee, in turn, is directed to substantiate the same forthwith failing which Ld. AO shall be at liberty to dispose-off the same on the basis of material available on record. Resultantly, all other grounds stands allowed for statistical purposes.

Issues Involved:
1. Classification of Lease Rentals Income
2. Disallowance of Depreciation on Equipment and Amenities
3. Disallowance of Prepayment Charges
4. Disallowance of Interest on Additional Loan
5. Allowance of Various Expenditures
6. Invocation of Revisional Jurisdiction under Section 263
7. Assessment of Interest Income on Advances and FDRs

Issue-wise Detailed Analysis:

1. Classification of Lease Rentals Income:
The primary issue was whether the lease rentals income should be classified as "Income from House Property" or "Business Income." The assessee argued that the income should be treated as Business Income due to the nature of services provided and the business model. The lower authorities had classified it as Income from House Property, relying on the Madras High Court's decision in CIT Vs. Chennai Properties & Investments Limited. However, the Supreme Court later reversed this decision, ruling that if the main objective of the assessee was leasing property as a business, then the income should be classified as Business Income. The Tribunal, considering the Supreme Court's judgment and the CBDT Circular No.16/2017, concluded that the rental income earned by the assessee was chargeable under the head Business Income.

2. Disallowance of Depreciation on Equipment and Amenities:
The lower authorities disallowed the depreciation on equipment and amenities because they classified the rental income under Income from House Property, which only allows a fixed statutory deduction of 30%. Since the Tribunal reclassified the rental income as Business Income, it restored the matter of allowance of various expenditures, including depreciation, to the Assessing Officer (AO) for re-evaluation.

3. Disallowance of Prepayment Charges:
The prepayment charges of ?19,72,233 paid to Indusind Bank Limited were disallowed by the lower authorities under the head Income from House Property. Since the Tribunal reclassified the rental income as Business Income, it directed the AO to re-evaluate the allowability of these charges under the correct head.

4. Disallowance of Interest on Additional Loan:
The AO disallowed the interest on an additional loan of ?5 Crores obtained from HDFC Bank, which was advanced to a sister concern as interest-free advances. The Tribunal restored this issue to the AO for re-evaluation under the head Business Income.

5. Allowance of Various Expenditures:
The lower authorities disallowed various expenditures, including depreciation, business expenses, and interest expenses, under the head Income from House Property. The Tribunal, having reclassified the rental income as Business Income, directed the AO to re-evaluate the allowability of these expenditures.

6. Invocation of Revisional Jurisdiction under Section 263:
For the assessment year 2004-05, the CIT invoked revisional jurisdiction under Section 263, directing the AO to reclassify the rental income as Income from House Property and verify the loans and expenditures claimed by the assessee. The Tribunal dismissed the appeal against the invocation of Section 263 as infructuous but allowed the appeal regarding the classification of rental income and restored the issue of expenditure allowance to the AO.

7. Assessment of Interest Income on Advances and FDRs:
The revenue was aggrieved by the CIT(A)'s decision to classify interest income on advances and FDRs as Business Income instead of Income from Other Sources. The Tribunal restored this issue to the AO for re-evaluation in light of its decision to classify the rental income as Business Income.

Conclusion:
The Tribunal reclassified the rental income as Business Income and restored various issues regarding the allowance of expenditures, prepayment charges, and interest on additional loans to the AO for re-evaluation. The appeals were disposed of with directions for re-computation of book profits under Section 115JB and carry forward of losses, if required.

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