2017 (11) TMI 903 - AT - Income Tax

Disallowance for the business expenses including the depreciation - assessee has not carried out any activity under the head business or profession during the year under consideration as well as subsequent year - Held that - It is the disputed fact that no income whatsoever has been shown by the assessee in the financial year which beginning from 2003-04 to 2005-06 and 2008-09 as evident from the order of Authorities Below. It is also disputed fact that assessee has shown various advances in its balance-sheet for the purchase of property as evident from the order of Authorities Below. But the disallowances were made by AO on the ground that there is no business activity carried out by assessee. In our considered view it is a question of fact to establish whether the business of assessee is in existence or not. If yes it is very much eligible for deduction of the expense incurred by assessee. We note that the ld. CIT-A has simply accepted on the submission of the assessee and has come to the conclusion that the assessee is doing business activity. But no contrary evidence has been brought on record to prove the existence of business of assessee in the appellate order except a finding that assessee has made advance for the purchase of property. In our considered view, the advance shown by assessee does not ipso facto prove that assessee is carrying on business. Thus in our considered view the fact that the assessee is running a business needs to be established. Therefore we are inclined to set aside the impugned order and restore the issue back to the file of Ld. CIT(A) with a direction to find out the question of fact as to whether the business of assessee is in existence or not. While doing so, the Ld. CIT(A) shall give a due and fair opportunity of hearing to the assessee as well as call for the remand report from the AO in accordance with law and shall decide the matter by way of a speaking order in accordance with law. Hence, this ground of Revenue s appeal is allowed for statistical purpose.

Summary

Issues Involved:
1. Disallowance of business expenses including depreciation due to lack of business activity.
2. Classification of rental income from car parking and furniture under the head "house property."

Issue-wise Detailed Analysis:

1. Disallowance of Business Expenses Including Depreciation:
The primary issue raised by the Revenue was that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in deleting the disallowance made by the Assessing Officer (AO) for business expenses, including depreciation, on the grounds that the assessee did not carry out any business activity. The assessee, a partnership firm, claimed to be engaged in the business of real estate development and had advanced payments for properties, which were reflected in its balance sheet. The assessee also claimed various business expenses and depreciation in its profit and loss account. However, the AO disallowed these expenses, arguing that the assessee had not conducted any business activity during the relevant assessment years and had already claimed expenses against rental income under Section 24 of the Income Tax Act, 1961.

The CIT(A) found that the assessee had given advances for properties and used its Delhi property as an administrative office for its real estate business. The CIT(A) referred to the judgment of the Hon'ble Calcutta High Court in the case of Tetrun Commercial Ltd. (261 ITR 422) and the Hon'ble Gujarat High Court in CIT v. Sourastra Cement & Chemical Industries Ltd. (102 ITR 25), which held that business activities commence with the first essential activity, such as acquiring land. The CIT(A) concluded that the business of real estate had commenced and allowed the expenses and depreciation claimed by the assessee.

The Revenue contended that the assessee had not carried out any business activities and was merely making investments in properties with rental income. The Tribunal noted that the CIT(A) had not verified whether the advances shown by the assessee were investments or stock-in-trade. The Tribunal set aside the CIT(A)'s order and remitted the issue back to the CIT(A) to determine whether the business of the assessee was in existence, directing the CIT(A) to provide a fair opportunity of hearing to the assessee and call for a remand report from the AO.

2. Classification of Rental Income from Car Parking and Furniture:
The second issue raised by the Revenue was whether the rental income from letting out car parking and furniture should be treated as income under the head "house property." The Tribunal noted that this issue did not require adjudication at this stage as the matter was already restored to the CIT(A) for deciding the primary issue afresh. Consequently, this issue was also remitted back to the AO for fresh adjudication in accordance with the law.

Conclusion:
The Tribunal allowed the Revenue's appeals for statistical purposes, remitting the primary issue of business activity and related expense claims back to the CIT(A) for a fresh determination. The classification of rental income from car parking and furniture was also remitted back for fresh adjudication. The Tribunal directed the CIT(A) to provide a fair hearing to the assessee and consider the remand report from the AO in accordance with the law.