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2018 (1) TMI 933 - AT - Income Tax


Issues Involved:
1. Confirmation of findings that no business was done by the assessee company and disallowance of related expenses.
2. Disallowance of deduction for interest paid on a loan taken for business purposes.
3. Assessment of rental income under "income from other sources" instead of "business income."
4. Disallowance of expenditure connected with earning rent.
5. Non-allowance of deduction for deferred revenue expenditure.

Issue-wise Detailed Analysis:

1. Confirmation of findings that no business was done by the assessee company and disallowance of related expenses:
The Assessing Officer (AO) observed that the assessee showed sales of ?30,656 and other income, including rental income, but doubted the genuineness of the purchase transaction from Pentagon Screws & Fasteners Ltd. The AO concluded that the purchases and sales were sham and bogus, leading to the disallowance of expenses amounting to ?22,97,677. The Tribunal noted that the assessee failed to provide sufficient evidence to prove the genuineness of the business transactions, including delivery challans and stock register discrepancies, thereby endorsing the AO's view that no business activity was conducted during the year.

2. Disallowance of deduction for interest paid on a loan taken for business purposes:
The AO disallowed the interest expense of ?15,23,312 paid to Punjab National Bank, reasoning that the loan was not utilized for business purposes. The Tribunal upheld this disallowance, noting that the loan was advanced to M/s. Rabab Publications Pvt. Ltd., and no interest was received from this third party from FY 1997-98 to 31.03.2001. Consequently, the interest paid was not allowable under Section 36(1)(iii) of the Income Tax Act.

3. Assessment of rental income under "income from other sources" instead of "business income":
The AO assessed the rental income of ?40,50,000 under "income from other sources" because the assessee was not the owner of the property. The Tribunal, referencing the Supreme Court decision in Chennai Properties & Investments Ltd. vs. CIT, concluded that the rental income should be treated as "business income" based on the nature of the assessee's activities and the objectives in its Memorandum of Association. The Tribunal found that the assessee's main business included leasing properties, thus aligning with the Supreme Court's interpretation.

4. Disallowance of expenditure connected with earning rent:
The AO allowed only 10% of the administrative expenses of ?4,38,636, disallowing the rest. The Tribunal found the 90% disallowance excessive and noted that the company needed to incur certain overhead expenses to remain operational. Therefore, the Tribunal allowed 50% of the total administrative expenditure.

5. Non-allowance of deduction for deferred revenue expenditure:
The AO disallowed the claim of ?3,00,000, being 1/10th of the deferred revenue expenditure incurred for property vacation. The Tribunal upheld this disallowance, stating that there is no provision under the Income Tax Act to allow such deferred revenue expenditure under Section 35D(1) & (2). The Tribunal concluded that the expenditure was neither revenue in nature nor incurred wholly and exclusively for the business during the year.

Conclusion:
The appeal was partly allowed. The Tribunal treated the rental income as "business income" and allowed 50% of the administrative expenses but upheld the disallowance of interest paid on the loan and the deferred revenue expenditure.

 

 

 

 

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