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2018 (1) TMI 933 - AT - Income TaxTreatment given to the rental income - Authorities below have treated these receipts as income from other sources only on the premise that the assessee was not the owner of the premises and the case relating to its ownership stood lost at the lower judicial level - Held that - This reason assigned by the ld. Authorities below to treat the rental income as income from other sources, in our considered opinion, is not tenable in view of the decision of Hon ble Supreme Court in the case of Chennai Properties & Investments Ltd. vs. CIT (2015 (5) TMI 46 - SUPREME COURT) stating deciding factor is not the ownership of land or leases but the nature of the activity of the assessee and the nature of the operations in relation to them. The objects of the company must also be kept in view to interpret the activities. Thus no hesitation to treat the rental income received by the assessee in the instant case as business income. Bogus transactions - Held that - As on perusal of assessee s account in the books of Vendor (PB-88), we find that no payments have been made by the assessee upto 31.03.2001 and the assessee was not able to establish any subsequent payment to the said party before the authorities below. We, therefore, endorse the view of the authorities below regarding no activities of purchase and sales during the year and transactions of purchase and sale shown, as sham. This however, would not affect the business of assessee regarding receipt of rentals as noted above. Administrative expenses disallowance - AO has allowed such expenditure only to the extent of 10% to earn the income from other sources - Held that - Disallowance made by the ld. Authorities below to the extent of 90% of the expenditure claimed by the assessee is somewhat excessive. It is worthwhile to note that in order to keep the company alive, the assessee is required to make certain necessary overhead expenses also apart from earning the income, as there is nothing on record to establish that the assessee company was closed once for all. We feel it appropriate to allow 50% of the total administrative expenditure of ₹ 4,38,636/- claimed by the assessee. Disallowance of interest on account of loans taken from PNB - addition u/s 36 - Held that - The interest shown to have been paid by assessee on this loan, which was advanced by the assessee to third party, in our opinion, has rightly been held as not allowable to the assessee for the reason that the purpose of advancing loan to third party after raising it from the bank, does not stand established from the account of the assessee, as no interest received on such loan from the third party, has been credited by the assessee in his books from F.Y. 1997-98 to 31.03.2001. The purpose of earning interest income, therefore, stood defeated and therefore, the interest paid by the assessee to the PNB claimed as deduction, is not admissible u/s. 36(1)(iii) of the IT Act. We, therefore, sustain the addition Allowance of 1/10th of deferred Revenue expenditure claimed by the assessee in the profit and loss account towards vacation of property - Held that - We find that there is no provision in the IT Act to allow such deferred Revenue Expenditure u/s. 35D(1) & (2) of the IT Act. It is neither the revenue expenditure nor an expenditure incurred wholly and exclusively for the purpose of business during the year. This issue is, therefore, decided against the assessee and in favour of the Revenue. Accordingly, this ground of assessee is dismissed.
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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