2018 (4) TMI 378 - AT - Income Tax

Rental income - nature of income - Income from business or profession OR Income from house property - Held that - Following the ratio in the case of Rayala Corporation Pvt. Ltd. vs. ACIT ( 2016 (8) TMI 522 - SUPREME COURT), we are of the considered view that if the main activity of the assessee is of letting out properties and derive rental income without any other business activity, then such rental income should be considered under the head Income from business or profession but not under the head Income from house property . Therefore, we direct the AO to assess rental income under the head Income from business or profession as claimed by the assessee. Disallowance being entire amount of remuneration paid to the directors of the company - Held that - No merits in the arguments of the AO for the reason that the allowability of expenses has to be considered in the light of the nature of business of the assessee and its relevance. Since we have already directed the AO to consider rental income under the head Income from business , the AO is directed to consider expenses incurred by the assessee against such income. In this case, the assessee has paid remuneration to directors and also furnished evidences for payment of remuneration for services rendered by the directors to the company. Therefore, we are of the view that the AO was incorrect in disallowing remuneration paid to directors by holding that the expenses were not wholly and exclusively incurred for business and also which is excessive and unreasonable. Hence, we direct the AO to allow expenses claimed by the assessee against business receipts. Motor car expenses and depreciation on motor car - proof of busniss use - Held that - Merely because the car is in the name of director the usage of car for the purpose of business cannot be ruled out. However, the fact remains that when the AO has specifically asked for production of log book, the assessee failed to furnish log book to prove the use of vehicle for the purpose of business. Therefore, we are of the view that the issue needs to be examined by the AO in the light of the claim of the assessee that the motor car has been used for the business purpose. If the assessee substantiates its claim with necessary evidences and also by producing the log book to prove that car is used for business purpose, then the AO is directed to allow motor car expenses including depreciation on motor car.

Summary

Issues Involved:
1. Disallowance of remuneration paid to directors.
2. Disallowance of motor car-related expenses.
3. Classification of rental income as "Income from house property" versus "Income from business or profession."
4. Disallowance of expenses related to rental income.

Detailed Analysis:

1. Disallowance of Remuneration Paid to Directors:
The assessee contested the disallowance of ?72,00,000/- paid to directors as remuneration. The AO disallowed this on the grounds that the rental income was assessed under "Income from house property," and hence no further deductions could be made. The CIT(A) upheld this disallowance, stating that the remuneration was not wholly and exclusively for business purposes. However, the Tribunal directed the AO to allow the remuneration as a business expense, noting that the directors were actively involved in managing the properties and the payment was supported by necessary evidence.

2. Disallowance of Motor Car-Related Expenses:
The assessee also challenged the disallowance of motor car expenses, including interest on car loan (?3,04,198/-), motor car expenses (?5,82,318/-), motor car insurance (?1,13,847/-), and depreciation on motor car (?5,83,233/-). The AO disallowed these expenses, arguing that the car was in the director's name and the assessee failed to provide evidence of its use for business purposes. The CIT(A) upheld this disallowance. The Tribunal directed the AO to re-examine these expenses, allowing them if the assessee could substantiate the business use of the car with necessary evidence, including a log book.

3. Classification of Rental Income:
The AO classified the rental income of ?1,89,70,520/- under "Income from house property" instead of "Income from business or profession." The assessee argued that its main business activity was letting out properties, supported by its memorandum of association. The Tribunal agreed with the assessee, citing the Supreme Court's decision in Rayala Corporation Pvt. Ltd. vs. ACIT, which held that rental income should be treated as business income if it is the primary business activity. The Tribunal directed the AO to assess the rental income under "Income from business or profession."

4. Disallowance of Expenses Related to Rental Income:
The AO disallowed various expenses related to the rental income, including the remuneration to directors and motor car expenses, on the grounds that these were not wholly and exclusively for business purposes. The Tribunal, having reclassified the rental income under "Income from business or profession," directed the AO to allow these expenses as business deductions, provided the assessee could substantiate their claims with appropriate evidence.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to:
- Reclassify the rental income under "Income from business or profession."
- Allow the remuneration paid to directors as a business expense.
- Re-examine and potentially allow motor car-related expenses if substantiated with evidence.

The appeal was thus partly allowed for statistical purposes.