2018 (5) TMI 47 - AT - Income Tax

Head of income - income from leasing of rice mill comprising of building and machinery - assessment of income under the head income from other sources against the admission of income by the assessee under the head business income - Held that - In the instant case, the assessee owns a rice mill and let out the rice mill to another rice mill and receiving the rental income without carrying on any business activity or rendering any services incidental to carrying on the rice mill. Therefore, referring to in the case of M/s. Sultan Brothers Pvt. Ltd. (1963 (12) TMI 4 - SUPREME Court) relied upon by the lower authorities are squarely applicable and the lower authorities have rightly assessed the income under the head income from other sources . - Decided against assessee. Denial of depreciation and set off of unabsorbed depreciation - Held that - Since the unabsorbed depreciation partakes the character of current year depreciation, we hold that the A.O. cannot deny the set off of unabsorbed depreciation against the income from other sources. Accordingly, we direct the A.O. to allow the unabsorbed depreciation from the rental income of the rice mill. The assessee s appeal on this ground with regard to depreciation is allowed. Deduction in respect of interest paid to bank, interest paid to others, interest paid to partners, establishment charges, electricity development charges and remuneration to partners disallowed - Held that - Section 57(iii) of the Act allows the expenditure incurred for earning the income. This issue is also considered in the case of Pujya Sujatha Agro Farms Pvt. Ltd. 2010 (11) TMI 694 - ITAT VISAKHAPATNAM and directed the A.O. to allow the expenses incurred for earning the income. Therefore, we hold that the assessee is entitled for the allowance of expenditure, accordingly we direct the A.O. to allow the expenses incurred for earning the income as well as the interest incurred in establishing, repairing and renovating the rice mill. This ground of appeal of the assessee is allowed. However, the interest and remuneration paid to partners is not covered u/s 57(iii) and the AO has rightly disallowed the same. Thus we confirm the disallowance to the extent of interest and remuneration paid to the partners and direct the AO allow the remaining expenditure including the interest paid to others.

Summary

Issues Involved:
1. Classification of income from leasing of rice mill as "business income" or "income from other sources."
2. Disallowance of expenditure incurred by the assessee, denial of depreciation, and set-off of unabsorbed depreciation.

Detailed Analysis:

Issue 1: Classification of Income from Leasing of Rice Mill
The assessee filed a return declaring a loss under "business income," deriving income from leasing a rice mill. The Assessing Officer (A.O.) assessed the income under "income from other sources," relying on the Supreme Court's decision in M/s. Sultan Brothers Pvt. Ltd. Vs. CIT, which states that a commercial asset is only an asset used in a business. The CIT(A) confirmed the A.O.'s decision. The assessee argued that the income should be classified under "business income" since the asset was commercial and exploited as such. However, the Tribunal upheld the lower authorities' decision, citing similar cases where rental income from leased assets was classified as "income from other sources" when no business activity or services were provided. Thus, the appeal on this ground was dismissed.

Issue 2: Disallowance of Expenditure, Denial of Depreciation, and Set-off of Unabsorbed Depreciation
The A.O. denied the set-off of unabsorbed depreciation but allowed current year depreciation under Section 57(ii) of the Act. The Tribunal noted that Section 32(2) allows unabsorbed depreciation to be treated as the depreciation of the succeeding year, eligible for set-off against any income except salary. This view was supported by various court decisions, including CIT Vs. Sahu Rubber Pvt. Ltd. and CIT Vs. Deepak Textile Industries Ltd. Consequently, the Tribunal directed the A.O. to allow the set-off of unabsorbed depreciation against the rental income.

Regarding the disallowance of expenditure, the A.O. did not allow certain expenses claimed by the assessee. Section 57(iii) permits deductions for expenses incurred wholly and exclusively for earning income. The Tribunal agreed with the assessee that expenses such as interest paid to others, establishment charges, and electricity development charges were incurred for earning income and should be allowed. However, interest and remuneration paid to partners were not covered under Section 57(iii) and were rightly disallowed by the A.O. Therefore, the appeal on this ground was partly allowed.

Conclusion:
The Tribunal dismissed the appeal regarding the classification of income but allowed the appeal concerning the set-off of unabsorbed depreciation and certain expenditures, except for interest and remuneration paid to partners. The overall result was a partial allowance of the assessee's appeal.