2019 (12) TMI 613 - AT - Income Tax

Addition as rental income by adding security deposit - assessee has declared rental income only for six months and has not declared rental income for the balance six months - tenants did not pay the rent and raised dispute before the court - HELD THAT - Since the tenants have filed suit before the Hon'ble High Court for recovery of security deposit, then the assessee could not have adjusted the security deposit towards it unrealised rent. We further find that in A.Y 2016-17, the assessee has included ₹ 63.36 lakhs in it profit and loss account after the decision of the Hon'ble High Court of Delhi. In our considered opinion, the action of the Assessing Officer is not acceptable and since the ld. CIT(A) has upheld the action of the Assessing Officer, both the lower authorities have erred in making the addition and sustaining the addition. Addition is unwarranted and deserves to be deleted. Accordingly, Ground No. 2 is allowed. Disallowance on account of depreciation on car and interest on car loan - allowable revenue expenses - HELD THAT - Depreciation has been claimed by the assessee on the written down value of the asset which means that in earlier years, the asset was used for the purposes of business. Nowhere the Assessing Officer has brought any material evidence on record to suggest that there is a closure of business activities. On the contrary, we find that in furtherance of its business activities, the assessee has further advanced ₹ 65 lakhs towards land at Chandan Hola, Delhi which means that the assessee was, in fact, carrying out business activities during the year under consideration. The Hon'ble High Court of Delhi in the case of Capital Bus Service 1980 (2) TMI 69 - DELHI HIGH COURT has held that the only condition for allowability of depreciation is that the business should not have been closed out once for all and that the assessee should demonstrate that hopes of the business being revived are alive and real. Assessee was in fact, engaged in furtherance of its business activities and, therefore, it cannot be said that the assessee has closed down its business once for all. Therefore, the assessee is eligible for claim of depreciation. Similarly, interest on car is also coming from earlier years as the money was borrowed in earlier years. Therefore, in our humble opinion, there cannot be any disallowance for want of any business activity as the assessee was very much engaged in its business activities. The Assessing Officer is accordingly directed to delete the addition

Summary

Issues involved:
1. Addition of rental income based on security deposit
2. Disallowance of depreciation and interest on capital

Detailed Analysis:
1. Addition of Rental Income:
The appeal was filed against the order of the Commissioner of Income Tax regarding the addition of rental income by the Assessing Officer. The Assessing Officer added ?63.36 lakhs as rental income based on security deposit not being adjusted against unrealized rent. The assessee argued that the security deposit couldn't be adjusted as the tenants had filed a suit for recovery of the deposit. The High Court's decision in a related case favored the assessee. The ITAT Delhi found that the security deposit couldn't be adjusted against unrealized rent due to the pending litigation. The addition was considered unwarranted, and the appeal was allowed.

2. Disallowance of Depreciation and Interest on Capital:
The disallowance of depreciation and interest on capital was based on the Assessing Officer's view that the assessee did not carry out any business activity during the relevant year. The assessee contended that it was engaged in construction and land development business, investing in agricultural land during the year. The ITAT noted that depreciation had been claimed on the asset's written down value, indicating past business use. The assessee's continued business activities were evident from further investments made. Referring to a High Court decision, the ITAT concluded that the assessee was eligible for depreciation and interest deduction. The disallowance was deemed unjustified, and the appeal was allowed.

In conclusion, the ITAT Delhi ruled in favor of the assessee on both issues, overturning the additions made by the Assessing Officer and upheld by the CIT(A). The judgment highlighted the importance of considering ongoing business activities and legal implications in determining tax liabilities.