2020 (5) TMI 257 - AT - Income Tax

Income from House Property - ALV determination - treating Municipal taxes paid as rent labile to be taxed u/s 23 - deduction of BMC Taxe s - HELD THAT - As per the terms of lease and license agreement, the licensee alone was liable to pay all taxes / outgoings with respect of leased premises. Same could be paid by the assessee and the same were reimbursable by licensee. This position has also been reiterated by the assessee in its submissions. However, the liability to pay the taxes was with respect of licensed premises only which was approx. 19% (232 Sq.Meters out of 1246.66 Sq. Meters) of total area of the building. Therefore, 19% of BMC taxes amounting to ₹ 7,99,519/- could be attributed to licensed premises. The proportionate amount comes to ₹ 1,51,900/-. In our opinion, this amount shall be added back to the rental income of ₹ 76 Lacs earned by the assessee. Consequently, the deduction of ₹ 1,51,900/- shall be allowable to the assessee. The rental income, after statutory deduction of 30%, would work out to ₹ 53.20 Lacs.Ground No.1 2 stand partly allowed. Allowability of business expenditure - HELD THAT - We find that the assessee has not practically carried out any business activity during the year. Therefore, the expenditure on account of directors remuneration would not be allowable to the assessee. However, the expenditure as tabulated at serial nos. 2 to 6 of table extracted in para-2.2 above, could be considered as expenditure incurred to maintain the corporate personality of the assessee and therefore, the same would be allowable business expenditure. The question of deduction of the expenditure under the head Income from other sources do not arise. Ground No.3 stand partly allowed

Summary

Issues:
1. Treatment of municipal taxes as part of rent liable to be taxed under Section 23 of the Income Tax Act.
2. Admissibility of additional evidence filed by the appellant.
3. Disallowance of all expenditure debited to profit and loss account.
4. Deduction under Section 57(iii) of the Income Tax Act.

Analysis:

Issue 1: Treatment of Municipal Taxes
The appellant contested the addition of municipal taxes paid as part of rent to be taxed under Section 23 of the Act. The Appellate Tribunal found that the licensee was liable to pay all taxes and outgoings for the licensed premises. The Tribunal determined that only 19% of the municipal taxes could be attributed to the licensed premises, amounting to ?1,51,900. Consequently, this amount was added back to the rental income, resulting in a taxable income of ?53.20 Lacs. The Tribunal partially allowed Grounds 1 and 2.

Issue 2: Admissibility of Additional Evidence
The appellant submitted additional evidence to establish that the business was set up, but had not commenced. The CIT(A) considered this evidence and concluded that the total liability of the licensee amounted to ?83.99 Lacs, justifying the deduction of municipal taxes. However, the CIT(A) did not accept the appellant's argument that the business expenditure should be allowed under Section 57(iii) of the Act. The Tribunal found that the appellant did not carry out any business activity during the year, leading to the dismissal of the grounds raised by the appellant.

Issue 3: Disallowance of Expenditure
The Tribunal noted that the appellant primarily earned rental income and did not engage in any other business activity. While the directors' remuneration was not considered allowable expenditure, other expenses were deemed necessary to maintain the corporate status of the appellant and were allowed as business expenditure. The Tribunal partially allowed Ground 3 and dismissed the alternative ground.

Issue 4: Deduction under Section 57(iii)
The CIT(A) did not allow the expenses debited to the profit and loss account under Section 57(iii) of the Act, stating that the appellant did not provide evidence of conducting any business activity. The Tribunal upheld this decision, emphasizing that the expenditure incurred should be wholly and exclusively for the purpose of the business. The Tribunal dismissed the alternative ground related to this issue.

In conclusion, the appeal was partly allowed, with the Tribunal making specific determinations regarding the treatment of municipal taxes, admissibility of evidence, disallowance of expenditure, and deduction under Section 57(iii) of the Income Tax Act.