2020 (9) TMI 955 - AT - Income Tax

Correct head of income - Taxability of rental income in respect of the property at Fort (Mumbai) under the head 'Profits and gains of business or profession' OR 'Income from house property' - Whether letting out of the property is not the part of business activity of the assessee and that letting out of property was an isolated activity of the assessee? - HELD THAT - The assessee has declared its income from letting out of house properties under the head Income from House Property' which falls under Chapter IV-C of the 1961 Act containing Section 22 to 27.Thus, the assessee will be entitled only for deductions prescribed under sections 22 to 27 of Chapter IV-C of the Act, while computing income from house property chargeable to tax. This chapter IV-C of the Act does not provide for depreciation on immovable properties as one of deductions from income earned by assessee from letting out of such house property. However, section 32 of the Act provides for depreciation and falls under Chapter IV-D which concerns itself with computation of income from Profits or Gains from Business or Profession . Thus, there is no question of allowing any deduction as depreciation under section 32 for the period for which this property was let out and income thereof was offered for tax under the head 'income from house properties'. Thus, we concur with the finding of the assessing officer. Office house property (office premises) earlier used for the purpose of business is not used for the purpose of business during the year under consideration and that the assessee has let out the same for the first time on rent and assessing officer may restrict to a fair proportionate part of asset for the purpose of depreciation - We find convincing force in the contention of assessee and restore back this issue to file of assessing officer to examine the issue afresh on this contention and pass the order in accordance with law. Needless to order that before passing the order the assessing officer shall grant opportunity to the assessee as per the new procedure of assessment. The assessee is also directed to provide all information and evidence to the assessing officer. - Decided in favour of assessee for statistical purpose. Disallowance under section 14A in respect of expenditure attributable to earning of exempt income - HELD THAT - Assessee fairly conceded that ground is covered against the assessee by the decision of Hon ble Apex Court in Maxopp Investment Ltd Vs CIT 2018 (3) TMI 805 - SUPREME COURT . - Decided against assessee. Disallowance under Rule 8D(iii) - Assessee limited prayer that only those investment which yielded the exempt income during the year may be considered for computing the average value of investment which yielded exempt income during the year - HELD THAT - We find convincing force in Assessee's submission that only those investments which yielded exempt income during the year be considered for computing the average value of investment. Therefore, the assessing officer is directed to re-compute the disallowance under Rule 8D(2)(iii) by following the decision of Special Bench of Delhi Tribunal in Vireet Investment P. Ltd. 2017 (6) TMI 1124 - ITAT DELHI Deduction in respect of education cess - admission of additional ground of appeal - HELD THAT - Considering the fact that the ground of appeal raised by assessee is purely legal in nature and no new facts are necessary to be brought on record for considering the relief claimed under this grounds of appeal and further, considering the decision of Sesa Goa 2020 (3) TMI 347 - BOMBAY HIGH COURT we admit the ground of appeal and direct the AO to consider the claim of assessee and allow appropriate relief in accordance with the decision above wherein it was held that Education Cess and Higher and Secondary Education Cess are liable for deduction in computing income chargeable under head of 'profits and gains of business or profession . Hence, this ground of appeal is admitted and restored to the file of assessing officer to consider and allow appropriate relief to the assessee.

Summary

Issues Involved:
1. Taxability of rental income under 'Profits and gains of business or profession' vs. 'Income from house property'.
2. Disallowance under section 14A in respect of expenditure attributable to earning exempt income.
3. Deduction in respect of education cess.

Issue-wise Detailed Analysis:

1. Taxability of Rental Income:
The primary issue is whether the rental income from the property at Fort, Mumbai should be taxed under 'Profits and gains of business or profession' instead of 'Income from house property'. The assessee argued that the property was used for business purposes until AY 2014-15 and was part of the block of assets on which depreciation had been claimed. The Assessing Officer (AO) treated the rental income as 'business income' because the property was a business asset and depreciation had been claimed on it. The Commissioner of Income-tax (Appeals) upheld this view.

The Tribunal observed that the property was part of the block of assets and depreciation had been claimed in earlier years. The rental income was offered under 'Income from house property' for the first time. The Tribunal agreed with the AO that the same asset could not be treated differently for income and depreciation purposes. However, the Tribunal found merit in the assessee's argument that if the property was not used for business during the year, depreciation should be proportionately restricted. The issue was remanded back to the AO to re-examine this aspect and pass a fresh order after granting the assessee an opportunity to provide necessary information.

2. Disallowance under Section 14A:
The second issue pertains to the disallowance of ?55,773 under section 14A for expenditure attributable to earning exempt income. The AO disallowed ?4,97,414 under Rule 8D, with ?3,99,598 under Rule 8D(ii) and ?97,816 under Rule 8D(iii). The assessee had already disallowed ?55,774, and the AO made an additional disallowance of ?4,41,640. The Commissioner of Income-tax (Appeals) upheld the disallowance to the extent of ?97,816.

The Tribunal noted that the assessee conceded that ground No. 7 (regarding strategic investments) was covered against them by the Supreme Court's decision in Maxopp Investment Ltd vs. CIT. For grounds 4 to 6, the Tribunal accepted the assessee's limited prayer that only investments yielding exempt income during the year should be considered for computing the average value of investments under Rule 8D(iii). The AO was directed to re-compute the disallowance accordingly, following the Special Bench of Delhi Tribunal's decision in Vireet Investment P. Ltd. The AO must grant the assessee an opportunity to provide necessary details.

3. Deduction of Education Cess:
The third issue involves the deduction of education cess amounting to ?11,04,967. The assessee raised this ground for the first time before the Tribunal, claiming it as a legal issue based on various judicial decisions. The Tribunal admitted this ground, noting that it was purely legal and no new facts were required. The Tribunal directed the AO to consider the claim and allow appropriate relief in line with the Bombay High Court's decision in Sesa Goa Ltd. vs. DCIT, which held that education cess is deductible in computing income under 'profits and gains of business or profession'.

Conclusion:
The appeal was partly allowed. The Tribunal remanded the issue of rental income back to the AO for fresh examination, directed re-computation of disallowance under section 14A, and admitted the ground regarding education cess, directing the AO to consider the claim in accordance with the jurisdictional High Court's decision.