2021 (2) TMI 541 - AT - Income Tax

Correct head of income - treatment of entire lease rentals - under the head 'Income from Business' to be 'Income from Property' or 'Income from Other Sources' - HELD THAT - By accepting the trading results, Ld. AO has accepted the fact that assessee s business was continuing despite the observation that no manufacturing activity was being carried out by the assessee during the year which is also evident from the fact that except for depreciation allowance, retrenchment compensation along with minor disallowances, all other business expenditure as claimed by the assessee has been allowed by Ld. AO. We find that various lease agreements of buildings and Plant Machinery, entered into by the assessee, were continuing since past many years and the assessee earned rental / lease income in similar manner since AY 1999-2000 and offered the same as Business income . The assessee s stand has always been accepted by the department in most of other years. Rental / lease income so earned by the assessee has been accepted by the revenue as Business income all along since AY 1999-2000 except for this assessment year and AYs 2007-08 2008-09. Though undisputedly, the principle of res - judicata is not applicable to income tax proceedings but the rule of consistency would demand that accepted position is not disturbed on identical facts as per the decision in the case of PCIT v/s. Quest Investment Advisors Pvt. Ltd. 2018 (7) TMI 479 - BOMBAY HIGH COURT wherein it has been held that when a principle has been accepted by the Revenue in earlier years as well as in subsequent years then the Revenue is bound by it unless there is a change in law or change in facts therein, which change has to be pointed out in the assessment Order. Therefore, action of Ld. AO in disturbing the rental / lease income as Business Income could not be held to be justified. Once the assessee s position has been accepted in so many past as well as succeeding years, there is no reason to disturb the same only in few years, the facts being remaining the same. Therefore, we are inclined to hold that the rental / lease income from building as well as from plant machinery was assessable as Business Income only. Consequently, the assessee would be entitled for depreciation on these assets. In such a scenario, the question of determining the notional rental income would not, at all, arise. Retrenchment compensation disallowance - as argued compensation is paid under section 25F of Industrial Disputes Act and is a deductible expenditure - HELD THAT - AR correctly pointed out that the payment was covered by the provisions of Sec.35DDA and accordingly, the same should be allowable in 5 equal installments. Concurring with the same, we direct Ld. AO to allow 1/5th of retrenchment compensation paid during the year. Ground No.2 stand partly allowed. Deduction of business expenditure as well as set-off of carry forward losses - As Rental / lease income was to be assessed as Business Income only. Consequently, the assessee would be entitled for deduction of business expenditure as well as set-off of carry forward losses. The Ld. AO is directed to recompute the income in terms of our above order. The appeal stand allowed in terms of our above order. Deduction of Salary expenditure, repairs to building and professional fees as well as set-off of carry forward losses - As rental / lease income was to be assessed as Business Income only. Consequently, the assessee would be entitled for deduction of Salary expenditure, repairs to building and professional fees as well as set-off of carry forward losses. The Ld. AO is directed to re-compute the income in terms of our above order.

Summary

Issues Involved:

1. Disallowance of Retrenchment Compensation.
2. Classification of Lease Rentals as 'Income from Business' vs. 'Income from Property' and 'Income from Other Sources'.
3. Addition of Notional Rental Income.
4. Depreciation on Assets Given on Lease Rental.
5. Condonation of Delay in Filing Appeal.

Issue-wise Detailed Analysis:

1. Disallowance of Retrenchment Compensation:

The assessee contested the disallowance of ?42,53,152/- as retrenchment compensation. The learned CIT(A) confirmed the AO's action, which disallowed the compensation, arguing it brought enduring advantage and should be considered capital expenditure. The Tribunal found the payment covered by Sec.35DDA, allowing it in 5 equal installments. The AO was directed to allow 1/5th of the retrenchment compensation for the year.

2. Classification of Lease Rentals as 'Income from Business' vs. 'Income from Property' and 'Income from Other Sources':

The AO reclassified the lease rentals from 'Income from Business' to 'Income from Property' and 'Income from Other Sources,' disallowing depreciation on the assets. The Tribunal noted that the assessee had been consistently offering rental/lease income as 'Business Income' since AY 1999-2000, which was accepted by the department. The Tribunal held that the rental/lease income should be assessed as 'Business Income,' allowing depreciation on these assets and negating the need to determine notional rental income.

3. Addition of Notional Rental Income:

The AO added notional rental income of ?19,60,888/-, considering the nominal rent received from M/s VSS as highly unimaginable. The Tribunal, aligning with the decision to treat rental/lease income as 'Business Income,' found no need to determine notional rental income, thus nullifying the addition.

4. Depreciation on Assets Given on Lease Rental:

The AO denied depreciation on leased buildings and Plant & Machinery, treating the income under different heads. The Tribunal, treating the rental/lease income as 'Business Income,' allowed the depreciation on these assets.

5. Condonation of Delay in Filing Appeal:

The appeal for AY 2007-08 faced a delay of 392 days. The assessee attributed the delay to a lapse by the tax consultant, supported by an affidavit. The Tribunal, considering the similar issues in AY 2004-05 and the assessee's inclination to contest, condoned the delay and proceeded with the appeal.

Conclusion:

The appeal for AY 2004-05 was partly allowed, directing the AO to allow 1/5th of the retrenchment compensation and treating rental/lease income as 'Business Income' with allowable depreciation. The appeals for AY 2007-08 and 2008-09 were allowed, directing the AO to treat rental/lease income as 'Business Income,' allowing related business expenditures and set-off of carry forward losses. The Tribunal emphasized consistency in the treatment of income across assessment years, aligning with established judicial principles. The order was pronounced on 09th February 2021.