2023 (4) TMI 35 - AT - Income Tax

Correct head of income - Chargeability of rental income under the head IFHP or PGBP - Income From House Property (IFHP) v/s Profits and Gains from Business or Profession (PGBP) - HELD THAT - Leasing out the property is not one of the objects of the business of assessee as could be culled out from the Memorandum of Association. Consequence is that the decision of Chennai Properties and Investments Ltd 2015 (5) TMI 46 - SUPREME COURT has no application to the facts of the case. We accordingly hold that the learned CIT(A) is right in rejecting the contention of the assessee and maintaining the chargeability of rental income under the head IFHP. Grounds relating to this issue are dismissed. Commencement of business - Assessee incurred expenditure relating to printing and stationery, audit fee, filing fee, miscellaneous expenses etc., which according to the learned AO are not specifically related to the business. Learned Assessing Officer further held that the Income from House Property cannot be equated to business income. We, however, are of the considered opinion that in commencement of business the assessee purchased the property and the rent is a by-product. We, therefore, accept the contention of the assessee that they have commenced their business. Processing fee and interest addition - We held that the assessee commenced its business - in order to claim any deduction towards interest or the processing fee in the nature of interest, the assessee must have acquired a business asset. No dispute that there is neither work in progress nor any stock in trade shown by the assessee in their books. Only some advance was given for acquiring the property in Hyderabad. Giving advance for acquiring a property cannot be equated to the acquisition of the property. Acquisition of property for business purpose means such property must be available to the assessee to be dealt for its business purposes, namely, to carry on the business of real estate s dealers, estate owners etc. Unless and until the assessee purchased the property in Hyderabad, it cannot be said that they are in a possession to use such property for the purposes of carrying out their business. Mere giving advance towards the property in Hyderabad will not entitle the assessee to deal with such property for the purposes of their business and, therefore, it cannot be said that the assessee acquired such property. Till the property is acquired by the assessee and ready for use for carrying out the business purposes, the interest or the processing fee in the nature of interest has to be capitalised and it cannot be claimed as deduction as revenue expenditure . No illegality or irregularity in the findings of the learned CIT(A) and restricting the processing fee and the interest to the extent the borrowed amount was used for repayment of the debt is incurred to acquire the Bangalore property and to disallow the rest of it, holding that at best it can be capitalised.

Summary

Issues Involved:
1. Taxability of lease rental income under "Income From House Property" (IFHP) vs. "Profits and Gains from Business or Profession" (PGBP).
2. Commencement of business and eligibility to carry forward business losses.
3. Deduction of processing fee and interest related to loans for property acquisition.

Summary:

1. Taxability of Lease Rental Income:
The primary issue was whether the lease rental income should be taxed under IFHP or PGBP. The assessee initially offered the lease rental income under IFHP but later contended it should be under PGBP, citing the Supreme Court decision in Chennai Properties and Investments Ltd. vs. CIT. However, the Tribunal held that "leasing out the property is not one of the objects of the business of assessee" as per the Memorandum of Association. Consequently, the Tribunal upheld the CIT(A)'s decision to tax the rental income under IFHP, dismissing the assessee's grounds on this issue.

2. Commencement of Business:
The Tribunal addressed whether the assessee had commenced its business, which impacts the eligibility to carry forward business losses. The Tribunal noted that the assessee, a private limited company, had carried out several business operations post-incorporation, such as raising loans and acquiring business assets, including a property in Bangalore. The Tribunal concluded that the assessee had indeed commenced its business, contrary to the Assessing Officer's view, and hence, the assessee was eligible to carry forward business losses.

3. Deduction of Processing Fee and Interest:
The issue was whether the processing fee and interest related to loans for property acquisition should be allowed as deductions. The Tribunal agreed with the CIT(A) that only the portion of the processing fee and interest related to the loan used for repaying debt incurred for the Bangalore property could be deducted under section 24(b) of the Income Tax Act. The remaining portion, related to an advance for a property in Hyderabad that was not acquired, should be capitalized and not allowed as revenue expenditure. The Tribunal upheld the CIT(A)'s decision on this matter.

Conclusion:
The appeals were allowed in part, with the Tribunal affirming the CIT(A)'s decisions on the taxability of lease rental income, the commencement of business, and the deduction of processing fees and interest, except for the portion related to the unacquired Hyderabad property.