1986 (6) TMI 59 - AT - Income Tax

Business Income Chargeable As Head Office Expenditure Business Expenditure Allowability of

Issues Involved:
1. Assessment of income from subletting of property.
2. Assessment of interest income from deposits.
3. Applicability of section 44C of the Income-tax Act, 1961.
4. Disallowance of expenses under section 44C.
5. Claim of depreciation.
6. Disallowance under rule 6D of the Income-tax Rules, 1962.
7. Treatment of medical reimbursement and repairs to flats under section 40A(5).
8. Allowance of depreciation on assets in a guest-house.
9. Deletion of addition under section 37(1), read with section 80VV.

Summary:

1. Assessment of Income from Subletting of Property:
The primary issue was whether the income from subletting should be assessed as 'Income from other sources' or 'Profits and gains of business or profession'. The Tribunal concluded that since the premises were taken for business purposes and subletting reduced business expenditure, the income should not be separately assessed under 'Income from other sources'. The ITO was directed to recompute the total income by reversing the items of receipts and expenditure relating to the premises.

2. Assessment of Interest Income from Deposits:
The interest income from deposits was assessed under 'Income from other sources' by the ITO, as the fixed deposits were not considered commercial assets. However, the Commissioner (Appeals) and the Tribunal held that since the funds were brought from the New York office for commercial purposes, the interest income should be assessed as business income.

3. Applicability of Section 44C:
The assessee argued that section 44C did not apply in a loss year. The Tribunal held that section 44C applies even if the adjusted total income is a loss. The proviso to section 44C allows further concession by computing five percent of the average adjusted total income if the adjusted total income is a loss. Thus, no head office expenses were allowed to the assessee.

4. Disallowance of Expenses under Section 44C:
The Tribunal examined the nature of various expenses and upheld the Commissioner (Appeals)' decision that specific expenses related to the Indian branch were not head office expenses under section 44C. The departmental appeals challenging the allowance of certain expenses were rejected.

5. Claim of Depreciation:
The assessee's claim that unabsorbed depreciation should be given preference over the current year's depreciation was rejected based on the Supreme Court decision in CIT v. Mother India Refrigeration Industries (P.) Ltd. The Tribunal upheld the disallowance under rule 6D on a 'per person' basis.

6. Disallowance under Rule 6D:
Both the assessee's and the department's appeals regarding the calculation of disallowance under rule 6D were rejected, following the Special Bench decisions of the Tribunal.

7. Treatment of Medical Reimbursement and Repairs to Flats:
The Tribunal held that medical reimbursement is not a perquisite but is part of the salary under section 40A(5). Repairs to flats occupied by employees were not considered perquisites or salary, thus rejecting the departmental grounds on this point.

8. Allowance of Depreciation on Assets in a Guest-house:
The Tribunal agreed with the Commissioner (Appeals) that the Beach House was not a guest-house for the purposes of section 37(4). Even if it were considered a guest-house, depreciation on assets therein would still be allowed under section 32, as section 37(4) does not override section 32.

9. Deletion of Addition under Section 37(1), Read with Section 80VV:
The Tribunal upheld the Commissioner (Appeals)' decision to allow Rs. 9,425 as expenses under section 37, as they were not subject to the provisions of section 80VV.

Conclusion:
The appeals were allowed in part, with specific directions and clarifications provided for each issue.

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