2007 (3) TMI 296 - AT - Income Tax

Summary

Issues Involved:
1. Classification of rental income as "income from house property" vs. "income from business."
2. Deductibility of various expenses related to the rental income.
3. Admissibility of additional grounds of appeal.

Issue-wise Detailed Analysis:

1. Classification of Rental Income:
The primary issue was whether the rental income earned by the assessee should be classified as "income from house property" or "income from business." The assessee argued that the income should be treated as business income, as it was derived from leasing properties and providing additional amenities. The AO treated the income as "income from house property," which was upheld by the CIT(A). The Tribunal found that the assessee was not the owner of the land but a lessee for an unexpired period of 13 years, and the structure was to revert to the lessor by 2014. The Tribunal noted that the assessee provided various amenities to tenants in an organized manner, which constituted business activities. Therefore, 60% of the income was treated as rental income and 40% as service charges, with the latter being classified as business income.

2. Deductibility of Expenses:
The assessee claimed various expenses such as repairs, maintenance, salary, electricity charges, and director's remuneration against the rental income. The AO disallowed these expenses, treating the entire income as "income from house property." The Tribunal, however, allowed the expenses related to the service charges portion (40% of the total receipts) under Section 37(1) of the Income Tax Act, as these were incurred in the course of business activities. For the rental income portion (60%), deductions were allowed as per Section 24 of the Act.

3. Admissibility of Additional Grounds of Appeal:
The assessee filed additional grounds of appeal, arguing that the business of taking properties on lease and providing amenities was its main business. The Tribunal admitted these additional grounds, relying on the Supreme Court's decision in the case of Jute Corporation of India Ltd. vs. CIT and the Allahabad Bench's decision in Verma Roadways vs. Asstt. CIT. The Tribunal found that these additional grounds did not involve any new facts and were based on existing material.

Conclusion:
The Tribunal concluded that the assessee's activities of providing amenities along with leasing properties constituted business activities. Thus, 60% of the receipts were treated as rental income, and 40% as service charges (business income). The assessee was allowed deductions for expenses related to the service charges portion under Section 37(1) and for the rental income portion under Section 24. Both appeals filed by the assessee were partly allowed.