1997 (6) TMI 42 - AT - Income Tax

Adventure In The Nature Of Trade Assessing Officer Assessment Year Business Loss Carry Forward Income From Business Income From House Property Rental Income Set Off Of Loss

Summary

Issues:
1. Assessment of rental income under the head 'Profits and gains of business or profession' or 'Income from house property' for the assessment years 1986-87 and 1987-88.
2. Allowance of interest paid on borrowed funds for property purchase as a deduction.
3. Set off of business loss against dividend income under different heads of income.

Analysis:
1. The appeals filed by the assessee for the assessment years 1986-87 and 1987-88 involved the issue of whether rental income should be assessed under the head 'Profits and gains of business or profession' or 'Income from house property.' The assessee contended that the property was purchased for business development, but the authorities assessed the rental income under the head 'Income from house property.' The contention was based on the intention behind the property purchase and the company's objects as per the Memorandum and Articles of Association. The Tribunal noted that despite the intention for business development, no concrete steps were taken during the relevant year. The Tribunal upheld the assessment of rental income under 'Income from house property' as the property did not qualify as a business asset due to the lack of business operations.

2. The issue of allowing interest paid on borrowed funds for property purchase as a deduction was raised by the assessee. The Tribunal acknowledged the intention of the property purchase for business purposes but emphasized that without actual business operations, the property did not qualify as a business asset. Therefore, the interest paid on borrowed funds was not allowed as a deduction under the head 'Profits and gains of business or profession.'

3. Another issue involved the set off of business loss against dividend income under different heads of income. The assessee argued that the entire dividend income should be adjusted against the loss under 'Income from house property.' The Tribunal analyzed the provisions of section 71(1) of the Income-tax Act and noted that there was no prescribed order of precedence for set off. Considering the eligibility for carry forward of losses under different heads, the Tribunal ruled in favor of the assessee's claim to adjust the entire dividend income against the loss under 'Income from house property.'

Overall, the Tribunal's decision emphasized the importance of actual business operations in determining the assessment of income and deductions, while also considering the set off provisions under the Income-tax Act for losses under different heads of income.