1993 (12) TMI 95 - AT - Income Tax

Summary

Issues Involved:

1. Validity and genuineness of the lease agreement.
2. Estimation of fair rental value under Section 23(1)(a) of the IT Act.
3. Assessment of income from movable properties under "income from other sources."
4. Inclusion of perquisite value of the residential building in the income.
5. Disallowance of interest on borrowed funds diverted for non-business purposes.

Detailed Analysis:

1. Validity and Genuineness of the Lease Agreement:

The assessees entered into a lease agreement with a private limited company formed by them and their children, effective from January 1, 1983. The Assessing Officer initially questioned the lease agreement, suspecting it to be a smoke screen to reduce tax liability. However, upon appeal, the CIT(A) found that the Assessing Officer had not examined the materials adequately and restored the assessments for a comprehensive examination. In the reassessment, the Assessing Officer did not doubt the genuineness or validity of the lease agreement. The Tribunal upheld the CIT(A)'s view, noting that the lease agreement had been accepted in the previous assessment year 1983-84 and that the company had to discharge several obligations under the lease. Therefore, the plea that the arrangement was a sham was rejected.

2. Estimation of Fair Rental Value under Section 23(1)(a) of the IT Act:

The Assessing Officer estimated the fair rental value of the properties at a higher figure than the lease rent received by the assessees, invoking Section 23(1)(a) of the IT Act. The CIT(A) disagreed, stating that the lease agreement was valid and the income should be computed based on the lease agreement. The Tribunal concurred, noting that the company was engaged in business activities and incurred various expenditures, including directors' remuneration. The Tribunal also highlighted that there was no loss to the Revenue as the assessees' income included lease rent and directors' remuneration. The argument based on the principles laid down in McDowell & Co. vs. CTO was rejected, as the lease agreement was genuine and valid.

3. Assessment of Income from Movable Properties under "Income from Other Sources":

The Assessing Officer contended that income from movable properties leased to the company should be assessed under "income from other sources." The CIT(A) rejected this, noting that the lease deed did not reference movable properties separately and that it was a composite lease. The Tribunal upheld this view, stating that leasing premises along with furniture and fittings is common and the lease income should be assessed under "property."

4. Inclusion of Perquisite Value of the Residential Building in the Income:

The assessees, as managing directors, stayed in a residential house that was part of the lease agreement. The CIT(A) directed the Assessing Officer to compute the perquisite value of the residential building as per the relevant IT Rules and add it to the income of the assessees. The Revenue misunderstood this direction, thinking it was to include the perquisite value in the house property income. The Tribunal clarified that the CIT(A)'s direction was to include the perquisite value in the assessment of the assessees as individuals receiving remuneration from the company.

5. Disallowance of Interest on Borrowed Funds Diverted for Non-Business Purposes:

The Assessing Officer disallowed interest on borrowed funds, alleging they were diverted for non-business purposes. The CIT(A) disagreed, finding no evidence of such diversion. The Tribunal upheld this view, noting that no material was presented to support the Revenue's contention.

Conclusion:

The Tribunal dismissed the Revenue's appeals, affirming the CIT(A)'s findings on all issues. The lease agreement was deemed genuine and valid, the fair rental value was not to be estimated under Section 23(1)(a), income from movable properties was not to be assessed under "income from other sources," the perquisite value of the residential building was to be included in the assessees' income, and the disallowance of interest on borrowed funds was not justified.