1991 (4) TMI 177 - AT - Income Tax

Summary

Issues Involved:
1. Classification of income from leased property and air-conditioning plant.
2. Allowance of depreciation on the building and air-conditioning plant.
3. Deduction of interest paid on loans for construction.
4. Deduction of house tax and ground rent.

Detailed Analysis:

1. Classification of Income from Leased Property and Air-Conditioning Plant:
The primary issue revolves around whether the income from leasing the building and the air-conditioning plant should be classified as business income, income from other sources, or property income. The Commissioner argued that the income should be assessed under property income since the lease deed did not explicitly mention the air-conditioning facility as a necessary condition. The assessee contended that the intention to provide air-conditioning was implicit and should be considered as a composite unit, thus classifying the income under business income or other sources. The Tribunal concluded that for the assessment year 1986-87, the income from the building with the air-conditioning facility should be assessed under "income from other sources" due to the inseparable nature of the building and air-conditioning. For the assessment year 1985-86, the income was assessed under property income since the air-conditioning facility was still under construction.

2. Allowance of Depreciation on the Building and Air-Conditioning Plant:
The Commissioner disallowed depreciation on the building and air-conditioning plant, asserting that the income should be assessed under property income. The Tribunal, however, held that for the assessment year 1986-87, since the income was classified under "income from other sources," the assessee is entitled to depreciation on both the building and the air-conditioning plant.

3. Deduction of Interest Paid on Loans for Construction:
The Commissioner allowed the deduction of interest only to the extent of the available income under property income, arguing that the loss under this head cannot be carried forward. The assessee contended that the interest should be fully deductible. The Tribunal agreed with the assessee, stating that the interest paid on loans for earning income must be deducted in full, and there is no restriction on the allowance of interest even under property income.

4. Deduction of House Tax and Ground Rent:
The Commissioner did not allow the house tax deduction without assigning a reason, despite the lease agreement stipulating that the tenant would bear any additional house tax after five years. The Tribunal noted that the assessee is entitled to deductions such as house tax, ground rent, and interest on borrowed funds as per the law for the assessment years 1985-86 and 1986-87.

Conclusion:
The Tribunal concluded that the income from the composite unit of the building and air-conditioning for the assessment year 1986-87 should be assessed under "income from other sources," allowing the assessee to claim depreciation and other deductions. For the assessment year 1985-86, the income from the property was assessed under property income due to the non-existence of the air-conditioning facility. The Tribunal modified the Commissioner's order to reflect these observations and allowed the appeals in part.