1995 (2) TMI 109 - AT - Income Tax

Assessing Officer, Income From Other Sources, Interest Liability, Interest Payable, Let Out, Rental Income, So Included

Summary

Issues Involved:
1. Taxability of income from letting out premises and equipment.
2. Allowability of depreciation on premises and equipment.
3. Allowability of interest on borrowed funds.

Detailed Analysis:

Issue 1: Taxability of Income from Letting Out Premises and Equipment

Assessing Officer's Findings:
- The assessee-company let out premises and equipment to an associate concern, M/s. CJHPL, which ran restaurants on the premises.
- The income from letting out the premises was shown as 'Income from house property,' while depreciation was claimed on the entire premises, furniture, and equipment.
- The AO held that the arrangement was a 'make-believe affair' and not genuine, as the consideration for hiring the equipment was grossly understated. The income was assessed as 'Income from other sources.'

CIT(A)'s Findings:
- Directed the AO to verify the turnover of the restaurants and assess 2% of the turnover as income from house property.
- Confirmed the addition of Rs. 5,00,000 as income from other sources, considering the transaction unreasonable and not genuine.

Tribunal's Findings:
- The Tribunal held that the agreement between the assessee and M/s. CJHPL was of a composite nature, and the payments constituted a package.
- The income received from M/s. CJHPL was taxable under 'Income from other sources' as it did not amount to exploiting commercial assets.
- The addition of Rs. 5,00,000 was reduced to Rs. 3,00,000, considering the assessee's expectations and the department's argument about the lack of prudence.

Issue 2: Allowability of Depreciation on Premises and Equipment

Assessing Officer's Findings:
- Disallowed depreciation on the building let out to M/s. CJHPL, as it was assessed under 'Income from other sources.'

CIT(A)'s Findings:
- Directed the AO to verify whether premises M-7 and M-15 were the same and consider the past history of the case.

Tribunal's Findings:
- Directed the AO to consider the claim of depreciation under clause (ii) of section 57, as the income was assessable under 'Income from other sources.'

Issue 3: Allowability of Interest on Borrowed Funds

Assessing Officer's Findings:
- Disallowed the interest liability claimed by the assessee, as the expenditure was not incurred for business purposes but to make assets available to M/s. CJHPL.

CIT(A)'s Findings:
- Directed the AO to consider the allowability of interest under section 57(iii).
- Confirmed the disallowance of interest, observing that the expenditure was not incurred wholly and exclusively for earning income.

Tribunal's Findings:
- Held that the assessee was entitled to relief under section 57(iii), as the interest expenditure was laid out and expended wholly and exclusively for earning income taxable under 'Income from other sources.'
- Directed the AO to allow the claim of interest in accordance with section 57(iii).

Conclusion:
The Tribunal concluded that the income from the composite agreement with M/s. CJHPL was assessable under 'Income from other sources.' Depreciation and interest on borrowed funds were allowed under section 57, considering the expenditure was incurred wholly and exclusively for earning the income. The addition of Rs. 5,00,000 was reduced to Rs. 3,00,000, and the AO was directed to reassess the depreciation and interest claims accordingly.