1997 (8) TMI 102 - AT - Income Tax

Annual Value Annual Value Assessment Year Assessment Year From Other Sources House Tax House Tax Income From Business Income From Business Income From House Property Income From House Property Income From Other Sources Rental Income Rental Income

Issues Involved:
1. Confirmation of additions of Rs. 9,100 and Rs. 10,100 as unexplained and non-genuine loans.
2. Assessability of rental income from leasing factory godowns and industrial sheds as income from property or business income.
3. Disallowance of expenses incurred in pursuance of the agreement with tenants.
4. Disallowance of depreciation on the portion of the building let out.

Issue-wise Detailed Analysis:

1. Confirmation of Additions of Rs. 9,100 and Rs. 10,100 as Unexplained and Non-genuine Loans:
1.1 The first ground raised by the assessee relates to the confirmation of the additions of Rs. 9,100 and Rs. 10,100 as unexplained and non-genuine loans.
1.2 Regarding the addition of Rs. 9,100, it was noted that Shri N. K. Bagla had deposited Rs. 5,000 in cash on 1-4-1987 and Rs. 4,100 on 2-4-1987 with the assessee firm. The assessee filed an affidavit before the Assessing Officer in which Shri Bagla admitted that the interest-free loan of Rs. 9,100 was given out of his savings from salary income. His statement recorded on 7-8-1989 confirmed these facts, explaining that the loan was given from money brought from his father, Shri Tej Bhan, who owns agricultural land. The contents of the affidavit and the statement indicated that the assessee discharged the burden of proving the identity and capacity of the depositor. Consequently, the Assessing Officer was directed to delete the addition of Rs. 9,100.
1.3 Regarding the addition of Rs. 10,100, the loan was received from Shri L.D. Sachdeva, Chartered Accountant. His statement recorded on 7-8-1989 confirmed the loan advance. He disclosed his income sources and expenditures, revealing that he was a man of means. Hence, there was no justification for sustaining the addition of Rs. 10,100, and the Assessing Officer was directed to delete the same.

2. Assessability of Rental Income:
2.1 The assessee challenged the finding that rental income from leasing factory godowns and industrial sheds is assessable as income from property, not as business income. The original partnership deed of the assessee-firm executed on 24th April 1982 indicated the main business was the manufacture and sale of PVC insulated cables. An amended deed executed on 9th September 1983 included leasing factory godowns and industrial premises as part of the business. The learned counsel argued that leasing activities should be assessed under 'Income from business' and related expenses and depreciation should be allowed.
2.2 The learned counsel cited the judgment of the Karnataka High Court in Balaji Enterprises v. CIT [1997] 225 ITR 471, emphasizing the nature of activity to determine whether it was a business activity or merely receiving rent as property owners. However, the facts differed as the assessee was the property owner.
2.3 The counsel also relied on CIT v. Anand Rubber & Plastics (P.) Ltd. [1989] 178 ITR 301, where it was held that the distinction between rent as business income or property income depends on whether the asset is exploited commercially or let out for enjoying rent. The facts of the present case were distinguishable as 90% of the property was rented out, not temporarily.
2.4 The counsel referred to Sultan Bros. (P.) Ltd. v. CIT [1964] 51 ITR 353, where composite rent for building and services was not bifurcated and assessed as business income. However, the present case involved incidental services, not a fully equipped hotel building.
2.5 The Tribunal concluded that the rental income was rightly charged under 'Income from property', supported by the Supreme Court judgment in East India Housing & Land Development Trust Ltd. v. CIT [1961] 42 ITR 49, which held that income from property remains as such even if received by a company formed for developing markets.
2.6 Past assessments showed inconsistency in treating rental income, but the matter was decided based on current facts.
2.7 The Tribunal confirmed the CIT(A)'s order that the income is assessable under 'Income from house property'.

3. Disallowance of Expenses:
3.1 The assessee claimed deductions for building repairs and security service charges (Rs. 55,552) and house-tax (Rs. 8,284). The Tribunal noted that no separate deduction for repairs is allowed as 1/6th for repairs was already provided under section 24 of the Income-tax Act, 1961.
3.2 However, security service charges (Rs. 30,012) should be deducted from the gross rent while computing the annual value under section 23, as these charges are part of the actual rent receivable.
3.3 The assessee's claim for house-tax (Rs. 16,044) was partly allowed, with the Assessing Officer directed to grant deduction for the entire amount paid in the year under consideration, as per the proviso to section 23.

4. Disallowance of Depreciation:
4.1 The assessee challenged the disallowance of depreciation on the portion of the building let out. Since the income from rent was assessed under 'Income from house property', depreciation on the let-out portion was not allowed. The Tribunal confirmed the CIT(A)'s view.

Conclusion:
The appeal was partly allowed, with the deletion of additions for unexplained loans and partial allowance of claimed expenses. The rental income was confirmed as assessable under 'Income from house property', and depreciation on the let-out portion was disallowed.

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