1991 (10) TMI 94 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of unrealized rent under Section 24(1)(x).
2. Deduction of brokerage fees.
3. Disallowance of salaries paid to directors.
4. Levy of interest under Section 216.

Issue-wise Detailed Analysis:

1. Disallowance of Unrealized Rent under Section 24(1)(x):
The assessee constructed a property in Connaught Place, New Delhi, known as Harsha Bhavan, and let a portion to M/s Jamuna Properties (P) Ltd. The tenant sub-let the premises to M/s Peerless Gen. Finance & Investments Co. Ltd. When Jamuna Properties failed to pay rent from 1st Aug 1982 onwards, Peerless became a direct tenant from 1st April 1983. The assessee claimed a deduction of Rs. 3,89,500 for unrealized rent from Jamuna Properties. The AO rejected the claim, stating the rent had accrued and a suit for recovery was pending. The CIT(A) upheld the disallowance, doubting the bona fides of the tenancy. The Tribunal found the CIT(A)'s reasoning flawed, noting no evidence of a fictitious tenancy and reversed the finding. The Tribunal remanded the matter to the CIT(A) to reconsider the claim for Rs. 3,64,000, excluding Rs. 25,500 for the period after Peerless became a direct tenant.

2. Deduction of Brokerage Fees:
The assessee claimed Rs. 45,000 as brokerage paid to M/s Kohli Estate Agency for negotiating the letting out of another floor to Peerless. The authorities denied the deduction, stating brokerage for letting out property is not allowable under Section 24. The assessee later contended it was for collection charges, a change in stance. The Tribunal upheld the disallowance, finding no merit in the new contention and noting the broker's bill mentioned service charges for negotiating and collecting rent.

3. Disallowance of Salaries Paid to Directors:
The AO disallowed portions of salaries paid to three directors, deeming them excessive. The CIT(A) partially upheld the disallowances. The Tribunal noted the assessee's substantial business and profits, and the directors' cessation of salaries from another group company, justifying the increases. The Tribunal found the salaries reasonable, considering business needs and services rendered, and deleted the disallowances in toto.

4. Levy of Interest under Section 216:
The issue of interest under Section 216 was deemed consequential, dependent on the final quantum assessment. The Tribunal noted the interest amount would need recalculation once the assessment is finalized.

Conclusion:
The assessee's appeal was partly allowed. The Tribunal remanded the issue of unrealized rent to the CIT(A) for reconsideration, upheld the disallowance of brokerage fees, deleted the disallowances of directors' salaries, and noted the consequential nature of the interest levy under Section 216.