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2025 (1) TMI 865 - AT - Income TaxDisallowance of expenses - appeal filing fee, legal and professional charges and payment to the auditors - Whether expenses are essentially relatable to its existence / establishment? - AO was of the opinion that, the assessee has earned income from rent and interest income did not have any income arising out of the business activity and hence disallowed the expenditure - HELD THAT - As noted from the records that the assessee has computed the rent receipt from the factory premises as income from house property against which standard deduction has been claimed further the expenses has been claimed in the profit and loss account and the rent received is also declared as income from under the head other income, this categorically clear from Schedule-I to the profit and loss account. Assessee computed the rental income received under the income from house property as well as business income which is not the right procedure. No doubt, the rental income received, from the factory premises, amounts to income under the head house property. However, considering the fact that the premises rented out formed part of the fixed Schedule assets, it would be appropriate if the rental income received is considered u/s 57 of the Act, wherein all related expenses incurred by the assessee to keep up the property could be claimed as an expenditure. Decisions relied by the Ld.AR are distinguishable on facts as in those cases the assessee therein re-started its business subsequently on this background Hon ble Courts considered the claim of assessee by allowing expenditure to be claimed u/s 37(1) of the Act. However in the present facts of the case, there is no evidence brought on record by the Ld.AR regarding revival of business activity in subsequent years. AO directed to verify the rental income received by the assessee and compute taxability u/s 57 by considering proportionate expenses against such rental income. AO is directed to re-compute the taxable income of the assessee in the hands of the assessee u/s 57 of the Act as mentioned hereinabove. Accordingly, grounds raised by the assessee stands partly allowed. 1. ISSUES PRESENTED and CONSIDERED The core legal questions considered in this judgment are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of Notice under Section 148 Relevant legal framework and precedents: Section 148 of the Income Tax Act, 1961, allows for the reopening of an assessment if the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment. However, the reasons for such belief must be recorded, and the notice must be sanctioned by the designated authority. Court's interpretation and reasoning: The assessee initially contested the validity of the notice under Section 148, claiming it was vague and lacked proper sanction. However, these grounds were not pressed during the appeal before the Tribunal, leading to their dismissal. Key evidence and findings: The Tribunal did not delve into the specifics of the notice's validity due to the withdrawal of these grounds by the assessee. Application of law to facts: Since the grounds were not pressed, the Tribunal did not apply the legal framework to the facts of the case regarding the notice's validity. Treatment of competing arguments: The Tribunal did not address competing arguments due to the dismissal of these grounds. Conclusions: The Tribunal dismissed the grounds related to the validity of the notice under Section 148 as they were not pressed by the assessee. Issue 2: Disallowance of Expenses Relevant legal framework and precedents: The disallowance of expenses is governed by the provisions of the Income Tax Act, particularly Sections 24 and 37(1), which pertain to deductions against income from house property and business income, respectively. Court's interpretation and reasoning: The Tribunal considered the nature of the assessee's income and expenses. The assessee had categorized rental income as income from house property and claimed related expenses as business expenses. The Tribunal noted that the assessee's business activity had slowed, and the rental income was derived from business assets. Key evidence and findings: The assessee provided a breakdown of expenses totaling Rs. 7,62,261/-, with Rs. 6,78,980/- disallowed by the AO. The Tribunal found that the rental income should be assessed under Section 57, allowing for the deduction of expenses related to maintaining the property. Application of law to facts: The Tribunal directed the AO to assess the rental income under Section 57 and allow proportionate expenses, as the premises rented out were part of the fixed assets. Treatment of competing arguments: The Tribunal distinguished the case from precedents cited by the assessee, noting that there was no evidence of business revival, which was a factor in allowing expenses in those cases. Conclusions: The Tribunal partially allowed the appeal, directing the AO to recompute the taxable income by considering the rental income under Section 57 and allowing related expenses. 3. SIGNIFICANT HOLDINGS Preserve verbatim quotes of crucial legal reasoning: "It is therefore, directed to the Ld.AO to verify the rental income received by the assessee and compute taxability u/s 57 of the Act by considering proportionate expenses against such rental income." Core principles established: The rental income from business assets should be assessed under Section 57, allowing for the deduction of related expenses, even if the primary business activity has slowed or ceased. Final determinations on each issue: The Tribunal dismissed the grounds related to the validity of the notice under Section 148. It partially allowed the appeal concerning the disallowance of expenses, directing the AO to reassess the rental income and allow proportionate expenses.
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