2012 (9) TMI 328 - AT - Income Tax

Rental income from the property Income from house property versus Profits & Gains of Business or Profession or under the head Income from other sources , as held by Revenue - Held that - In the instant case, though assessee contended that assessee derived income from exploitation of commercial asset, however not even a whisper is made in the impugned order as to whether or not the assessee derived income from exploitation of property as a commercial asset or as an owner. Apparently, the issue has not been examined in proper perspective. Where income is derived from house property by the exercise of property rights properly so called, the income falls under the head income from property; however where house property is given on lease or licence basis for earning income therefrom, the true character of the income derived is income from property. The said character is not changed and the income does not become income from trade or business if the hiring is inclusive of certain additional services such as heating, cleaning, lighting or sanitation, which are relatively insignificant and only incidental to the use. A mere glance at the impugned order for the year under consideration, reveals that the order passed by the CIT(A) is cryptic and grossly violative of one of the facets of the rules of natural justice, namely, that every judicial/quasi- judicial body/authority must pass reasoned order, which should reflect application of mind by the concerned authority to the issues/points raised before it. Decision does not merely mean the conclusion . It embraces within its fold the reasons forming basis for the conclusion. In view of the foregoing, especially when the CIT(A) have not passed a speaking order, matter is restored to file of CIT(A) to bring out clearly as to whether or not the assessee derived income from exploitation of property as a commercial asset or as a owner Decided in favor of assessee for statistical purposes

Issues Involved:

1. Classification of lease rental income.
2. Allowance of business deductions for expenses.
3. Deduction of expenditure under Section 57(iii) of the Income-tax Act.
4. Deduction for expenses incurred for maintaining the corporate entity.

Detailed Analysis:

1. Classification of Lease Rental Income:

The primary issue revolves around whether the lease rental income of Rs. 12,73,200/- should be classified under the head 'Income from other sources' or 'Profits and gains from business and profession'. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] both concluded that the income should be assessed under 'Income from other sources'. The AO noted that the assessee did not carry on any business during the relevant year and had only one source of income, which was lease charges. The CIT(A) upheld this view, referencing the ITAT Mumbai decision in DCIT Vs. Vaishnav S. Puri (HUF), which established that mere letting out of property does not constitute a business activity. The assessee argued that the business involved dealing in properties, and historically, the lease income had been assessed as business income. However, the Tribunal found that the CIT(A) did not properly analyze whether the income was derived from exploiting the property as a commercial asset or as an owner.

2. Allowance of Business Deductions for Expenses:

The assessee claimed business deductions for expenses totaling Rs. 9,46,188/-. The AO restricted the deduction to 15% of the lease charges, as the income was assessed under 'Income from other sources'. The CIT(A) agreed, stating that the expenses claimed (e.g., bank charges, director's traveling charges, printing, and stationery) were not incurred for earning rental income and were therefore not allowable. The Tribunal noted that the CIT(A) did not provide a detailed basis for allowing only 15% of the expenses and did not assess whether the expenses were necessary for maintaining the corporate entity.

3. Deduction of Expenditure under Section 57(iii) of the Income-tax Act:

The assessee argued that even if the income was classified under 'Income from other sources', the entire expenditure of Rs. 9,46,188/- should be deductible under Section 57(iii) of the Act, which allows for deductions of expenses incurred wholly and exclusively for the purpose of earning such income. The CIT(A) restricted the deduction to 15% of the lease rental income without providing a detailed basis for this decision. The Tribunal found that the CIT(A) did not properly analyze whether the expenses were incurred wholly and exclusively for earning the lease rental income.

4. Deduction for Expenses Incurred for Maintaining the Corporate Entity:

The assessee contended that the expenses incurred for maintaining the corporate entity should be deductible in computing the total income. The CIT(A) did not address this argument in detail. The Tribunal noted that the CIT(A) failed to provide a reasoned order on whether these expenses were necessary for maintaining the corporate entity and should be deductible.

Conclusion:

The Tribunal found that the CIT(A) did not pass a speaking order on the issues raised, failing to analyze whether the income was derived from exploiting the property as a commercial asset or as an owner. The Tribunal set aside the order of the CIT(A) and restored the matter for a fresh decision, directing the CIT(A) to pass a reasoned order in accordance with law, after allowing sufficient opportunity to both parties. The appeal was allowed for statistical purposes.

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