2012 (12) TMI 378 - AT - Income Tax

Rental Income - Business Income vs Income from House Property - nature of income - assessee had received rent from letting out of the property being flats and therefore income has to be assessed as income from house property. However, assessee has raised a plea that the part of the property i.e. 65% had been let out to the director Ms. Rekha Jalan for her residence which had to be treated as business user of the property and in such cases income from such asset has to be treated as business income. The plea raised by the assessee is supported by judgment of Hon ble High Court of Madras in the case of New India Maritime agencies Pvt. Ltd. 2001 (6) TMI 27 - MADRAS HIGH COURT in which it has been held that the buildings owned and occupied by the Director of the assessee company has to be treated as used for business and income derived has to be assessed as business income - held that - rental income received from Ms. Rekha Jalan has to be treated as business income and rental income received from Ms. Snehal who was only a shareholder has to be assessed as income from house property. Determination of annual value - income from house property - rental income from Ms. Snehal Jalan - Applicability of the provisions of Rent Control Act - held that - The provisions of Rent Control Act can be applied only in case of bonafide letting out of properties and not in case of colourable transactions which are only an arrangement to reduce tax liability. In this case the company had let out the property to the daughter of the director who controlled the company and is responsible for taking all decisions Instead of letting out the property at market rate which is very high the director had let out property to her daughter at a very low rent obviously to reduce tax liabilities. Therefore in our view the provisions of Rent Control Act cannot be applied to such arrangements. Accordingly we hold that annual value in relation to part of the property let out to Ms. Snehal Jalan will be the fair rent in the market based on comparable cases. Deduction on account of municipal taxes @ 30% u/s 24(a) - held that - municipal tax paid by the assessee will be allowable as deduction @ 30% while computing income from house property. As regards the portion let out to its director income from which has been held as assessable as business income the deduction on account of municipal tax will obviously be allowable. Administrative expenses - assessee was not doing any business since long - AO disallowed the claim of expenses ie 65% of rental income being received from director was assessable as business income and only 35% of the rent received from the share holder could be assessed as house property income - held that - 65% of administrative expenses should be allowed. Interest income received from ICDs and bills discounting - business of financing is one of the objects in MOA and assessee had been undertaking these activities in an organized manner - held that - in assessment year 2005-06 in scrutiny assessment u/s 143(3) had treated the income as income from other sources which was accepted by the assessee as no appeal was filed. Though in subsequent years the business income declared by the assessee has been accepted but those assessments were covered in summary scheme in which the AO was not empowered to take any view regarding computation of income and had to simply accept the returned income. Therefore acceptance of business income under section 143(1) in subsequent years can not be taken as decision by authorities to accept the claim of the assessee. There is nothing to show that assessee was engaged in these activities in an organized manner - held that - Assessee had surplus fund which had been invested to earn interest income which in our view has been rightly assessed as income from other sources - order of CIT(A)is confirmed.

Issues Involved:
1. Nature of rental income: business income or house property income.
2. Determination of annual value of property.
3. Allowability of deduction on account of municipal tax.
4. Allowability of administrative expenses.
5. Nature of interest income: business income or income from other sources.

Issue-wise Detailed Analysis:

1. Nature of Rental Income: Business Income or House Property Income
The assessee had declared rental income as business income, arguing that the property was held as a business asset. The AO, however, assessed the rental income under the head "house property" based on precedents like East India Housing and Land Development Trust Ltd. vs. CIT and Shambhu Investments. The Tribunal upheld the AO's decision but made an exception for the portion of the property let out to the director, Ms. Rekha Jalan, treating it as business income based on judgments from the Andhra Pradesh and Madras High Courts.

2. Determination of Annual Value of Property
The AO determined the annual value based on fair market rental value, rejecting the assessee's claim that the rent received should be considered. The Tribunal upheld the AO's assessment of fair rent at Rs. 125 per sq.ft. for the portion let out to Ms. Snehal Jalan, noting that the property was let out at a significantly lower rate to a related party, which was an arrangement to reduce tax liability. The Tribunal also clarified that properties not covered under Rent Control Act should have their annual value determined based on fair rent in the market, supported by comparable cases.

3. Allowability of Deduction on Account of Municipal Tax
The authorities below had denied a separate deduction for municipal tax, stating it was covered under the 30% deduction allowed under section 24(a). The Tribunal disagreed, stating that municipal tax should be deducted on a paid basis while determining the annual value under section 23, in addition to the 30% deduction under section 24(a).

4. Allowability of Administrative Expenses
The AO had disallowed administrative expenses, asserting that the assessee was not conducting any business. The Tribunal, however, allowed 65% of the administrative expenses, aligning with the proportion of rental income assessed as business income from the portion let out to the director.

5. Nature of Interest Income: Business Income or Income from Other Sources
The AO and CIT(A) treated the interest income from ICDs and bill discounting as income from other sources, citing that the assessee's main business did not include financing. The Tribunal upheld this view, noting that in the assessment year 2005-06, the interest income was similarly assessed as income from other sources and accepted by the assessee. The Tribunal found no evidence of organized business activity in financing and confirmed the assessment of interest income as income from other sources.

Conclusion:
The appeal was partly allowed, with the Tribunal making specific rulings on each issue, particularly differentiating between portions of rental income as business income and house property income, and allowing deductions for municipal tax and a portion of administrative expenses.

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