2014 (8) TMI 841 - AT - Income Tax

Interest income to be treated as business income or income from other sources Business of letting out property - Held that - The borrowed amount has been lended to its sister concern - The amount was borrowed at the rate of 8.25% interest and the same was given at the rate of 11.03% interest - The intention is clear, the assessee was engaged in money lending business - the main object of the assessee company may not be money lending business but ancillary object clearly show that the assessee is engaged in financial activities - the income from interest should be taxed under the head profits and gains of business or profession - the AO is directed to treat the interest income under the head Profits and Gains of Business or Profession Decided in favour of assessee. Taxability of income from amenities under the head Income from other sources Held that - The assessee has entered into two separate agreements one relating to the rent of the leased premises and the other relating to the amenities - Relying upon CIT Vs. J.K. Investors 2012 (11) TMI 186 - BOMBAY HIGH COURT - the service agreement is totally dependent upon the rent agreement considering the amenities to be provided by the assessee, which includes lift facility, security, common area facility, car parking etc. - all the amenities are part and parcel of the building which are necessary for the enjoyment of the building by the tenant and otherwise no tenant will occupy the building on lease and such amenities not only increase the cost of the building but also the rental income - the AO is directed to treat the income from amenities under the head Income from House property and compute the income as per the provisions of law under the head Income from House property Decided in favour of Assessee.

Summary

Issues:
1. Tax treatment of interest income under Income from other sources instead of Income from Business and profession.
2. Disallowance of business expenditure.
3. Tax treatment of income received for providing amenities under Income from other sources instead of income from house property.

Analysis:

Issue 1:
The appellant contested the tax treatment of interest income, arguing it should be taxed under Profits and Gains of Business or Profession. The AO initially taxed the interest income under Income from other sources, citing lack of continuity in lending activity. However, the ITAT held that since the borrowed amount was lent to a sister concern at a higher interest rate, the appellant was engaged in money lending business ancillary to financial activities. Thus, the interest income was directed to be taxed under Profits and Gains of Business or Profession, allowing for related expenditures.

Issue 2:
The AO disallowed business expenditure claimed by the appellant, which was confirmed by the CIT(A). However, upon review, the ITAT directed the AO to consider the expenditure under Profits and Gains of Business or Profession after due verification and hearing, as per the provisions of law. Ground No. 2 was allowed for statistical purposes.

Issue 3:
Regarding the income from amenities, the AO taxed it under Income from other sources instead of Income from house property. The ITAT found that the service agreement for amenities was dependent on the rent agreement, making it an integral part of the rental income. Citing a precedent, the ITAT directed the AO to treat income from amenities under Income from House property, considering amenities as essential for tenant enjoyment and part of the building's cost.

In conclusion, the ITAT allowed the appeal for statistical purposes, directing the tax treatment of interest income under Profits and Gains of Business or Profession and income from amenities under Income from House property, while instructing a reevaluation of business expenditures under relevant provisions.