2014 (11) TMI 684 - AT - Income Tax

Assessability of rental income - Income from House Property or Income from business Held that - The shares of the assessee company was acquired by M/s Seto Teknolog P Ltd on 5th September, 2006, due to which the assessee company became its Subsidiary Company - the assessee was engaged in the business of dealing in computers and peripherals - the business activity of the holding company appear to be more complex and technical in nature, whereas the activity of the assessee company consisted of merely dealing in computers and peripherals - in order to carry out the job work given by the holding company, the assessee company should have possessed skilled workers, who were having required technical knowledge - it is unbelievable that the assessee could have performed the job work with the help of its existing workers, who were merely engaged in the job of selling computer - the assessee has failed to show the nature of services performed by it to its holding company. Since the assessee has claimed to have received the labour charges from its holding company by carrying out certain technical activity and since it forms the foundation to determine whether the assessee was continuing to carry on the business, the onus to prove its claim is fully placed upon the assessee - the assessee has failed to discharge the onus - CIT(A) was not justified in accepting the claim of the assessee that it has continued to carry on its business - the nature of business activity of the assessee company and its holding company was different and hence the possibility of workers of the assessee company rendering technical services was remote - the so called job work or receipt of labour charges can only be categorized as colourable device to create an impression that the assessee has continued to carry on the business - the AO was justified in disallowing the claim of administrative expenses and further he was also justified in assessing the receipt of labour charges as income from other sources Decided in favour of revenue. Whether the expenses are assessable as business income or house property income Held that - The rent received on letting out of factory premises on temporary basis due to lull in the business is normally assessed as Business income , since the object of the assessee in such type of cases was not mere earning of rental income, but effective exploitation of business assets - the telephone company or the company providing services to the telephone company, could not have accepted installation of the same for a shorter period - the assessee has let out the terrace, which means, it has let out the space which was not required for it - the claim of letting out on a temporary basis does not apply to the facts surrounding the rental receipt from M/s Reliane Infratel Ltd. - the intention of the assessee in letting out the terrace to a telephone company for enabling it to erect a tower could only be with the intention to earn rental income the AO was justified in assessing the rental income received from M/s Reliance Infratel Limited under the head Income from House Property . Assessment of rental income received from the holding company of the assessee Held that - The assessee company has become subsidiary of M/s Seto Teknolog Pvt. Ltd and the premises have been let out, meaning thereby, there is a possibility that the assessee company has let out the factory premises in pursuance of a business policy decision - the letting out of factory business should be due to the fact of temporary lull in the business and the intention of the assessee could be ascertained from the efforts taken to revive the business activities - though the assessee claims that the letting out of factory premises was for a temporary period, yet no material was brought on record to substantiate the claim - the relationship between the assessee and its holding company also weakens the claim - The assessee has also failed to show that it was taking efforts to revive its business activities - All these factors cumulatively show that the intention of the assessee in letting out the factory premises could not be due to temporary lull in the business - the AO was justified in assessing the rental income under the head Income from House Property Decided in favour of revenue. Determination of Annual Letting Value (ALV) of the factory premises let out to the holding company Held that - The Annual letting value is determined as per the provisions of sec. 23 of the Act, according to which the fair market value or the actual rent received whichever is higher is taken as ALV - the municipal ratable value may be adopted as fair rental value - the ALV may be taken as the municipal ratable value - the order of CIT(A) is modified Decided partly in favour of assessee.

Summary

Issues Involved:
1. Classification of rental income as "Income from House Property" or "Income from Business".
2. Justification for deleting the disallowance of administrative expenses of Rs. 17,22,361/-.
3. Classification of income from Labour charges as "Income from Business" or "Income from Other Sources".

Issue-wise Detailed Analysis:

1. Classification of Rental Income:
The primary issue was whether the rental income received by the assessee should be classified as "Income from House Property" or "Income from Business". The assessee had let out its factory premises to its holding company and a portion to M/s Reliance Infratel Ltd for erecting a telephone tower. The AO assessed this rental income under the head "Income from House Property", while the CIT(A) accepted the assessee's claim that it was business income due to a temporary lull in business.

Upon review, it was determined that the assessee's claim of temporary letting was not substantiated with evidence. The court observed that the letting out of the terrace for a telephone tower was likely intended to earn rental income rather than for temporary commercial exploitation. Similarly, the letting out of the factory premises to the holding company was not proven to be a temporary measure due to business lull, and the relationship between the assessee and its holding company suggested a business policy decision rather than a temporary arrangement. Thus, the rental income was rightly assessed under "Income from House Property".

2. Deletion of Disallowance of Administrative Expenses:
The AO disallowed administrative expenses amounting to Rs. 17,22,361/- on the grounds that the assessee did not carry out any business activity and failed to prove the genuineness of the expenses. The CIT(A) accepted the assessee's claim that it was carrying on business activities and allowed the expenses.

However, upon further examination, it was found that the assessee did not provide sufficient evidence to prove the continuation of business activities. The AO had noted significant points such as no electricity expenses, no detailed agreement for labour services, and the nature of services not being specified in the bills. These points indicated that the assessee's claim of business continuity was not credible. Consequently, the disallowance of administrative expenses by the AO was justified.

3. Classification of Income from Labour Charges:
The AO classified the income from labour charges as "Income from Other Sources" rather than "Income from Business", citing lack of evidence for actual business activities. The CIT(A) had accepted the assessee's claim that it was business income.

Upon review, it was noted that the assessee failed to provide detailed evidence of the labour services rendered, and the nature of the business activities of the holding company was significantly different from that of the assessee. The lack of a written agreement and specifics in the bills further weakened the assessee's claim. Thus, the classification of income from labour charges as "Income from Other Sources" by the AO was upheld.

Determination of Annual Letting Value (ALV):
The AO had enhanced the rental income based on market rates, considering the interest-free deposit received by the assessee. However, the court directed that the municipal ratable value of Rs. 5,29,850/- should be adopted as the ALV, in line with judicial precedents against adding notional interest on security deposits to the ALV.

Conclusion:
The appeal was partly allowed, with the court upholding the AO's decisions on the classification of rental income and labour charges, and the disallowance of administrative expenses, while modifying the ALV determination to the municipal ratable value.