2015 (9) TMI 706 - AT - Income Tax

Income from the house property shown by the assessee on letting out the property on rent to her husband - whether is a colourable transaction and therefore, the same is assessable under the head, income from other sources - Held that - The entire finding of the AO as well as Ld. CIT(A), that it is a colourable transaction is without any merits and examining the case of the husband. If at all the revenue had any doubt about such arrangement, then both the cases of husband and wife should have been examined. If the money received by the assessee has been shown by letting out of the property, then it has to be taxed as income from house property unless some material is brought on record to controvert the transaction. Further as brought on record by the learned counsel, the department itself in the subsequent year has accepted the rent received from husband as chargeable to tax under the head income from house property. Thus, on the facts of the case, the assessee s income from letting out the property is to be taxed under the head income from house property - Decided in favour of assessee. Disallowance made u/s 14A read with Rule 8D - Held that - Assessee has shown income under the head salary, income from house property, capital gains and interest income, which is mainly from saving bank account and FDR. From the perusal of the P&L Account, it is seen that assessee has debited ₹ 1,52,835/- on share transaction charges and STT charges of ₹ 2,89,148/- which can be said to be relatable for purchase of shares. The AO without examining the nature of expenditure and assessee s claim, has resorted to Rule 8D mechanically. This is not mandate of the law under section 14(2). On these facts and in the interest of justice, we restore this matter to the file of the AO to examine the nature of expenses claimed by the assessee and whether any expenditure can be held to be attributable for earning of the exempt income or not - Decided in favour of assessee for statistical purposes .

Summary

Issues:
1. Taxability of rental income from letting out property to husband.
2. Disallowance made under section 14A read with Rule 8D.

Issue 1: Taxability of rental income from letting out property to husband:
The appeal was filed against the order passed by the Ld. CIT(A) regarding the taxability of income from letting out a property to the husband under the head "income from other sources." The AO observed that the assessee received rent from her husband for a self-occupied property, leading to a dispute on whether it should be taxed as income from house property. The assessee argued that she had the right to let out the property to her husband and that there was no prohibition under the law for such transactions. The Ld. CIT(A) deemed the transaction as a colorable device for tax avoidance and dismissed the assessee's claim. However, the ITAT held that the income from letting out the property should be taxed as "income from house property" unless proven otherwise. The department's allegation of tax avoidance needed to be examined in the husband's case, and the money received could be treated as a gift if not rent. The ITAT allowed the assessee's ground, emphasizing the need for concrete evidence to label the transaction as colorable.

Issue 2: Disallowance made under section 14A read with Rule 8D:
The assessee challenged the disallowance made under section 14A read with Rule 8D concerning dividend income claimed as exempt. The AO calculated the disallowance at &8377; 3,66,782 based on Rule 8D, which was confirmed by the Ld. CIT(A). The assessee contended that no expenditure was incurred in relation to earning the exempt income, and the AO should have verified this claim before resorting to Rule 8D. The ITAT observed that the AO mechanically applied Rule 8D without examining the nature of expenses claimed by the assessee. The matter was restored to the AO for proper examination of the expenses related to earning exempt income. The ITAT allowed Ground No. 4 for statistical purposes, emphasizing the importance of verifying expenses before applying Rule 8D.

In conclusion, the ITAT partially allowed the appeal, ruling in favor of the assessee on the taxability of rental income from letting out the property to the husband and directing a reexamination of expenses related to the disallowance under section 14A read with Rule 8D.