2016 (4) TMI 120 - AT - Income Tax

Income on account of rent - income from house property‟ OR income from business‟ - Held that - We find it appropriate to send this issue back to the file of the AO to examine this aspect properly. If this income has been assessed under the head income from business‟ in all the past years, then, Revenue should not change the head of income unless the AO is able to bring out on record some material pointing out change in facts or law. For this purpose, the AO is obliged under the law to give a detailed reasoning in the assessment order in case he is not accepting the claim of the assessee. In the absence of the same, the AO is not permitted to change the head of income and should accept the claim of the assessee. The assessee is permitted to submit requisite details and documentary evidences, as may be required by the AO, or as may be considered appropriate by it, as per law and facts. The AO shall give adequate opportunity of hearing to the assessee before deciding this issue afresh. With these observations, this issue is sent back to the file of the AO. Disallowance of benefit of deduction u/s. 80IB of interest income, rental income and income from other sources - Held that - This issue is squarely covered against the assessee with the judgement of the Hon‟ble Supreme Court in the case of Liberty India (2009 (8) TMI 63 - SUPREME COURT) wherein it has been held by the Hon‟ble Supreme Court that for granting benefit of deduction u/s. 80IB only the profit and gains which are derived from the industrial undertaking would be eligible to be considered. The ld. Counsel of the assessee was not able to show that the receipts on account of interest and rental income were in any manner derived from the industrial undertaking.

Issues Involved:
1. Classification of rental income as "income from house property" vs. "income from business."
2. Deduction under section 80IB for interest income, rental income, and income from other sources.
3. Levy of interest under sections 234B and 234C.
4. Deductibility of legal fees paid to solicitors.

Detailed Analysis:

1. Classification of Rental Income:
The assessee challenged the CIT(A)'s confirmation of the AO's action in treating rental income as "income from house property" instead of "income from business." The assessee argued that the rental income had consistently been shown as business income in previous years and had been accepted by the AO. The Tribunal noted that neither the facts of earlier years were properly recorded nor did the lower authorities provide adequate reasoning for changing the classification. Citing the Supreme Court's decision in CIT v. Excel Industries Ltd., the Tribunal emphasized the principle of consistency and sent the issue back to the AO for re-examination. The AO was instructed to provide detailed reasoning if rejecting the assessee's claim and to give the assessee an opportunity to submit requisite details and evidence.

2. Deduction under Section 80IB:
The assessee contested the CIT(A)'s decision to exclude interest income from the deduction under section 80IB, arguing that the income should be considered as part of the profits derived from the business of the industrial undertaking. The AO had excluded the interest income, treating it as "income from other sources," since it was earned from surplus funds deposited in a Fixed Deposit account. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's judgment in Liberty India v. CIT, which stated that only profits directly derived from the industrial undertaking are eligible for deduction under section 80IB. The Tribunal found that the interest and rental income were not derived from the industrial undertaking, thus disallowing the deduction.

3. Levy of Interest under Sections 234B and 234C:
The assessee's challenge to the levy of interest under sections 234B and 234C was deemed consequential and therefore dismissed.

4. Deductibility of Legal Fees:
In the appeal for A.Y. 2009-10, the assessee challenged the disallowance of legal fees paid to M/s. Kanga & Co. The fees were incurred to protect tenancy rights in a rented property. The AO disallowed the deduction, arguing that the expenses were not related to the business. The CIT(A) upheld this view, stating the expenses were connected to the rented property and not the business. The Tribunal noted that the determination of the head of taxability of rental income (sent back to the AO in para 7) directly impacted this issue. Thus, the Tribunal sent the issue back to the AO for re-evaluation, allowing the assessee to present all relevant legal and factual arguments.

Separate Judgments:
The Tribunal's decisions for A.Y. 2007-08, 2008-09, and 2010-11 followed the same rationale as for A.Y. 2006-07. The appeals for A.Ys. 2006-07 to 2009-10 were partly allowed for statistical purposes, while the appeal for A.Y. 2010-11 was dismissed.

Conclusion:
The Tribunal's judgment emphasized the principle of consistency in tax treatment, the specific requirements for deductions under section 80IB, and the need for detailed reasoning in assessment orders. The issues were sent back to the AO for re-examination with instructions to provide adequate opportunities for the assessee to present evidence and arguments.

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