2017 (2) TMI 1092 - AT - Income Tax

Taxability of the lease rental income - Profits and gains of business or profession or Income from other sources - Held that - It is the claim of the assessee that the income from lease rental should have been taxed under the head Profit and gains of business or profession . Subsequent conduct of the assessee prompts us to dismiss this grievance of the assessee because in subsequent years, the assessee itself has shown the lease rental income under head Income from other sources . Therefore, without going into the merits of this claim of the assessee and considering the subsequent conduct of the assessee, this grievance of the assessee is also dismissed. Allowability of depreciation, additional depreciation and carry forward of unabsorbed depreciation - Held that - Coming back to the allowability of depreciation from the income taxed under the head Income from other sources in the light of the afore-stated discussions, in our considered opinion, the A.O. ought to have allowed depreciation as per the provisions of the law. Section 32 (1) (iia) contains the provisions for the allowability of additional depreciation. As mentioned elsewhere, u/s. 57(ii) deductions are allowed as provided in Sections 30, 31 & 32 of the Act and since the legislature has not specified any provision in respect of any sub-clause in these sections, all the deductions provided in these sections have to be allowed accordingly.. We accordingly held that the assessee is entitled for additional depreciation and the A.O. is directed accordingly. Unabsorbed depreciation - The definitions of actualcost and written down value in Section 43. We accept the submissions made on behalf of the assessee that if the unabsorbed depreciation is not allowed to be deducted, the assets which remain the same whether used in business and yielding income from the business or whether they are let out and earn income from other sources, there will be an anomaly as the same assets would have different written down values and different rates of depreciation for the purpose of deductions under Section 57 than that which would be computed if the assets earn business income. Reading the relevant sections, it appears that the scheme of the Act is that the written down value and actual cost for the purpose of sections 32and 57 are meant to be one and the same.We accordingly direct the A.O. to allow the unabsorbed depreciation to be carried forward as per the provisions of the law. Deductions of interest on prorata basis - We find that in A.Y. 2006-06, the assessee has done the business for some part of the year which income has been taxed under the head Profits and gains of business or profession . In our considered opinion, the interest should have been allowed on pro rata basis. We accordingly direct the A.O. to deduct interest proportionately from the income taxed under the head Profits and gains of business or profession and Income from other sources . Invoking the provisions of Section 38(2) of the Act while dismissing the claim of deductions from the head Income from other sources - Held that - Since the assessee has let out its entire premises lock, stock and barrel to Arvind Mills Ltd., in our considered opinion, the provisions of Section 38(2) do not apply on the facts of the case.

Issues Involved:

1. Taxability of lease rental income under "Profits and gains of business or profession" or "Income from other sources".
2. Allowability of depreciation and additional depreciation.
3. Set off of unabsorbed depreciation.
4. Allowability of interest deductions.
5. Admissibility of additional evidence under Rule 46A.
6. Applicability of Section 38(2) of the Income Tax Act.

Detailed Analysis:

1. Taxability of Lease Rental Income:
The primary issue concerns whether the lease rental income should be taxed under "Profits and gains of business or profession" or "Income from other sources." The assessee initially claimed it should be under "Profits and gains of business or profession," but later reported it under "Income from other sources." The Tribunal upheld the latter classification, dismissing the assessee's grievance based on their subsequent conduct.

2. Allowability of Depreciation and Additional Depreciation:
The Tribunal examined whether depreciation and additional depreciation could be claimed under "Income from other sources." It noted that Sections 56(ii) and (iii) and Section 57(ii) allow deductions similar to those under "Profits and gains of business or profession." The Tribunal concluded that depreciation should be allowed as per the provisions of the law, including additional depreciation under Section 32(1)(iia).

3. Set Off of Unabsorbed Depreciation:
The Tribunal held that unabsorbed depreciation should be allowed to be carried forward, even if the income is classified under "Income from other sources." It emphasized that the written down value and actual cost for depreciation purposes should remain consistent regardless of the income head.

4. Allowability of Interest Deductions:
In A.Y. 2006-07, the assessee had conducted business for part of the year, with income taxed under both "Profits and gains of business or profession" and "Income from other sources." The Tribunal directed that interest should be deducted proportionately between these two heads.

5. Admissibility of Additional Evidence under Rule 46A:
The Revenue challenged the admissibility of additional evidence regarding additional depreciation, claiming a violation of Rule 46A. However, since the Tribunal decided the issue in favor of the assessee, it dismissed this grievance.

6. Applicability of Section 38(2):
The Tribunal considered Section 38(2), which restricts deductions if assets are not exclusively used for business purposes. Since the assessee had leased out the entire premises, the Tribunal found that Section 38(2) did not apply.

Summary of Findings:
(i) Lease rental income is taxed under "Income from other sources."
(ii) Depreciation is allowed as per the provisions of the law.
(iii) Additional depreciation is also allowed.
(iv) For A.Y. 2006-07, interest and depreciation should be proportionately allocated between "Profits and gains of business or profession" and "Income from other sources."

Conclusion:
The appeal by the assessee is partly allowed, and the appeals by the Revenue are dismissed. The Tribunal directed the A.O. to allow the unabsorbed depreciation to be carried forward and to allocate interest and depreciation proportionately for A.Y. 2006-07. The Tribunal dismissed the Revenue's challenge regarding additional evidence and found Section 38(2) inapplicable.

← Previous Next →