2018 (1) TMI 87 - AT - Income Tax

Rental receipt from subletting of premises - whether business income or income from other sources? - Held that - the issue is squarely covered by Tribunal s order in assessee s own case for AY 2009-10 2014 (6) TMI 803 - ITAT MUMBAI , where it was held that the fact that the assessee running the business centre by exploiting the property is not merely an activity of letting out the property and the fact that the assessee has been showing the rent received from letting out the business centre under the head business income continuously since 1984, we are of the considered view that the authorities below are not justified in treating the impugned receipts under the head income from other sources. Treatment of consequential expenses - allowability - Held that - the income received from the business centre has to be treated as business income in pursuance of the adjudication and the fact that the expenditures have nexus with the business income, the expenditures claimed by the assessee have also to be allowed as business expenditure. Appeal dismissed - decided against Revenue.

Summary

Issues Involved:
1. Determination of whether rental receipts from subletting of premises constitute business income or income from other sources.
2. Allowance of consequential expenses claimed by the assessee against the rental receipts.

Analysis:

Issue 1:
The primary issue in this appeal pertains to the classification of rental receipts from subletting of factory premises as either business income or income from other sources. The Revenue contested the CIT(A)'s decision, arguing that the receipts should be taxed under the head 'Business Income' rather than 'income from other sources'. The CIT(A) based its decision on previous orders for AY 2009-10, where it allowed the claim of the appellant and directed the AO to treat the receipts as business income. The Tribunal also considered the appellant's history of engaging in manufacturing activities and renting out surplus premises, treating both the incomes from manufacturing and property divisions as business income. The Tribunal emphasized the company's activities permitted by its memorandum and articles of association, indicating a business-oriented approach to generating income from leased premises. Various legal precedents were cited to support the conclusion that the rental income should be treated as business income, given the nature of the appellant's operations and consistent treatment of such income in previous years.

Issue 2:
Regarding the allowance of consequential expenses claimed by the assessee, the AO initially disallowed certain expenditures, including interest, depreciation, bank charges, compensation, license fees, and rent paid, on the grounds that they were not directly related to earning rental income. Similarly, legal charges for defending property rights were disallowed for AY 2009-10. However, the Tribunal found that these expenses were essential for maintaining the premises to generate income from the legitimate business activity of renting. The legal fees were deemed necessary for safeguarding the company's tenanted properties. In light of the decision to treat rental income as business income, the Tribunal directed the AO to allow the claimed expenditures as business expenses, as they were deemed to have a nexus with the business income.

In conclusion, the Tribunal upheld the CIT(A)'s decision, confirming that the rental receipts from subletting of premises should be treated as business income and allowing the consequential expenses claimed by the assessee. The consistent application of this treatment in previous years and the business-oriented nature of the appellant's activities were pivotal in determining the tax treatment of the rental income and associated expenses.