2018 (6) TMI 227 - AT - Income Tax

Nature of Income - Whether the income from lease rent of property is business income or house property income - nature of rental expense - Held that - As in assessee s own case for AY 1997-98 and AY 2001-02 AO is supposed to maintain consistency on his stand upto and unless there is material change either in the facts or on the law. No such thing is discernible from the assessment order. More so, the AO has not doubted the leasing business of the assessee because he has accepted the assessee s version as far as the rental income received by the assessee on the properties taken on lease and thereafter subleased by it to the sister concerns. In view of the above discussion, we allow the appeals of the assessee and direct the AO to assess the rental income from leasing activity under the head business income. Consistently, we also allow the depreciation on the building as well as equipment provided by the assessee Disallowance u/s 14A r.w. Rule 8D - Held that - Neither the AO nor the Ld. CIT(A) had the benefit in the case of GODREJ AND BOYCE MFG. CO. LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT which is relevant to the instant case, we set aside the order of the Ld. CIT(A) and restore the matter to the file of the AO to recompute the disallowance u/s 14A r.w. Rule 8D. Deduction of lower of brought forward business loss or depreciation as per books of accounts while calculating the book profit u/s 115JB - Held that - the issue involved herein requires verification at the level of the AO. Therefore, we set aside the order of the Ld. CIT(A) and restore the matter to the file of the AO for examination and passing an order, after giving reasonable opportunity of being heard to the assessee.

Issues Involved:
1. Classification of income from lease rent of property as "Business Income" or "Income from House Property."
2. Allowability of rental expenses and depreciation on building against rental income.
3. Disallowance under Section 14A read with Rule 8D for exempt income.
4. Deduction of lower of brought forward business loss or depreciation while calculating book profit under Section 115JB.

Detailed Analysis:

1. Classification of Income from Lease Rent:
The Revenue contested that the lease rent income should be classified as "Income from House Property" rather than "Business Income." The Assessing Officer (AO) assessed the business center income and rental income under "Income from House Property," disallowing certain expenses and depreciation. The Commissioner of Income Tax (Appeals) [CIT(A)], following the precedent set in earlier years, classified the income as "Business Income." The Tribunal upheld the CIT(A)'s decision, emphasizing the principle of consistency in tax assessments, as established by the Supreme Court in Radhasoami Satsang v. CIT and other relevant cases. The Tribunal noted that in all other assessment years, the rental income had consistently been assessed as business income, and there was no material change in facts to warrant a different classification.

2. Allowability of Rental Expenses and Depreciation:
The AO disallowed expenses of ?59,94,458 and depreciation of ?1,49,21,727 on the building, arguing they were related to property rented out and not eligible for deduction except as per Section 24 of the Act. The CIT(A) allowed these expenses and depreciation, considering them as business expenses. The Tribunal upheld the CIT(A)'s decision, following the principle of consistency and the established practice in previous years. The Tribunal directed the AO to assess the rental income from leasing activity under "Business Income" and allow the related expenses and depreciation.

3. Disallowance under Section 14A read with Rule 8D:
The AO disallowed ?2,83,60,930 under Rule 8D(2)(iii) for expenses related to earning exempt income, which the assessee contested, claiming no expenses were incurred for earning the exempt income. The CIT(A) upheld the AO's disallowance but directed credit for ?45,200 already disallowed by the assessee. The Tribunal, referencing recent Supreme Court and Bombay High Court decisions (Godrej & Boyce, Maxopp Investment Ltd.), set aside the CIT(A)'s order and remanded the matter to the AO for recomputation of disallowance under Section 14A read with Rule 8D, ensuring adherence to the relevant judicial precedents and providing the assessee an opportunity to present evidence.

4. Deduction of Lower of Brought Forward Business Loss or Depreciation:
The CIT(A) confirmed the AO's calculation of book profit under Section 115JB, deducting the lower of brought forward business loss or depreciation. The Tribunal found this issue required further verification and remanded it to the AO for re-examination, instructing the AO to provide the assessee with a reasonable opportunity to present relevant documents and evidence.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal for statistical purposes, directing further examination and recomputation by the AO in accordance with judicial precedents and after providing the assessee a fair opportunity to present their case. The order was pronounced in open court on 30/05/2018.

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