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2020 (3) TMI 226 - AT - Income TaxDisallowances of expenses - no business activity - whether the temporary lull in the business activities amount to closure of the business - HELD THAT - The answer certainly is in negative. It is because there can be a situation when the assessee is not able to generate any business but it has to incur the expenses to keep its business setup in existence. Thus in such a situation the assessee cannot be denied the claim of expenses incurred during the period when he was not able to generate the business. Furthermore, it is also important to note that the business is governed by the market forces which are beyond the control of the assessee. Thus merely lull in the business activities does not mean that the assessee has closed down its business activities. Accordingly, we hold that the assessee cannot be deprived from the benefit of claiming the deduction for the expenses incurred to keep the setup of the business in existence. Disallowance of expenses - no business activity during the year and the appellant had failed to prove the same - HELD THAT - Expenses incurred by the assessee to keep the business setup in existence are eligible for deduction. But it is equally important to ascertain whether the expenses incurred by the assessee are really essential to keep its business setup in existence during the lull period. As such, in our considered view all the expenses incurred by the assessee during the lull period are not eligible for deduction except those expenses which were necessary to incur or keep its business setup in existence. In the case on hand, this aspect has not been verified by the authorities below. Now again the question arises whether the issue for the deduction of the expenses claimed by the assessee should be set aside to the file of the AO to find out the expenses which were necessary to be incurred for keeping the status of the business alive. Considering the facts available on record, we note that all the details of the expenses incurred by the assessee were available before the authorities below, therefore we feel that the revenue should not be given fresh inning for determining the expenses incurred by the assessee which are to be allowed/disallowed as the case may be. Ground of appeal of the assessee is allowed. Deduction claimed u/s 24(a) and 24(b) - income from letting out the land is chargeable under the head income from other sources - HELD THAT - Rent cannot be classified as income under the head house property. To tax the rent income under the head house property, there has to be a house property or the land pertinent thereto as envisaged under the provisions of section 22 of the Act. But in the case on hand, even if we assume that there was the bungalow for some time, the rent received thereto cannot be classified as income under the head house property as lease agreement was never intended for the use of bungalow. Accordingly, the only option available to tax the impugned rental income from the land is under the head income from other sources. Accordingly, we hold that the assessee is not entitled for the deduction under section 24(a) and 24(b) of the Act with respect to such rental income as discussed above. Regarding the claim of the assessee for the interest expenses against the income from other sources, we note that the provisions of section 57 of the Act require allowing the deduction of the expenses incurred in generating the income under the head other source. Indeed the assessee has incurred interest expenses but failed to justify based on documentary evidence that such interest expenses were incurred in connection with impugned land/investments/bungalow. Accordingly, we are not convinced with the argument of the assessee. Hence, we do not find any infirmity in the order of the authorities below. Thus, the ground of appeal of the assessee is dismissed. Penalty u/s 271(1)(c) - addition on account of business expenses - HELD THAT - Once the quantum addition itself stands deleted then there should not be any penalty on the assessee based on such addition/disallowance. Hence we direct the AO delete the penalty with respect to addition on account of business expenses disallowed. Disallowances of deduction claimed under section 24(a) and 24(b) - HELD THAT - We hold that the assessee did not claim the deduction under section 24(a) of the Act with mala-fide /dishonest intent. We hold that there cannot be any penalty on account of disallowance of the deduction claimed by the assessee under section 24(a) of the Act. Interest expenses in the earning of impugned rental income - Assessee claimed that the interest was paid on the money borrowed which was invested in the impugned property from where he was getting the rental income. The assessee has also furnished the details of the parties from whom he has borrowed fund which was utilized for the purpose of the investments. However the AO without verifying the genuineness of the details furnished by the assessee has levied the penalty merely on the ground that such interest expenses was disallowed during the quantum proceedings. We hold that the AO cannot just levy the penalty merely on the ground that the additions were made during the quantum proceedings. As such the AO has to carry out necessary verification by issuing the notice to the parties before levying the penalty. In view of the above, we are of the opinion that no penalty can be levied under section 271(1)(c) of the Act for the reasons as stated above. Hence the ground of appeal of the assessee is allowed.
Issues Involved:
1. Legality of the CIT(A)’s order and principles of natural justice. 2. Disallowance of business expenses of ?14,26,813. 3. Classification of rental income and disallowance of interest expenses of ?8,00,387. 4. Penalty under section 271(1)(c) for furnishing inaccurate particulars of income. Issue-wise Detailed Analysis: 1. Legality of the CIT(A)’s order and principles of natural justice: The assessee contended that the CIT(A) passed the order without granting sufficient opportunity, which is against the principles of natural justice. However, this ground was not pressed by the assessee before the Tribunal and was dismissed accordingly. 2. Disallowance of business expenses of ?14,26,813: The AO disallowed the business expenses claimed by the assessee, stating that there was no business activity during the year. The assessee argued that the business was not discontinued but faced a lull due to market conditions. The Tribunal noted that the business was active in previous and subsequent years, and a temporary lull does not mean the business was closed. The Tribunal held that expenses incurred to keep the business setup in existence during the lull period are eligible for deduction. The Tribunal set aside the CIT(A)’s order and directed the AO to delete the addition, allowing the assessee’s ground of appeal. 3. Classification of rental income and disallowance of interest expenses of ?8,00,387: The AO classified the rental income from the lease of a bungalow to Shell India Marketing Pvt. Ltd. as income from other sources, not house property, because the bungalow was demolished, and the land was used for a petrol pump. The CIT(A) confirmed this view, stating that the intention was to lease the land, not the house property. The Tribunal upheld this classification, noting that the lessee was interested in the land for a petrol pump, not the bungalow. Consequently, the assessee was not entitled to deductions under sections 24(a) and 24(b) of the Act. Regarding the interest expenses, the Tribunal found that the assessee failed to justify that the interest expenses were incurred in connection with the impugned land/investments/bungalow and upheld the disallowance. 4. Penalty under section 271(1)(c) for furnishing inaccurate particulars of income: The CIT(A) confirmed the penalty imposed by the AO for furnishing inaccurate particulars of income on account of disallowances of business expenses and rental income treated as income from other sources. The Tribunal noted that the addition of business expenses was deleted, and thus, no penalty should be levied on this ground. Regarding the rental income, the Tribunal held that the assessee’s claim under the head house property was a wrong claim but not furnishing inaccurate particulars. The Tribunal referred to the Supreme Court’s judgment in CIT vs. Reliance Petroproducts (P) Ltd., stating that a wrong claim does not amount to inaccurate particulars. The Tribunal directed the AO to delete the penalty related to the disallowance of business expenses and held that no penalty could be levied for the disallowance of deductions under section 24(a) and 24(b). Conclusion: The Tribunal partly allowed the assessee’s appeals, deleting the disallowance of business expenses and the corresponding penalty, while upholding the classification of rental income as income from other sources and the disallowance of interest expenses.
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