2020 (7) TMI 100 - AT - Income Tax

Treatment to loss from the unit in Trump Hotel International under income from other sources' - HELD THAT - As evident from the conduct of the assessee that the assessee was not intending to run a unit in Trump Hotel International himself but rather he had purchased the unit while he was employed with an Oil Exploration Company in USA and he has given this unit for being run under the Hotel Operations and Maintenance Agreement to be run by the managing company. At no point of time has the assessee ever been engaged in running the Hotel Unit on his own. It is also evident that the control of the affairs of the assessee s unit like to whom the unit is to be let out, what kind amenities are to be provided within the unit, what tariff has to be charged from the unit etc. are beyond the control and decision making powers of the assessee. Unit under consideration cannot be considered to be a business undertaking of the assessee. Admittedly and undisputedly, the Department has also accepted this position in the preceding two assessment years. Although the principle of res judicata does not strictly apply to Income tax proceedings, all the same, the Hon ble Apex Court in the case of Radha Soami Satsang Vs. CIT, 1991 (11) TMI 2 - SUPREME COURT as held that the revenue cannot disturb and alter issues which have already been settled in previous years if there is no change in the facts and circumstances - unable to accept the view taken by the Ld. CIT (A) and we set aside his finding on the issue and direct the Assessing Officer to treat the loss from the unit in Trump Hotel International under income from other sources . Determining the head of income for share of loss from LLCs situated in the USA - assessee had made investment in two limited liability companies in the USA - HELD THAT - Assessee, by virtue of being the whole time employee Director in an oil exploration company, could not have made the capital outlay in the two limited liabilities company for the purpose of business and, apparently, this was only for the purpose of an investment. AO seems to have overlooked this factor and somehow failed to appreciate that in the case of outlays of this nature, it is important to determine as to whether the investment was in the realm of business or not. AO has at no point of time established that the intention of the assessee was to earn out of business - also has chosen to ignore the fact that in the preceding assessment years, the investment of this nature have consistently have not been treated as business. Even on the ground of consistency, the impugned loss should have been treated as loss under other sources. Also it is well-settled that the onus is on the Revenue to prove that the particular time of income or loss is from business. However, in the present case such a finding by the Assessing Officer is entirely absent. Accordingly, there is no foundation for AO to have treated the impugned loss as business loss and we have no option but to disagree with the findings of the Ld. CIT (A). - Decided in favour of assessee.

Issues Involved:
1. Classification of loss from a hotel unit at Hotel Trump International, New York, USA.
2. Classification of loss from Limited Liability Companies (LLCs) situated in the USA.
3. Denial of set-off of losses against salary income.

Detailed Analysis:

Issue 1: Classification of Loss from Hotel Unit at Hotel Trump International, New York, USA

The primary issue was whether the loss from the hotel unit should be classified under "business loss" or "income from other sources." The assessee argued that the investment in the hotel unit was solely for investment purposes and not for business. The unit was part of a larger hotel complex managed by a separate entity, and the assessee had no control over the hotel's operations. The assessee emphasized that he was a whole-time Director of an Indian company, which restricted him from engaging in other business activities.

The Tribunal considered the facts that the assessee had no active role in the hotel's operations and that the income from the unit was previously accepted as "income from other sources" in earlier assessment years. Citing the Supreme Court's decision in Sultan Brothers (Pvt.) Ltd. vs. CIT, which held that income from letting out a fully furnished building for use as a hotel should be assessed as "income from other sources," the Tribunal concluded that the loss from the hotel unit should be treated under "income from other sources."

Issue 2: Classification of Loss from Limited Liability Companies (LLCs) Situated in the USA

The second issue was whether the loss from investments in two LLCs in the USA should be classified under "business loss" or "income from other sources." The assessee contended that the investments were made for supplementing income from other sources and not for conducting business. The assessee highlighted that he was a whole-time employee in India, making it impractical to engage in business activities in the USA.

The Tribunal noted that the losses from these investments were previously accepted as "income from other sources" in earlier assessment years. The Tribunal emphasized that the intention behind the investments was crucial and that the Assessing Officer had not established that the assessee intended to earn from business activities. The Tribunal also pointed out that the principle of consistency should apply, and the losses should be treated as "income from other sources."

Issue 3: Denial of Set-Off of Losses Against Salary Income

The assessee sought to set off the losses from the hotel unit and the LLCs against his salary income. The Tribunal's decision to classify these losses under "income from other sources" rather than "business loss" directly impacted the ability to set off these losses against salary income.

Conclusion:

The Tribunal concluded that the losses from the hotel unit and the LLCs should be classified under "income from other sources" and not "business loss." Consequently, the assessee's appeal was allowed, and the Assessing Officer was directed to treat the losses accordingly. The Tribunal also emphasized the importance of consistency in tax assessments and the need for the Revenue to establish the nature of income or loss.

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