2023 (2) TMI 52 - AT - Income Tax

Taxability of rental income - CIT-A held income of the appellant is chargeable under the head Income from Profits and Gains of Business and Profession as against the income offered to tax under the head Income from House Property by the appellant - Deduction of Interest paid on loan to acquire the property - disallowance u/s. 40(a)(ia) HELD THAT - The undisputed fact is that the ratio laid down in the case of Chennai Properties and Investments 2015 (5) TMI 46 - SUPREME COURT squarely apply on the facts of the case, therefore, there is no error or infirmity in the decision of the CIT(A) wherein rental income has been taxed under the head profits and gains of business or profession. Once the income has been held to be taxed under the head profits and gains of business or profession the same has to be computed as per the provision of section 28 to section 43D of the Act and to this extent also there is no infirmity in the directions of the CIT(A). Once the assessee has filed form 26A in respect of the interest payment the same has to be considered in the light of the provisions of section 201 of the Act vis a vis the applicability of the provision of section 40 (a)(ia) of the Act. Accordingly the directions of the CIT(A) are modified and the AO is directed to consider the claim of expenditure in the light of the relevant provisions of the Act after making due verification from the recipients of the interest. With the above modifications the appeal of the assessee is partly allowed.

Summary

Issues:
1. Whether the rental income should be taxed under the head "Income from Profits and Gains of Business and Profession" or "Income from House Property"?
2. Whether the disallowance of interest under section 40(a)(ia) of the Income Tax Act, 1961 is justified?

Issue 1: Taxation of Rental Income
The appellant, a private limited company, declared income under the head "Income from House Property" for the assessment year 2014-15. However, the CIT(A) held that the income should be taxed under the head "Income from Profits and Gains of Business and Profession" based on the decision of the Hon'ble Supreme Court in the case of Chennai Properties & Investments Limited. The CIT(A) directed the AO to compute the income as per the provisions of sections 28 to 43D, treating the rental income as business income. The appellant argued that their main objects, as per the memorandum of association, did not include letting out properties for rental income. They contended that the facts of the Chennai Properties case were distinguishable. Nevertheless, the CIT(A) dismissed the appellant's contention and upheld the taxation of rental income as business income. The ITAT concurred with the CIT(A) and upheld the decision to tax the rental income under the head "Income from Profits and Gains of Business and Profession."

Issue 2: Disallowance of Interest
The appellant had taken a loan for purchasing a property, and interest on the loan was disallowed by the AO under section 40(a)(ia) of the Act for non-deduction of TDS. The CIT(A) upheld the disallowance. However, the ITAT modified the directions of the CIT(A) regarding the disallowance of interest. The ITAT directed the AO to consider the claim of expenditure after verifying the recipients of the interest. The ITAT partially allowed the appeal of the assessee, modifying the directions of the CIT(A) concerning the disallowance of interest under section 40(a)(ia) of the Act.

In conclusion, the ITAT upheld the taxation of rental income under the head "Income from Profits and Gains of Business and Profession" based on the Chennai Properties case. Additionally, the ITAT modified the directions of the CIT(A) regarding the disallowance of interest, instructing the AO to verify the recipients of the interest before making a final decision on the claim of expenditure.