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TMI Blog2010 (6) TMI 512X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the A.O., the said rental income was chargeable to tax in the hands of the assessee under the head "income from house property" and not under the head "profits and gains of business or profession". He, therefore, required the assessee to offer its explanation in the matter. In reply filed vide letter dated 17.12.2007, it was submitted on behalf of the assessee that hotel buildings owned by it were its commercial assets and income from exploitation thereof was its business income irrespective of whether the exploitation was done directly by the assessee or through some other agency. It was submitted that the assessee firm itself was running the restaurant in the said buildings for many years in the past and the same have subsequently been given on lease temporarily for overcoming financial crisis. The submissions made on behalf of the assessee were not found acceptable by the A.O. for the following reasons given in para No. 4 to 5.1 of his order: "The assessee has claimed various expenses against rental income and income from other sources. It may be noted here that rental income is formed p[art of income from house property and comes under the concept of ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s business expenditure." 3. For the reasons given above and relying, inter alia, on the decision of Hon'ble Supreme Court in the case of Shambhu Investment P. Ltd. 263 ITR 143, the A.O. held that the rental income received by the assessee was chargeable to tax in its hands under the head "income from house property". Accordingly, deduction u/s 24 amounting to Rs. 10,51,200/- being 30% of the rent received only was allowed by him as deduction for repairs and maintenance and the deductions claimed by the assessee on account of various expenses aggregating to Rs. 40,93,651/- was disallowed by him. During the course of assessment proceedings, the A.O. also noticed that deposits in cash amounting to Rs. 1,50,000/- and Rs. 32,000/- were made by the assessee in its bank account with Centurion Bank on 20.8.2004 and 18.10.2004 respectively. When the assessee was called upon by the A.O. to explain the source and nature of the said cash deposits, it was submitted by the assessee that the said deposits were made in the bank account out of cash available as per the cash book. The extract of the relevant cash book was also filed by the assessee be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal income was received by the assessee by exploitation of its commercial assets and the same was chargeable to tax in its hands as business income irrespective of the fact that such exploitation was done through some other agency. In support of its contention, reliance was placed on behalf of the assessee on the decision of Hon'ble Supreme Court in the case of Commissioner of Excess Profit vs. Shri Laxmi Silk Mills Ltd. 20 ITR 451. 5. As regards the disallowance of expenses made by the A.O. amounting to Rs. 40,70,496/-, it was submitted on behalf of the assessee before the ld. CIT(A) that the said expenses have been incurred wholly and exclusively for the purpose of its business. It was submitted that the main expenditure on account of interest amounting to Rs. 26,94,967/- was incurred in respect of funds borrowed for acquisition of building and fixtures of restaurant and the same, therefore, was allowable as deduction. It was submitted that similarly depreciation claimed by the assessee on fixed asset amounting to Rs. 8,92,849/- was allowable as deduction as fixed asset were used by the assessee for the purpose of its business. It was submitted that even the other expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is, the rent for letting out the premises and hire charges for infrastructure and equipments. According to the ld. CIT(A), the nature of such income was such that the same could not be termed as business income of the assessee. He held that the main intention of the assessee thus was to let out the property owned by it and the income from such letting out was chargeable to tax in its hands under the head "income from house property" as held by the Hon'ble Supreme Court in the case of Shambhu Investment (supra). He therefore upheld the action of the A.O. on this issue. 8. Having held that the entire rental income received by the assessee was chargeable to tax under the head "income from house property", the ld. CIT(A) also agreed with the A.O. that the assessee was entitled only to deduction u/s 24 and expenses claimed by it under the various heads were not allowable as deduction in the absence of any business activity carried on by the assessee. He, therefore, confirmed the disallowance of Rs. 40,70,496/- made by the A.O. on account of various expenses claimed by the assessee. He also disallowed the claim of the assessee for setting off of brought forw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t forward unabsorbed depreciation allowance of prior years at Rs. 4,019,385/-. Reason assigned for the impugned refusal are wrong and contrary to the provisions of law." 11.The learned counsel for the assessee at the time of hearing took us through the relevant clauses of the lease agreement placed in his paper book to show that the assessee has let out not only the premises but also the furniture, fixtures & equipments etc. which are required for running a restaurant. He also pointed out that there was restriction on the tenant to use the premises only for the purpose of running a restaurant and even the possession of the said premises was given subject to various conditions. He pointed out that even the employees of the assessee working in the restaurant were to be continued to work with the tenant and there was no right created in respect of the premises in favour of the tenant. He submitted that consolidated amount of rent was charged by the assessee for the premises to the tenant and there was no bifurcation of such rent made for premises separately and for other assets such as furniture, fixtures & equipments etc. He contended that having regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook and if such opportunity is now given by restoring this matter to the file of A.O., the assessee is in a position to produce that cash book for verification. 14. As regards ground No. 6, the ld. Counsel for the assessee submitted that the claim of the assessee for set off of brought forward business loss and unabsorbed depreciation is consequential to the main issue involved in this appeal relating to the head of income under which the rental income is to be held as chargeable to tax in the hands of the assessee. 15. The learned D.R. strongly relied on the impugned order of the ld. CIT(A) in support of the Revenue's case on the issues raised by the assessee in this appeal. He submitted that both the premises owned by the assessee were let out by him on long term basis to earn rental income and there being no services whatsoever rendered by the assessee except giving the premises on rent, it was a case of earning rental income simplicitor and the income so earned is chargeable to tax in the hands of the assessee under the head income from house property as rightly held by the A.O. as well as ld. CIT(A). He submitted that there was no invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cern in the course of its business. Where house property is given on lease or license basically for earning income there from, the true character of the income derived is income from house property falling u/s 22 and the said character is not changed and the income does not become business income even if the hiring is inclusive of certain additional services such as cleaning, lighting or sanitation which are relatively insignificant and only incidental to the use and occupation of the terms. In cases where the income received is not from the bare letting of tenements or from letting accompanied by incidental services or facilities, but the subject hired out is a complex one and the income obtained is not so much because of the bare letting of tenements but because the facilities and services rendered, the operation involved in such letting of the properties may be of the nature of business or trading operations and income derived may be income not from exercise of property rights but income from operations of trading nature falling u/s 28. In cases where the letting is only incidental and subservient to the main business of the assessee, income derived from letting will no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the subject hired out was a complex one and the income obtained was not so much because of the bare letting of tenement but because of other facilities provided by the assessee. Moreover, all these business assets including two properties as well as other assets provided therein were let out by the assessee for a period of 6 to 15 years and it cannot be said that only some of its business assets were let out temporarily by the assessee while carrying out its other business activity. On the other hand, as established by the authorities below, the assessee had come out of the business of running of restaurant completely and there was no such business activity carried on by him either in the year under consideration or even in the immediately succeeding years. It was thus not a case of exploiting some of its business assets by the assessee by letting them out temporarily while carrying out its business. On the other hand it was a case of exploitation of its property by the assessee as owner thereof to earn fixed income in the form of rent. In our opinion, when all these facts of the assessee's case are considered in the light of principles laid down by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of assets. On verification, if it is found that the corresponding funds were borrowed for acquisition of land and building, the interest paid thereon has to be allowed as deduction while computing income from house property. If the borrowed funds are partly utilized for acquisition of other assets such as furniture, fixtures and other equipments etc., the allowability of interest attributable thereto has to be considered for computing the income of the assessee under the head "income from other sources". Similarly, the claim of the assessee for depreciation on such assets has to be considered under the said head in accordance with law. We, therefore, set aside the impugned order of the ld. CIT(A) confirming the disallowance made by the A.O. out of various expenses and restore this issue to the file of the A.O. for considering the same afresh in accordance with law. Ground No. 3 & 4 of assessee's appeal are accordingly treated as allowed for statistical purposes. 20. As regards ground No. 5 relating to the addition of Rs. 1,82,000/- made by the A.O. and confirmed by the ld. CIT(A)on account of cash deposits found to be made in the bank account of the assessee, the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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