Tribunal allows appeal, directs AO to verify rental income declaration & allow interest deduction for taxable income.

The appeal was allowed in favor of the assessee. The Tribunal directed the AO to verify whether the buyer declared the rental income and to allow the full deduction of interest paid to M/s DSPL for the borrowed funds used to earn taxable interest income. The order emphasized the principles of consistency and proper tax treatment under the Income Tax Act.

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Issues Involved:
1. Treatment of rental income for the period from December 2005 to March 2006.
2. Disallowance of interest paid to M/s DSPL.

Issue-wise Detailed Analysis:

1. Treatment of Rental Income for the Period from December 2005 to March 2006:

The assessee had rented out Unit No.206, Cyber Park, Gurgaon, and received rental income. However, in the return of income, the assessee declared rent for only five months and later revised it to seven months. The Assessing Officer (AO) treated the revised return as nonest and included the entire rental income in the assessee's taxable income, as no sale agreement was executed before the end of the financial year. The assessee claimed that the rental income for the last four months was transferred to M/s PJ Associates, the buyer, as per a mutual understanding.

The Tribunal noted that the property was registered in the buyer's name after May 2006, and under similar circumstances, the rental income for April and May 2006 was transferred to the buyer and accepted by the AO in the subsequent year. The Tribunal emphasized the principle of consistency, citing the judgment of the Hon'ble Punjab and Haryana High Court in CIT v. Reita Biscuits Co. Pvt. Ltd., which states that a different view should not be taken in the preceding year if the issue is decided in favor of the assessee in the subsequent year.

The Tribunal also considered the tax impact, noting that the revenue would not gain by rejecting the assessee's treatment due to various consequential adjustments. It was concluded that if the buyer declared the rental income in its return, the addition should not be made in the assessee's hands, and the AO should withdraw the TDS credit for the period in question. The matter was remanded to the AO for verification of whether the buyer included the rental income in its return. The burden of proof was placed on the assessee.

2. Disallowance of Interest Paid to M/s DSPL:

The assessee declared interest income after reducing the interest paid to M/s DSPL, which was incurred on a loan taken for share investment and mutual fund activities. The AO disallowed the interest payment, stating it was not allowable against interest income assessable under "Income from Other Sources." The CIT(A) partially allowed the deduction, restricting it to the interest earned from the bank.

The Tribunal held that the interest-bearing borrowed funds were utilized for earning taxable interest income, and thus, the full amount of interest payment should be allowed as a deduction. The Tribunal found that the CIT(A) erred in restricting the deduction to the extent of actual interest income and deleted the disallowance of interest expenditure.

Conclusion:

The appeal was allowed in favor of the assessee. The Tribunal directed the AO to verify whether the buyer declared the rental income and to allow the full deduction of interest paid to M/s DSPL for the borrowed funds used to earn taxable interest income. The order emphasized the principles of consistency and proper tax treatment under the Income Tax Act.

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