2014 (1) TMI 1530 - AT - Income Tax

Tribunal ruling on rental income, advisory fees, deductions, disallowances, interest, bad debts, and more.

The Tribunal upheld the classification of rental income as income from house property, denying depreciation allowance. The issue of double booking of ... Whether rental income be treated as Business Income or Income from House Property - Held that:- Decision of co-ordinate bench of the Tribunal in SICOM LIMITED Versus Dy. Commissioner of Income Tax [2014 (1) TMI 1413 - ITAT MUMBAI] followed - Immediately after acquiring the property, the property was not occupied by the assessee for its own use for its business and was let out from the time it was acquired on leave and license basis for a longer period of 33 months each time - The assessee has let out the property by the leave and license agreement dated 31.07.2006 for a further period of 33 months upto 31.01.2009 - The assessee has let out the property for the longer period w.e.f. 21-07-2002 by way of leave and license agreement - The assessee was not involved in day to day management or maintenance of the premises and except giving the property on leave and license basis, there are no complex commercial activities involved in this agreement - rental income has to be treated as income from house property - Decided against assessee. Advisory fees - Held that:- A sum of ₹ 28.32 lakhs had been wrongly booked twice in the accounts of the assessee - The assessee has been taxed twice on this income - The issue has been restored for fresh adjudication. Municipal taxes relating to preceding financial year - Held that:- If the expenditure incurred towards additional municipal taxes and actually paid by the assessee has been disallowed in the subsequent assessment year on the reason that the same were prior period expenses, then the claim must be considered during the financial year under consideration - The issue has been restored for fresh adjudication. Disallowance under section 14A - Held that:- Following Rule of consistency the disallowance has been restricted to 1% of the administrative expenses as decided by the Tribunal in earlier years - Decided in favour of assessee. Write-off of bad debts - Held that:- The assessee was engaged in activity of purchase and sale of shares as business - The loss on shares is thus business loss liable to be written-off u/s 36 - Decided in favour of assessee. Issues Involved:1. Classification of rental income as business income or income from house property.2. Double booking of advisory fees.3. Deduction of municipal taxes.4. Disallowance under section 14A of the Income Tax Act.5. Deletion of disallowance of interest expenditure under section 14A.6. Allowance of write-off of bad debts.7. Reduction of total income by principal recovery portion of lease rentals.Detailed Analysis:Ground No.1: Classification of Rental IncomeThe primary issue was whether the rental income from leasing a commercial establishment should be classified as business income or income from house property. The Tribunal noted that the issue was already decided against the assessee in previous years (2005-06 and 2006-07). The Tribunal observed that the property was leased for a long period, and the assessee was not involved in day-to-day management or maintenance, leading to the conclusion that the rental income should be treated as income from house property. Consequently, the Tribunal upheld the CIT(A)'s decision, denying the depreciation allowance claimed by the assessee.Ground No.2: Double Booking of Advisory FeesThe assessee contended that advisory fees of Rs. 28.32 lakhs were booked twice, leading to double taxation. The Tribunal acknowledged that tax cannot be charged twice on the same income and restored the issue to the AO to verify the claim and allow the necessary corrections if found genuine.Ground No.3: Deduction of Municipal TaxesThe assessee claimed a deduction of Rs. 57.52 lakhs paid as additional municipal tax, arguing that the expense was crystallized during the assessment year under consideration. The Tribunal noted that the expense was disallowed in the subsequent year as a prior period expense. Therefore, the Tribunal restored the issue to the AO to verify the claim and consider it for the relevant assessment year if found valid.Ground No.4: Disallowance under Section 14AThe assessee contested the disallowance of Rs. 26.84 lakhs under section 14A, calculated as 0.5% of the average value of investments. The Tribunal referred to its earlier decision, where a disallowance of 1% of total administrative expenses was deemed reasonable. Following the principle of consistency, the Tribunal restricted the disallowance to 1% of administrative expenses, deciding the issue in favor of the assessee.Ground No.1 (Revenue's Appeal): Deletion of Disallowance of Interest ExpenditureThe Revenue challenged the deletion of Rs. 3.32 crores disallowed as interest expenditure under section 14A. The AO had made the disallowance based on the utilization of borrowed funds for investments. The CIT(A) had deleted the disallowance, confirming only 0.5% of the average value of investments for administrative expenses. The Tribunal upheld the CIT(A)'s decision, referencing its earlier judgment where similar interest expenditure disallowance was deleted.Ground No.2: Allowance of Write-off of Bad DebtsThe Revenue contested the allowance of Rs. 5.10 crores as bad debts, comprising preference shares and equity shares. The AO had disallowed the claim, arguing that the market value was unascertained. The CIT(A) allowed the deduction, stating the investments had turned bad with no market value. The Tribunal upheld the CIT(A)'s decision, noting that the assessee was engaged in the business of buying and selling shares, making the loss a business loss.Ground No.3: Reduction of Total Income by Principal Recovery Portion of Lease RentalsThe Revenue disputed the CIT(A)'s direction to reduce the total income by the principal recovery portion of lease rentals. The issue was whether transactions with Konkan Railway Corporation and Andhra Pradesh State Electricity Board were lease transactions or finance loans. The Tribunal restored the issue to the AO for fresh examination, referencing earlier Tribunal decisions and judgments, including those of the Delhi High Court and Special Bench of the Tribunal.Ground Nos.4 & 5: General GroundsThese grounds were general in nature and did not require adjudication.Conclusion:The appeal of the assessee was partly allowed, and the appeal of the Revenue was partly allowed for statistical purposes. The Tribunal directed the AO to verify and decide on specific issues afresh, considering relevant judgments and facts. The order was pronounced in the open court on 15.01.2014.