2016 (9) TMI 258 - AT - Income Tax

Tribunal Denies Depreciation Claim on Leased Assets, Upholds Revenue's Disallowance of Expenses

Lake View Developers Versus Addl. CIT, Range 12 (3), Mumbai and Vica-Versa

The assessee's appeal seeking depreciation on 'Furniture and Fixture' forming part of leased assets was dismissed by the Tribunal, citing the ... Allowability of depreciation on ‘Furniture and Fixture’, forming part of the leased assets, income from which is assessable u/s. 22 of the Act as ‘Income from house property’ - Held that:- The letting of the furniture and fixture is incidental (to letting the building) (para 6(b) of SOF). Further, per para 6(c) thereof, as an alternative, a prayer is made for a proportionate allowance, i.e., qua building that is complete and not leased, while that leased or, as the case may be, under construction, being liable to be adjusted against the value of the leased stock and work-in-progress (WIP) respectively. The furniture and fixture in the present case is without doubt only an adjunct to the letting of the building, being in fact appropriated on an equal basis over the house properties under reference. We, therefore, have no hesitation in confirming the impugned disallowance; there being no scope for assessment of the proportionate rent, as contended, as income from other sources. Our decision rests, we may clarify, not on the inseparability of the two lettings, but on the finding of the furniture and fixture under reference forming an integral part of the building, so that it’s letting is, as admitted, incidental. That is, it is a case of a single letting and, therefore, the rent relatable to furniture and fixture is not ascertainable. Add to this, the fact that the property under reference is actually leased out, i.e., constitutes a source of income and, thus, a capital asset by definition, and the assessee’s case becomes untenable on facts – the leased house property constituting the assessee’s capital asset, yielding a regular source of income, and toward which the assessee has, in fact, expended no insubstantial sums. Juxtapose this with the settled position in law that the income assessable under a particular head of income is to be necessarily computed under that head only and in the manner provided under the relevant sections (Sultan Brothers (P.) Ltd. (1963 (12) TMI 4 - SUPREME Court); East India Housing & Land Development Trust Ltd. (2016 (3) TMI 1109 - ITAT RAJKOT)), and there can be no manner of any doubt that the assessee’s claim is not sustainable in law. Decided against the assessee. Issues Involved:1. Allowability of depreciation on 'Furniture and Fixture' forming part of leased assets.2. Deletion of disallowance of expenditure on 'brokerage' and 'professional fees'.Issue-wise Analysis:1. Allowability of Depreciation on 'Furniture and Fixture' (Assessee’s Appeal):The primary issue in the assessee's appeal was whether depreciation on 'Furniture and Fixture' forming part of the leased assets should be allowed when the income from these assets is assessable under Section 22 as 'Income from house property'. The assessee claimed that since the furniture and fixtures were part of the leased assets, depreciation should be allowed in the computation of its construction business income. However, the Tribunal noted that there is no provision for allowing depreciation under Chapter IV-C of the Act for computing property income. The Tribunal cited the decision in Sultan Brothers (P.) Ltd. vs. CIT, emphasizing that the several heads of income under the Act are mutually exclusive. Therefore, the assessee’s claim for depreciation was not accepted.The assessee also raised an alternate claim for proportionate rent to be assessed under 'income from other sources' with depreciation allowed under Section 57. However, the Tribunal found that the furniture and fixtures were integral to the buildings and incidental to the letting of the property. As such, the rent related to the furniture and fixtures was not ascertainable separately and could not be assessed under 'income from other sources'. Hence, the Tribunal dismissed the assessee's appeal.2. Deletion of Disallowance of Expenditure on 'Brokerage' and 'Professional Fees' (Revenue’s Appeal):The Revenue appealed against the deletion of the disallowance of brokerage and professional fees by the CIT(A), which were incurred by the assessee in the course of its business. The Tribunal examined whether these expenditures should be allowed under Section 37(1) of the Act, considering the assessee's business of construction and leasing properties. The Tribunal noted that the income from leasing properties is assessable under Section 22 as 'Income from house property' and not as 'business income'.The Tribunal referred to the decision in East India Housing & Land Development Trust Ltd., which clarified that income derived from property should be computed under the appropriate head of income, and the expenditure allowable is limited to what is permissible under that head. The Tribunal found that the brokerage and professional fees were incurred solely for securing tenants for the leased properties and had no nexus with the assessee's construction business. Therefore, the Tribunal concluded that the expenses could not be allowed as business expenditure under Section 37(1) and upheld the Revenue's appeal.Separate Judgments:The Tribunal delivered a separate judgment for another assessee, Omega Associates, which involved similar facts and issues as in the case of Lake View Developers. The Tribunal upheld the disallowance of brokerage and professional fees and the denial of depreciation on leased furniture and fixtures for the same reasons as in the Lake View Developers case.Conclusion:- The assessee's appeal regarding the allowability of depreciation on 'Furniture and Fixture' was dismissed.- The Revenue's appeal regarding the deletion of disallowance of brokerage and professional fees was allowed.- The Tribunal upheld the disallowance in a similar case involving another assessee, Omega Associates.