2017 (2) TMI 805 - AT - Income Tax

Tribunal decision: Assessee's appeal partly allowed, revenue's appeal dismissed. AO directed on rental income, expenses, and depreciation.

The tribunal partly allowed the assessee's appeal and dismissed the revenue's appeal. It directed the Assessing Officer (AO) to delete the enhancement of ... Enhancement of rental income receivable - Held that:- We notice that the tax authorities have interpreted the agreement entered between the assessee and M/s Visage studios in their own way and accordingly came to the conclusion that the assessee was entitled to a sum of ₹ 1.11 crores. However, the fact remains that the recipient of the share, being the assessee and the payer of the share, being M/s Visage Studios have understood the transactions in a particular way and accordingly shared the lease income. When there is no misunderstanding between the parties on the terms and conditions of the agreement, in our view, the tax authorities may not be justified in interpreting the agreement in a different manner. As contended by Ld A.R, the assessing officer has not brought any material on record to show that there was suppression of share of income. It is also not the case of the AO that the rent received from M/s Visage studio was less than the fair market value. In view of the above, we are unable to agree with the view taken by Ld CIT(A) as well as the AO. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the enhancement made by him. Disallowance of expenses claimed under the head Security charges, Depreciation and Interest - Held that:- There is no dispute with regard to the fact that the assessee is a private limited company and it did not discontinue the business. It is stated that similar expenses claimed in the past have been allowed. The AO has not shown that the assessee has discontinued the business activities permanently. Hence we are of the view that the expenses claimed by the assessee should be allowed fully, since they have been incurred for the purposes of business only. With regard to the depreciation, the assessee has submitted it has been claimed in respect of entire building, plant and machinery etc. With regard to the depreciation claimed on the building, we direct the AO to disallow depreciation pertaining to the let out portion on proportionate basis from the WDV of the building, since the building let out cannot be considered to be used for the purposes of business. Accordingly we modify the order passed by Ld CIT(A) on the lines discussed above. Determining ALV of the property let out by taking the share of income of the assessee in lease rent as the basis - Held that:- M/s Rem Nord Lab P Ltd have been occupying the premises of the assessee since 1995 and the agreement is being renewed periodically. The AO has not shown that the fair rental value of the property was more than the rent received by the assessee. The agreement with M/s Visage studios was entered only in the preceding year and the assessee could fix the rental value on some other methodology depending upon market conditions. The same, in our view, would not render the agreements entered by the assessee with M/s Rem Nord Lab P Ltd since 1995 void. Hence we are of the view that the AO was not justified in determining the Annual Letting value of the property let out to M/s Rem Nord Lab P Ltd by taking the share of income of the assessee in lease rent as the basis. We notice that the Ld CIT(A) has analysed the facts in a proper perspective in accordance with the law and hence we do not find any reason to interfere with his decision rendered on this issue. Issues Involved:1. Enhancement of rental income receivable from M/s. Visage Studio.2. Disallowance of expenses claimed by the assessee under the head security charges, interest expenditure, and depreciation.3. Deletion of the enhancement of rental income receivable from M/s. Rem Nord Research Laboratories Pvt. Ltd.Detailed Analysis:1. Enhancement of Rental Income Receivable from M/s. Visage Studio:The assessee declared rental income of Rs. 88,09,375/- from M/s. Visage Studio, which was its share from the hiring income. The Assessing Officer (AO) noticed that this amount was after deducting the assessee's share in commission expenses of Rs. 12,60,000/-. The AO argued that the agreement did not provide for the deduction of commission expenses and thus determined the rental income to be Rs. 94,39,675/-. Further, the AO observed that M/s. Visage Studio had gross receipts of Rs. 2,22,87,861/- and concluded that 50% of this amount, Rs. 1,11,43,930/-, should have been received by the assessee. The AO assessed the rental income at this higher figure.The assessee contended that the amount received from M/s. Visage Studio was correctly declared and confirmed by M/s. Visage Studio. The tax authorities were not justified in interpreting the agreement differently when there was no dispute between the parties about the quantum of income. The tax authorities did not provide any material evidence to show suppression of income.The tribunal found merit in the assessee's contentions, stating that the tax authorities may not be justified in interpreting the agreement differently when both parties to the agreement understood and shared the income as per their understanding. The AO did not show that the rent received was less than the fair market value. Therefore, the tribunal set aside the order of the CIT(A) and directed the AO to delete the enhancement made.2. Disallowance of Expenses Claimed by the Assessee:The assessee claimed various expenses, including security charges of Rs. 2,29,850/-, depreciation of Rs. 7,48,803/-, and interest expenditure of Rs. 13,27,304/-. The AO disallowed these expenses, reasoning they were not related to earning house property income or editing income.The assessee argued that these expenses were incurred in the normal course of running the company and similar expenses had been allowed in the past. The tribunal noted that the assessee is a private limited company that did not discontinue its business activities. The AO did not show that the business activities were permanently discontinued. Therefore, the tribunal held that the expenses should be allowed fully as they were incurred for business purposes. However, for depreciation claimed on the building, the tribunal directed the AO to disallow depreciation proportionate to the let-out portion of the building.3. Deletion of Enhancement of Rental Income Receivable from M/s. Rem Nord Research Laboratories Pvt. Ltd.:The AO determined the annual letting value of the property let out to M/s. Rem Nord Research Laboratories Pvt. Ltd. by taking the assessee's share in studio lease income from M/s. Visage Studios as the basis. The CIT(A) deleted this enhancement, stating that the rental value should be determined as per the agreement with M/s. Rem Nord Research and not based on the rental income from M/s. Visage Studios.The tribunal observed that M/s. Rem Nord Lab Pvt. Ltd. had been occupying the premises since 1995, with the agreement being renewed periodically. The AO did not demonstrate that the fair rental value was more than the rent received by the assessee. The agreement with M/s. Visage Studios was entered only in the preceding year, and the rental value could be fixed differently based on market conditions. The tribunal agreed with the CIT(A) that the AO was not justified in determining the annual letting value based on the lease rent share from M/s. Visage Studios. The tribunal upheld the CIT(A)'s decision on this issue.Conclusion:The appeal filed by the assessee was partly allowed, and the appeal of the revenue was dismissed. The tribunal directed the AO to delete the enhancement of rental income from M/s. Visage Studio and allowed the expenses claimed by the assessee, with a specific direction on depreciation. The tribunal upheld the CIT(A)'s decision on the rental income from M/s. Rem Nord Research Laboratories Pvt. Ltd.