2017 (8) TMI 320 - AT - Income Tax

Tribunal: Lease Income as Business Income, Set-off Depreciation, Re-evaluate Disallowance

The Tribunal upheld the treatment of lease income as 'Business Income', allowed the set-off of unabsorbed depreciation for AY 1995-96, and directed a ... Addition u/s 14A - set-off / carried forward of business losses / depreciation - Held that:- A perusal of Balance Sheet reveals that the assessee’s Share Capital & Reserves stood at ₹ 23.21 Crores, Loan Funds stood at ₹ 46.16 crores whereas investments stood at ₹ 42.45 crores. The assessee has debited finance charges of ₹ 4.68 Crores in the Profit & Loss Account. Prima facie, the assessee has used mixed funds to make the investments which results into triggering of Rule 8D(2)(ii). In the revenue’s appeal, we have already settled that the rental income earned by the assessee shall be chargeable under the head ‘Business Income’. We are of the considered opinion that disallowance computed by AO under Rule 8D require re-appreciation / re-working in the light of our decision in revenue’s appeal. Therefore, we deem it fit to restore this matter back to the file of AO for re-appreciation / re-working of disallowance u/s 14A read with Rule 8D. We accordingly direct so. To reiterate, the rental income earned by assessee shall be assessed as ‘Business Income’ against which business expenditure as per law shall be allowable. The disallowance u/s 14A read with Rule 8D shall be computed denovo. The assessee shall be allowed set-off of unabsorbed depreciation in terms of our above order. The set-off / carried forward of business losses / depreciation, if any, shall also be reworked. The assessee’s appeal stands allowed for statistical purposes. Issues:1. Treatment of lease income under 'Business Income' vs. 'Income from House Property'2. Allowance of set-off of unabsorbed depreciation of AY 1995-963. Disallowance u/s 14A read with Rule 8D for administrative expensesAnalysis:1. The appeals involved challenges to the order of the Ld. Commissioner of Income Tax (Appeals) regarding the treatment of lease income under 'Business Income' instead of 'Income from House Property'. The Assessing Officer initially considered the rental income as taxable under 'Income from House Property', but the Ld. CIT(A) accepted the assessee's stand based on previous judicial pronouncements. The Tribunal dismissed the revenue's appeal, upholding the treatment of rental income as 'Business Income'. The set-off of unabsorbed depreciation for AY 1995-96 was also allowed based on relevant legal provisions and court judgments.2. The second issue pertained to the disallowance u/s 14A read with Rule 8D for administrative expenses. The Assessing Officer calculated the disallowance based on Rule 8D(2)(iii), leading to a substantial amount. The assessee contended that most expenses were related to leasing activities, not investments. The Tribunal found the applicability of Rule 8D undisputed but ordered a re-evaluation of the disallowance amount by the AO, considering the treatment of rental income as 'Business Income'. The matter was remanded for reworking the disallowance u/s 14A read with Rule 8D.3. The Tribunal directed the AO to recompute the disallowance u/s 14A read with Rule 8D, considering the treatment of rental income as 'Business Income'. The assessee was allowed set-off of unabsorbed depreciation, and any business losses/depreciation were to be reworked accordingly. The revenue's appeal was dismissed, while the assessee's appeal was allowed for statistical purposes.In conclusion, the Tribunal upheld the treatment of lease income as 'Business Income', allowed the set-off of unabsorbed depreciation, and directed a re-evaluation of the disallowance u/s 14A read with Rule 8D, considering the nature of rental income.