Tribunal directs reclassification of rental income & expenses for remuneration and motor car

M/s. Bharat Tiles & Marble Pvt. Ltd. Versus Dy. Comm. of Income Tax, Circle 2 (1), Mumbai

M/s. Bharat Tiles & Marble Pvt. Ltd. Versus Dy. Comm. of Income Tax, Circle 2 (1), Mumbai - TMI Issues Involved:
1. Disallowance of remuneration paid to directors.
2. Disallowance of motor car-related expenses.
3. Classification of rental income as "Income from house property" versus "Income from business or profession."
4. Disallowance of expenses related to rental income.

Detailed Analysis:

1. Disallowance of Remuneration Paid to Directors:
The assessee contested the disallowance of Rs. 72,00,000/- paid to directors as remuneration. The AO disallowed this on the grounds that the rental income was assessed under "Income from house property," and hence no further deductions could be made. The CIT(A) upheld this disallowance, stating that the remuneration was not wholly and exclusively for business purposes. However, the Tribunal directed the AO to allow the remuneration as a business expense, noting that the directors were actively involved in managing the properties and the payment was supported by necessary evidence.

2. Disallowance of Motor Car-Related Expenses:
The assessee also challenged the disallowance of motor car expenses, including interest on car loan (Rs. 3,04,198/-), motor car expenses (Rs. 5,82,318/-), motor car insurance (Rs. 1,13,847/-), and depreciation on motor car (Rs. 5,83,233/-). The AO disallowed these expenses, arguing that the car was in the director's name and the assessee failed to provide evidence of its use for business purposes. The CIT(A) upheld this disallowance. The Tribunal directed the AO to re-examine these expenses, allowing them if the assessee could substantiate the business use of the car with necessary evidence, including a log book.

3. Classification of Rental Income:
The AO classified the rental income of Rs. 1,89,70,520/- under "Income from house property" instead of "Income from business or profession." The assessee argued that its main business activity was letting out properties, supported by its memorandum of association. The Tribunal agreed with the assessee, citing the Supreme Court's decision in Rayala Corporation Pvt. Ltd. vs. ACIT, which held that rental income should be treated as business income if it is the primary business activity. The Tribunal directed the AO to assess the rental income under "Income from business or profession."

4. Disallowance of Expenses Related to Rental Income:
The AO disallowed various expenses related to the rental income, including the remuneration to directors and motor car expenses, on the grounds that these were not wholly and exclusively for business purposes. The Tribunal, having reclassified the rental income under "Income from business or profession," directed the AO to allow these expenses as business deductions, provided the assessee could substantiate their claims with appropriate evidence.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to:
- Reclassify the rental income under "Income from business or profession."
- Allow the remuneration paid to directors as a business expense.
- Re-examine and potentially allow motor car-related expenses if substantiated with evidence.

The appeal was thus partly allowed for statistical purposes.