2019 (10) TMI 844 - AT - Income Tax

Tribunal: Lease rent as Business Income, Sec. 50 treatment, depreciation, educational expenses allowed.

M/s Third Eye Estate (I) Pvt. Ltd. Versus ACIT Circle -15 (3) (2), Mumbai

The Tribunal directed the Assessing Officer to treat lease rent income as 'Business Income', compute the sale of depreciable assets under Sec. 50 as ... Disallowance of motor vehicle expenses - allowable revenue expenses u/s 37(1) - HELD THAT:- Unable to persuade ourselves to accept the view taken by the lower authorities, that as Shri Uday Singh, director of the assessee company in whose name the aforesaid motor car was registered also happened to be a director in two other companies, therefore, the aforesaid claim of depreciation, interest expenditure, and vehicle expenses pertaining to the said car were liable to be disallowed on the said count too. In our considered view, the fact that somebody other than the assessee is also benefited by the expenditure incurred by the assessee cannot come in the way of allowability of the said expenditure, if it otherwise satisfies the test of commercial expediency. Apart there from, the view taken by the A.O that the personal expenses pertaining to the aforesaid motor car cannot be ruled out, we are afraid cannot be accepted. As the case before us is that of a company, therefore, in our considered view there can be no question of any personal expenses - We vacate the disallowance of motor vehicle expenses made by the A.O. Disallowance of education expenses - HELD THAT:- As observed by the authorities below, that as Shri Uday Singh was a director of three different companies (including the assessee company), therefore, it could safely be concluded that the expenditure incurred on his education was not wholly and exclusively for the purpose of the business of the assessee company. Apart there from, it was observed by them, that the assessee had also not been able to support its claim by showing any real connection between the expenditure so incurred and the business of the assessee company. As such, the A.O had disallowed the aforesaid claim of expense raised by the assessee u/s 37(1) of the Act. We have given a thoughtful consideration to the aforesaid issue before us, and are unable to subscribe to the view taken by the lower authorities. Admittedly, a perusal of the facts borne from the records reveals that Shri Uday Singh, director of the assessee company had gone for a management programme/course at Harward Business School. The expense therein involved were borne by the assessee company. In our considered view, the expenses incurred by the assessee company on the education of its director viz. Mr. Uday Singh, who was pursuing a management course, can safely be held to have been incurred wholly and exclusively for the purpose of its business. As observed by us hereinabove, merely for the reason that the aforesaid higher education of the director of the assessee company viz. Mr. Uday Singh would also benefit the two other companies in which too he was a director, in our considered view, cannot form a basis for dislodging the said claim of expenditure incurred by the assessee company. We thus not finding favour with the disallowance of the education expenses by the A.O, which thereafter had been sustained by the CIT(A), delete the same. Issues Involved:1. Characterization of Lease Rent Income2. Disallowance of Interest Paid on Loan3. Taxation of Sale of Depreciable Assets4. Disallowance of Depreciation and Expenses on Motor Car5. Disallowance of Educational ExpensesDetailed Analysis:1. Characterization of Lease Rent Income:The assessee argued that the lease rent income should be taxed as 'Business Income' instead of 'Income from House Property', as the main object of the company was to deal in properties. The Tribunal referred to its own decision in the assessee's case for A.Y. 2010-11, where it was held that rental receipts were rightly claimed as 'Business Income'. The Tribunal upheld this view, directing the A.O. to assess the rental receipts as 'Business Income'. Consequently, the expenses disallowed due to this re-characterization were also to be allowed.2. Disallowance of Interest Paid on Loan:Given the Tribunal's decision to treat the rental income as 'Business Income', the alternative claim regarding the disallowance of interest paid on loans for properties held as depreciable assets under 'Income from House Property' was rendered infructuous and dismissed.3. Taxation of Sale of Depreciable Assets:The assessee contended that the sale of properties, which were depreciable assets, should be taxed under Sec. 50 as 'Short Term Capital Gain' (STCG) instead of 'Long Term Capital Gain' (LTCG). The Tribunal, agreeing with the assessee, noted that the properties formed part of the 'block of assets' and were used in the business. Thus, the profit on sale should be computed under Sec. 50, reducing the sale consideration from the block of assets. The Tribunal vacated the A.O.'s assessment of the profit as LTCG and allowed the assessee's appeal on this ground.4. Disallowance of Depreciation and Expenses on Motor Car:The A.O. disallowed depreciation and expenses on a motor car registered in the name of the director, reasoning that it was not used wholly for the company's business. The Tribunal disagreed, stating that the car, purchased by the company and used for its business, should be eligible for depreciation and related expenses, regardless of registration in the director's name. The Tribunal cited various judicial pronouncements supporting this view and vacated the disallowance of motor vehicle expenses.5. Disallowance of Educational Expenses:The assessee claimed educational expenses for a director's management degree from Harvard Business School, arguing it was for the company's benefit. The A.O. disallowed this, stating the director was also involved with other companies. The Tribunal, however, found the expenses were incurred wholly and exclusively for the business purpose of the assessee company. It cited judicial precedents supporting the allowance of such expenses and deleted the disallowance.Conclusion:The Tribunal allowed the appeal, directing the A.O. to treat rental income as 'Business Income', compute the sale of properties under Sec. 50, and allow depreciation and educational expenses as claimed by the assessee. The appeal was allowed in terms of these observations.