Tribunal rules on rental income classification & allows deductions for bad debts and business loss

The Tribunal upheld the classification of rental income under "Income from House Property" based on the assessee's consistent past declarations. However, the Tribunal allowed the deduction of bad debts and business loss due to the cancellation of property, directing the Assessing Officer to accept these claims. The appeal was partly allowed in favor of the assessee.

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Issues Involved:
1. Classification of rental income: "Income from House Property" vs. "Income from Business & Profession."
2. Disallowance of bad debts and business loss amounting to Rs. 3,45,57,662.
3. Disallowance of business loss due to cancellation of property amounting to Rs. 9,23,800.

Issue-wise Detailed Analysis:

1. Classification of Rental Income:
The assessee declared rental income under the head "Income from Business & Profession" in the revised return, contrary to the original return, which classified it as "Income from House Property." The assessee argued that the main object was to lease out properties, citing the Supreme Court decision in Chennai Properties & Investment Ltd. However, the Tribunal observed that the assessee, an individual, had consistently declared such income under "Income from House Property" in previous years. The Tribunal ruled that the intention of the assessee could be understood from past actions, and thus, the rental income should be classified under "Income from House Property," dismissing the assessee's ground.

2. Disallowance of Bad Debts and Business Loss:
The assessee advanced Rs. 3.1 crores to M/s. Rusam Developer Pvt. Ltd. and claimed it as bad debts due to the company's liquidation. The assessee had declared interest income from this loan in previous years, which was accepted by the Revenue. The Tribunal found that since the interest income was declared as business income, the bad debts should be allowed as a deduction under Section 37 of the Income Tax Act. The Tribunal directed the Assessing Officer to allow the bad debts claimed by the assessee.

3. Disallowance of Business Loss due to Cancellation of Property:
The assessee purchased a flat intending to lease it out but later canceled the purchase due to non-completion of construction, leading to a loss of Rs. 9,23,800 in stamp duty and registration charges. The Tribunal noted that the property was bought for leasing purposes and the loss incurred from non-recovery of registration charges should be allowed as a loss under "Income from House Property." The Tribunal directed the Assessing Officer to allow the loss claimed by the assessee.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the classification of rental income under "Income from House Property" but allowed the deduction of bad debts and business loss due to the cancellation of property.

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