2023 (12) TMI 921 - AT - Income Tax

ITAT upholds rental income as business income, grants partial relief on section 40(a)(ia), remands section 68 capital contribution matter

M/s. MM Creations Versus The ACIT, Circle 32 (1), Delhi

ITAT Delhi dismissed assessee's appeal regarding rental income classification, upholding CIT(A)'s decision to treat rental receipts as business income ... Rental income earned from lease of building - Denial of deduction claimed u/s 24(a) - 'income from other sources' or 'Business and profession' instead of 'House Property' - As argued CIT(A) has not classified the stand of granting depreciation which will only enhance the deduction in favour of the appellant - HELD THAT:- DR submitted that while dismissing the grounds of assessee the ld. CIT(A) has followed order of ITAT Delhi [2017 (5) TMI 1102 - ITAT DELHI] AY 2008-09 & 2009-10 respectively wherein the Tribunal held that the rental income earned by the assessee from lease of building would be taxable under the head “income from business and profession and the AO was also directed to grant depreciation on the capital asset/building while computing the income from business. On being asked by the bench the ld. counsel of assessee, in all fairness, submitted that the issue has been decided against the assessee by the Tribunal. Since the ld. CIT(A) followed order of the Tribunal for AY 2008-09 & 2009-10 while upholding the action of the Assessing Officer treating the rental receipts as income from business or profession and also directed to grant deprecation on the building. Therefore we are unable to see any valid reason to interfere with the findings recorded by the ld. CIT(A) on this issue based on order of Tribunal in assessee’s own appeals - Decided against assessee. Addition u/s 40(a)(ia) - 'cost of sales' as covered by the provision of section 194C(6) & 194C(7) - HELD THAT:- As we note that the Hon'ble Delhi High Court in the case of CIT Vs. Ansal Land Mark Township (1) Pvt. Ltd [2015 (9) TMI 79 - DELHI HIGH COURT] has taken the view that the insertion of the second proviso to Sec.40(a)(ia) of the Act is retrospective and will apply from 1.4.2005. Once it is held that the Assessee is entitled to the benefit of 2nd proviso to Sec.40(a)(ia) of the Act, the CIT(A) ought to have directed the AO to verify whether the recipients have included the receipts paid by the assessee in their respective returns of income and also paid taxes on the same. To the extent the recipients from the Assessee have so included the sum in their returns of income and filed the same, no disallowance u/s.40(a)(ia) of the Act ought to have been sustained by the CIT(A). CIT(A) ought to have also directed the AO that in case the recipient parties are not cooperating in providing details, the AO should call for the information u/s. 133(6) or 131 of the Act, for verification of the same. We therefore set aside the order of the CIT(A) to the extent to which he had sustained the order of the AO on the disallowance u/s.40(a)(ia) of the Act and remand the issue to the file of the AO to verify whether the recipients have included the receipts paid by the assessee in their respective returns of income and also paid taxes on the same. Accordingly, ground of assessee is allowed for statistical purposes. Allowable business expenditure - expenditure incurred on foreign travel by the employees and partners - HELD THAT:- Addition has been upheld by observing that since the assessee failed to prove the business expediency of foreign trip to Europe therefore the primary onus has not been discharged by the appellant either during the assessment or during appellate proceedings. CIT(A) also rightly concluded that the appellant has failed to prove that these expenses identified by the Assessing Officer, were incurred wholly and exclusively for the business purpose of assessee. We are unable to see any valid reason to interfere with the findings recorded by the ld. CIT(A) as the submissions of assessee does not hold merits. Accordingly, ground of assessee is dismissed upholding the addition. Addition u/s 68 - capital contribution to the assessee firm by a partner - HELD THAT:- From the order of ITAT Delhi Bench in the case of Alliance Engineers and Construction [2019 (2) TMI 2095 - ITAT DELHI] is relevant to note that wherein the Tribunal held that when a partner introduces the money/capital in the firm either in the shape of capital or loan to the partnership firm, addition, if any, can be made only in the hands of partner and not in the hands of partnership firm as long as the partner confirms to have invested towards capital or as loan to the firm. In the present case the assessee has filed documents but we are unable to see any confirmation from the contributing partner confirming the capital contribution to the firm. The Assessing Officer and the ld. CIT(A) has noted detailed findings while confirming the addition u/s. 68 of the Act but they have not show cause the assessee to file relevant documentary evidence including confirmation etc. substantiating the claim of capital contribution. Therefore in our consider view the assessee should be allowed to explain his case before the Assessing Officer with the support of all relevant material, documentary evidence etc. Hence the issue of capital contribution by the partner is restored to the file of the Assessing Officer for readjudication of issue after allowing due opportunity of hearing to the assessee. Issues Involved:1. Classification of rental income under statutory deduction claimed u/s 24(a).2. Disallowance of Rs. 16,84,235/- under section 40(a)(ia).3. Disallowance of foreign travel expenses of Rs. 7,34,657/-.4. Addition of Rs. 67,45,000/- as unexplained capital contribution u/s 68.Summary:Issue 1: Classification of Rental IncomeThe appellant contested the CIT(A)'s decision to classify rental income as 'income from other sources' instead of under statutory deduction u/s 24(a). The Tribunal upheld the CIT(A)'s order, referencing past decisions for AY 2008-09 and 2009-10, where rental income was treated as 'income from business and profession' and depreciation was granted on the building. The Tribunal found no reason to interfere with these findings and dismissed grounds 2 to 4.Issue 2: Disallowance under Section 40(a)(ia)The appellant challenged the disallowance of Rs. 16,84,235/- under section 40(a)(ia), arguing that the 'cost of sales' should not be covered by section 194C(6) & 194C(7) and that payments were reimbursements. The Tribunal noted that the CIT(A) had correctly observed the appellant's failure to fulfill obligations under section 194C(7). However, following the Delhi High Court's ruling in CIT Vs. Ansal Land Mark Township, the Tribunal remanded the issue to the Assessing Officer (AO) for verification of whether recipients included the receipts in their returns and paid taxes. The AO was directed to call for information under sections 133(6) or 131 if recipients were uncooperative. Ground 5 was allowed for statistical purposes.Issue 3: Disallowance of Foreign Travel ExpensesThe appellant argued that the foreign travel expenses of Rs. 7,34,657/- were for business purposes. The CIT(A) and the Tribunal found that the appellant failed to prove business expediency, noting that the trip involved family members of the CEO and partner, suggesting a personal nature. The Tribunal upheld the CIT(A)'s findings and dismissed ground 6.Issue 4: Addition under Section 68The appellant contested the addition of Rs. 67,45,000/- as unexplained capital contribution by a partner, arguing that the capital contribution was reflected in audited accounts. The Tribunal noted the absence of a confirmation from the contributing partner, Shri Dinesh Kumar Gaind, and remanded the issue to the AO for re-adjudication, allowing the appellant to provide necessary evidence. Ground 7 was allowed for statistical purposes.Conclusion:The appeal was partly allowed for statistical purposes on grounds 5 and 7, while grounds 2, 3, and 6 were dismissed.