2017 (8) TMI 334 - AT - Income Tax

Leasing income from commercial premises - Income from House Property OR Profits & Gains from Business /Profession - Held that - Assessee pointed out that assessee has suffered long term capital loss on sale of Preference shares, which was sought to be carried forward. It has been explained that there was no determination by the Assessing Officer on this aspect and when the issue was taken up before the CIT(A), he has also denied the same on a misconception that the loss was on account of sale of equity shares. The Ld. Representative for the assessee pointed out that assessee company would be satisfied if the matter is restored back to the file of Assessing Officer in order to appreciate the correct position and determine the long term capital loss on sale of Preference shares.The Ld. Departmental Representative has not opposed the plea of the assessee to set-aside the issue back to the file of Assessing Officer. In the above background, we restore the issue back to the file of the Assessing Officer who shall revisit the issue on the basis of the submissions of the assessee and decide afresh in accordance with law. Disallowing the interest and other expenses under section 14A - Held that - In so far as the finding of the CIT(A) that the interest on borrowed funds were utilized towards investment in equity shares are concerned, the same has not been negated before us by the Revenue. Therefore, the same is hereby affirmed. Even otherwise, we find that even with respect to the quantum of disallowance out of other expenses is concerned, we find no infirmity in the order of the CIT(A), which is hereby affirmed. Thus, in so far as Grounds of appeal No.1 to 3 of the Grounds of appeal, the Revenue has failed to produce any evidence in support of its claim, therefore, the same are dismissed. Disallowance of interest expenditure under section 36(1)(iii) - Held that - No fault can be found in the plea set-up by the assessee, so however, it was essential for the CIT(A) to take into consideration the specified observation of the Assessing Officer to the effect that the assessee had failed to prove the utilization of such funds by the subsidiaries. Even at the time of hearing before us, when this was put across to the parties, the Ld. Representative for the assessee submitted that the assessee would be in a position to demonstrate the utilization of such funds by the subsidiaries for their business purposes and for that purpose the matter may be set-aside to the file of the Assessing Officer. Therefore, under these circumstances, it would be in the fitness of things that the said aspect, being a factual aspect, is appropriately put to verification by the Assessing Officer. The assessee shall submit appropriate evidence in support of its plea that the funds have been utilized by the subsidiaries for the purposes of their business and the Assessing Officer shall consider the same and, thereafter pass an appropriate fresh order

Issues Involved:
1. Classification of leasing income from commercial premises as "Income from House Property" vs. "Profits & Gains from Business/Profession".
2. Carry forward of Long Term Capital Loss on sale of preference shares.
3. Disallowance under section 14A read with Rule 8D of the Income Tax Rules.
4. Disallowance of interest expenditure under section 36(1)(iii) of the Income Tax Act.
5. Classification of interest earned on money lending operations as "Income from Other Sources" vs. "Profits and Gains from Business and Profession".

Issue-wise Detailed Analysis:

1. Classification of Leasing Income:
The assessee contended that the leasing income from its commercial premises should be classified as "Profits & Gains from Business/Profession" instead of "Income from House Property." The Assessing Officer (AO) and CIT(A) both disagreed, assessing the rental income as "Income from House Property" based on the nature of the lease agreement and the lack of business center services provided by the assessee. The Tribunal upheld this decision, noting that the assessee failed to provide evidence of business center services and that leasing property was not the main business activity of the assessee but only an ancillary object.

2. Carry Forward of Long Term Capital Loss:
The assessee sought to carry forward a long-term capital loss arising from the sale of preference shares. The CIT(A) denied this, mistakenly treating the loss as arising from equity shares. The Tribunal restored the issue back to the AO for fresh consideration, directing the AO to determine the correct position and allow the carry forward of the long-term capital loss if applicable.

3. Disallowance under Section 14A read with Rule 8D:
The AO disallowed interest and other expenses under section 14A, amounting to ?91,38,871/-, on the basis that they were incurred in earning exempt income. The CIT(A) limited the disallowance to ?4,08,033/-, reasoning that the interest on borrowed funds could not be allocated towards equity shares. The Tribunal affirmed the CIT(A)’s decision, finding no evidence from the Revenue to support a higher disallowance.

4. Disallowance of Interest Expenditure under Section 36(1)(iii):
The AO disallowed ?14,79,794/- of interest expenditure, arguing that the assessee had advanced funds to its subsidiaries at a lower interest rate than it paid on borrowings. The CIT(A) set aside this disallowance, accepting the assessee's argument of commercial expediency and noting that the overall interest income exceeded the interest expense. The Tribunal remanded the issue back to the AO for verification of the actual utilization of funds by the subsidiaries, directing the AO to reassess based on the evidence provided by the assessee.

5. Classification of Interest Earned on Money Lending Operations:
The AO classified the interest earned on loans and advances as "Income from Other Sources," while the CIT(A) classified it as "Profits and Gains from Business and Profession," following the Tribunal’s previous decisions in the assessee’s case. The Tribunal affirmed the CIT(A)’s decision, noting that similar interest income had been consistently treated as business income in prior years.

Conclusion:
The Tribunal partly allowed the appeals of both the assessee and the Revenue. The leasing income was confirmed as "Income from House Property," the issue of long-term capital loss was remanded for fresh consideration, the disallowance under section 14A was limited to ?4,08,033/-, the disallowance under section 36(1)(iii) was remanded for verification, and the interest income from money lending was affirmed as "Profits and Gains from Business and Profession."

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