2016 (3) TMI 1109 - AT - Income Tax

Treatment to income from letting - income from house property or business income - Held that - In the present case we find that one of the main object of the assessee was to run classes and to do educational activities and the property which has been let out by the assessee was a commercial property and was also used by the person to whom it was leased for the purpose of educational activities. We further find that Hon ble Gujarat High Court in the case of New India Industries (1992 (8) TMI 41 - GUJARAT High Court ) and after relying on various decisions has laid down various tests to determine the head of income under which the rental income is to be assessed. The tests inter alia lays down the principle that when an assessee derives income from a commercial asset which is capable of being used as a commercial asset and the asset would not cease to be commercial asset simply because temporarily it was not put to use or was let out to other person for his use the income derived would be business income irrespective of the manner in which it is exploited by the owner of business. In the present case the finding of ld. CIT(A) that asset is a commercial asset has not been controverted by Revenue. In such a situation we do not find any infirmity in the order of ld. CIT(A) and for which we also find support by the recent decision of Hon ble Calcutta High Court in the case of Shyam Burlap Co. Ltd. vs. CIT reported in (2015 (9) TMI 852 - CALCUTTA HIGH COURT ) wherein the Hon ble High Court after taking into consideration that when the object in the memorandum permitted the assessee to carry on business in letting out properties and when 85% of the income was by way of deriving rent and lease the income from letting was considered as business income of the assessee. In view of the aforesaid facts and relying on the aforesaid decisions of High Courts we find no reason to interfere with the order of ld. CIT(A) and thus the ground of Revenue is dismissed. Addition on account of unaccounted investment u/s.69 - Held that - . In the present case we find that A.O. had proceeded to disallow the expenses of labour on the basis of estimation and has not brought any material on record to demonstrate that the investment were not recorded in the books of account. On the other hand before us ld. A.R. has submitted that the expenses having been incurred in subsequent years and has also placed on record the copy of ledger account. The aforesaid statements of the assessee has not been controverted by the Revenue. In view of the aforesaid facts and more so when the addition has been made on estimated basis and without bringing any material on record by Revenue to prove the incurring of expenses to towards labour by assessee we are of the view that in the present case no addition is called for. We thus direct the deletion of addition including that which is confirmed by the ld. CIT(A). In the result this ground of Revenue is dismissed and ground of assessee in C.O. is allowed. Addition on account of labour expenses - Held that - In the present case we find that A.O. has proceeded to disallow the expenses of labour on estimation basis. He has not brought any material on record to demonstrate that the expenses were incurred by the assessee. Before us ld. A.R. has submitted that the expenses having been incurred in subsequent years. The aforesaid statement of the assessee has not been controverted by the Revenue.In view of the aforesaid facts and more so when the addition has been made on estimated basis and without bringing any material on record by Revenue to prove the incurring of expenses towards labour by assessee we are of the view that in the present case no addition is called for.

Summary

Issues Involved:
1. Treatment of rental income as business income or income from house property.
2. Addition on account of unaccounted investment under Section 69 of the Income Tax Act.

Detailed Analysis:

1. Treatment of Rental Income as Business Income or Income from House Property:
The primary issue was whether the rental income received by the assessee should be taxed as "business income" or "income from house property." The assessee, a partnership firm, declared income from rent as business income. The Assessing Officer (A.O.) contended that the rental income should be taxed under the head "income from house property" as per Section 22 of the Income Tax Act.

During the assessment proceedings, the A.O. observed that the assessee received Rs. 14 lakhs as rent and treated it as business income. The A.O. argued that the income must be taxed as house property income, leading to an addition of Rs. 8,92,173 after statutory deductions. The CIT(A) disagreed with the A.O. and held that since the property was a commercial asset, the income should be treated as business income. The CIT(A) cited several judgments, including the Hon'ble Gujarat High Court in CIT vs. New India Industries Ltd. [1993] 201 ITR 208 (Guj), which laid down tests to determine the head under which rental income should be assessed. The CIT(A) concluded that the property was a commercial asset, and thus the rental income should be taxed as business income.

The Tribunal upheld the CIT(A)'s decision, noting that the property was a commercial asset used for educational activities, aligning with the firm's main objective. The Tribunal referenced various judgments, including the Hon'ble Calcutta High Court in Shyam Burlap Co. Ltd. vs. CIT [2016] 380 ITR 151 (Cal), which supported treating rental income as business income when the asset is a commercial property.

2. Addition on Account of Unaccounted Investment under Section 69:
The second issue involved the addition of unaccounted investment under Section 69 of the Income Tax Act. The A.O. noticed that the assessee had incurred expenses aggregating to Rs. 9,02,823 on construction materials but had not recorded any labour expenses. The A.O. estimated that 33% of the expenses should constitute labour charges, leading to an addition of Rs. 2,97,930 as unaccounted investment.

The CIT(A) partially agreed with the A.O. but reduced the addition to Rs. 1,48,965, noting that the A.O.'s estimation was on the higher side without verifiable basis. The Tribunal, however, found that the addition was made on an estimated basis without concrete evidence of unrecorded investment. The Tribunal noted that the assessee had submitted ledger accounts showing that the labour expenses were incurred in subsequent years, which the Revenue did not dispute. Consequently, the Tribunal directed the deletion of the entire addition, including the amount confirmed by the CIT(A).

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection and appeals for the subsequent assessment years. The Tribunal upheld the CIT(A)'s decision to treat the rental income as business income and directed the deletion of additions made on account of unaccounted investment under Section 69. The judgments emphasized the importance of the nature of the asset and the intention behind its use in determining the head under which rental income should be assessed.