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2020 (3) TMI 226

..... s because there can be a situation when the assessee is not able to generate any business but it has to incur the expenses to keep its business setup in existence. Thus in such a situation the assessee cannot be denied the claim of expenses incurred during the period when he was not able to generate the business. Furthermore, it is also important to note that the business is governed by the market forces which are beyond the control of the assessee. Thus merely lull in the business activities does not mean that the assessee has closed down its business activities. Accordingly, we hold that the assessee cannot be deprived from the benefit of claiming the deduction for the expenses incurred to keep the setup of the business in existence. Disallowance of expenses - no business activity during the year and the appellant had failed to prove the same - HELD THAT:- Expenses incurred by the assessee to keep the business setup in existence are eligible for deduction. But it is equally important to ascertain whether the expenses incurred by the assessee are really essential to keep its business setup in existence during the lull period. As such, in our considered view all the expenses incurr .....

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..... ities below. Thus, the ground of appeal of the assessee is dismissed. Penalty u/s 271(1)(c) - addition on account of business expenses - HELD THAT:- Once the quantum addition itself stands deleted then there should not be any penalty on the assessee based on such addition/disallowance. Hence we direct the AO delete the penalty with respect to addition on account of business expenses disallowed. Disallowances of deduction claimed under section 24(a) and 24(b) - HELD THAT:- We hold that the assessee did not claim the deduction under section 24(a) of the Act with mala-fide /dishonest intent. We hold that there cannot be any penalty on account of disallowance of the deduction claimed by the assessee under section 24(a) of the Act. Interest expenses in the earning of impugned rental income - Assessee claimed that the interest was paid on the money borrowed which was invested in the impugned property from where he was getting the rental income. The assessee has also furnished the details of the parties from whom he has borrowed fund which was utilized for the purpose of the investments. However the AO without verifying the genuineness of the details furnished by the assessee has levied t .....

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..... e Ld.CIT(A) has grievously erred in upholding that there was no business activity during the year and the appellant had failed to prove the same. The appellant was not allowed sufficient opportunity to produce evidence in this regard. 3.1. The Ld.CIT(A) has erred in upholding that rental income from lease of bungalow to Shell India Marketing Pvt.Ltd., was assessable under the head income from other sources and not House property . 3.2. That in the facts and circumstances of the case as well as in law the Ld.CIT(A) ought not to have upheld that the intention behind letting out to Shell India Marketing Pvt.Ltd., was land and not house property so that income was not assessable as property income. 4.1. Theld.CIT(A) has grievously erred in law and on facts in upholding the disallowance of interest expenses of ₹ 8,00,387/-. It is, therefore, prayed that the additions upheld by the CIT(A) may kindly be deleted. 2. The first issue raised by the assessee is that the order passed by the learned CIT (A) is bad in law and against natural justice as the same was passed without granting sufficient opportunity. However, the learned AR did not press this ground before us. Accordingly we dis .....

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..... sed his contention by filing the assessment order under section 143(3) of the Act for the assessment year 2006-07 wherein the business activities of the assessee were shown. 6.3. In view of the above the learned AR claimed that there cannot be disallowance of the expenses incurred by the assessee to keep its business alive. 7. On the other hand the learned DR submitted that there was no business activity carried out by the assessee in the year under consideration. Similarly, the assessee has not justified weather the expenses incurred by the assessee were incurred to keep the business alive. The learned DR vehemently supported the order of the authorities below. 8. We have heard the rival contentions of both the parties and perused the materials available on record. The facts as discussed above are not in dispute. Therefore, we are not repeating the same for the sake of brevity and convenience. From the foregoing discussion, the issues arise for our consideration stand as under: 1. Whether the assessee was engaged in business activity or business was continuing or closed? 2. Whether the expenses incurred were wholly and substantially for the purpose of business or not? 8.1. Regardi .....

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..... g the question No.2 as discussed above, we note that the expenses incurred by the assessee to keep the business setup in existence are eligible for deduction. But it is equally important to ascertain whether the expenses incurred by the assessee are really essential to keep its business setup in existence during the lull period. As such, in our considered view all the expenses incurred by the assessee during the lull period are not eligible for deduction except those expenses which were necessary to incur or keep its business setup in existence. In the case on hand, this aspect has not been verified by the authorities below. Now again the question arises whether the issue for the deduction of the expenses claimed by the assessee should be set aside to the file of the AO to find out the expenses which were necessary to be incurred for keeping the status of the business alive. Considering the facts available on record, we note that all the details of the expenses incurred by the assessee were available before the authorities below, therefore we feel that the revenue should not be given fresh inning for determining the expenses incurred by the assessee which are to be allowed/disallow .....

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..... f September 2006 is self-serving document and cannot be relied to infer that the impugned rental income is taxable under the head house property. The AO finally held that the impugned rental income is chargeable to tax under the head income from other sources and thus the AO denied the benefit for the claim of the assessee under section 24(a) and 24(b) of the Act. The AO further observed that the assessee is not entitled for the deduction of interest expenses against the rental income chargeable to tax under the head income from other sources for the reason that the interest expenses was not incurred for the running of such rental income. Accordingly the AO denied the deduction to the assessee for ₹ 8,00,387/- and added the same to the total income of the assessee. Aggrieved assessee preferred an appeal to the learned CIT (A). 11.8. The assessee before the learned CIT (A) submitted that he has given the bungalow to the lessee as per the supplementary deed dated 11-9-2006. The inspector of the income tax visited to the property in dispute and submitted in his report that the bungalow was demolished and there was a piece of land. But the inspector visited to such property after .....

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..... the income earned by the assessee is not income from house property, but income from other sources. In view of this reason, this ground of appeal is dimsmissed. Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us: 12. The learned AR before us submitted that the assessee has let out the bungalow to the party as evident from the supplementary agreement of lease placed on pages 41 to 47 of the paper book. Therefore, any subsequent change in the said bungalow should not change the character of the income in the hands of the assessee. 12.1 Without prejudice to the above the learned AR also claimed that there was no change in the bungalow till the end of the year under consideration as evident from the Municipal Corporation tax bill for assessment year 2006- 07 and 2007-08 which are placed on pages 48 to 51 of the paper book. 12.2 The learned AR without prejudice to the above also submitted that if the rental income is treated as income from other sources then also benefit of interest expenses should be extended to the assessee. 13. On the other hand, the learned DR before us submitted that the entire bungalow was demolished and it became a piece of l .....

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..... ssessee has taken two different stands. Firstly, he submitted that he has let out the land to the party but subsequently changed his stand by revising the rent agreement for let out of the bungalow. In such a situation, it is difficult to believe on the statement of the assessee to ascertain when he was speaking the truth. In holding so, we draw support and guidance from the judgment of the Hon'ble Calcutta High Court in the case of Eastern Commercial Enterprise (1994) 210 ITR 103 (Cal) wherein it was held that A man indulging in double-speaking cannot be said by any means a truthful man at any stage-and no court can decide on which occasion he was truthful. 14.3. Accordingly, the impugned rent cannot be classified as income under the head house property. To tax the rent income under the head house property, there has to be a house property or the land pertinent thereto as envisaged under the provisions of section 22 of the Act. But in the case on hand, even if we assume that there was the bungalow for some time, the rent received thereto cannot be classified as income under the head house property as lease agreement was never intended for the use of bungalow. Accordingly, the .....

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..... 1)(c) of ₹ 13,62,000. 3.1. The ld.CIT(A) has failed to appreciate that the claim of business expenses and lease rent as property income were genuine and the explanation offered by him was duly substantiated so that the provisions of Sec.271(1)9c) were not attracted. 3.2. That in the facts and circumstances of the case as well as in law, the ld.CIT(A) ought not to have held that the provisions of Sec.271(1)(c) were attracted in respect of business disallowance and rental income treated as income from other sources. 3.3. In any view of the matter, the penalty proceedings u/s.271(1)(c) initiated only in respect of disallowance of business expenses, the penalty levied by AO in respect of rental income treated as other sources is wholly illegal and unlawful. It is therefore prayed that penalty of ₹ 13,62 lakhs levied by the AO and confirmed by the CIT(A) should be deleted. 17. The effective issued raised by the assessee in all the grounds of appeal is that the learned CIT (A) erred in confirming the penalty of ₹ 13,62,200/- imposed by the AO under section 271(1)(c) for furnishing inaccurate particular of income on account of disallowances of expenses of ₹ 14,26,8 .....

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..... , the deduction claimed against such rental income was denied automatically. Now the controversy arises whether the assessee has furnished inaccurate particular of income by treating the impugned income under the head house property. 20.2. There is no dispute to the fact that the assessee has earned lease rental and declared the correct rental income but the same was declared under the wrong head i.e. under income from house property instead of income from other sources. Thus, it is transpired that the assessee has declared his income under the wrong head which can be inaccurate claim but the same cannot be treated as inaccurate particulars of income. It is because the deduction under section 24(a) of the Act is automatic against the income chargeable to tax under the head house property. Thus, in our considered view a wrong claim by the assessee cannot tantamount as inaccurate particulars of income. In holding so we find support and guidance from the judgment of Hon ble Supreme Court in the case of CIT vs. Reliance Petroproducts (P) Ltd. reported in 322 ITR 158 wherein it was held as under: Therefore, it must be shown that the conditions under section 271(1)(c ) exist before the p .....

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..... 4(a) of the Act with mala-fide /dishonest intent. 20.4. We further note that the issue involved in hand is debatable in nature and there can be dispute to classify the impugned rental income under the head house property/income from other sources. In holding so we draw support and guidance from the judgment of Hon ble Gujarat High Court in the case of CIT vs. Sambhav Media Ltd. where it was held as under: It appears that the assessee made a claim of statutory deduction under Section 24 of the Act as well as also for depreciation. At the time of assessment, all relevant material facts were disclosed by the assessee and depreciation was also claimed on its business assets. Both Assessing Officer and CIT(A) found that assessee was dis-entitled to claim double deduction of depreciation as well as deduction under Section 24 of the Act. The Tribunal rightly held that there was no concealment of income nor was there any filing of inaccurate particulars of income. Thus, on finding the conduct of the assessee bona fide and this being a matter of bona-fide difference of opinion between the assessee and the department regarding allowability of the claim, it was justified in deleting the penal .....

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..... h credits as income of the assessee but merely on that basis by recourse to Explanation 1, penalty under section 271(1)(c) could not have been imposed without the department making any other effort to come to a conclusion that the cash credits could in no circumstances had been amounts received as temporary loans from various parties. The assessee in the quantum proceedings failed to produce the accountant but the department also in penalty proceedings made no effort to summon him. Applying the test (ii) discussed above, therefore, it was a case where there was no circumstance to lead to a reasonable and positive inference that the assessee s case, that the cash credits were arranged as temporary loans, was false. The facts and circumstances were equally consistent with the hypothesis that it could have been sundry loans in small amounts obtained from different parties. Therefore, even taking recourse to Explanation 1, the circumstance or state of evidence on which the cash credits were treated as income, could not by themselves justify imposition of penalty without anything more on record produced by the assessee or the department. It was, accordingly, held that the Tribunal was n .....

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