KANDOI AUTOMOBILES PVT. LTD.,CUTTACK vs. PRINCIPAL COMMISSIONER OF INCOME TAX, CUTTACK

Brief facts of the case are that the assessee is a private limited company and is engaged in the business of transportation. The assessment in this case was completed u/s.143(3) of the Act vide order dated 05.12.2017 and thereafter the Pr.CIT, Cuttack initiated the proceedings u/s.263 of the Act and passed order holding the said assessment order as erroneous and prejudicial to the interest of revenue for the three issues. The ld. CIT(A) has modified the assessment order and directed the AO to assess the rental income of Rs.24,69,840/- under the head “income from house property” as against “the business income” declared by the assessee. Besides this, ld. Pr.CIT observed that assessee has declared interest income and also claimed expenses towards interest paid in the profit and loss account. According to the ld. Pr.CIT, the interest income is to be assessed under the head “Income from Other Sources” and allowability of interest paid to be considered u/s.57 of the Act against such income. Further the ld. Pr.CIT also directed to verify the transactions carried out with sister concerns. Against this order, the present appeal is filed by the assessee.

Before us, the ld. AR of the assessee submitted that the assessee is having rental income from the open land i.e. shed and godown situated at Jagatpur Industrial Estate, Cuttack, which was given on rent. Since the main income is of renting from immovable property, the same was declared under the head "business and profession" and claimed expenses which are in nature of regular business expenditure and net income was offered for tax which has been assessed by the AO in the order passed u/s.143(3) of the Act. The ld. CIT(Admn.) in order passed u/s.263 of the Act directed that the income declared by the assessee is to be assessed under the head "income from house property". He further submitted that all the issues raised were fully examined by the AO at the time of completion of the original assessment proceedings and merely for the sake of verification, the ld. PCIT without establishing that the order passed by the AO erroneous as well as prejudicial to the interest of revenue, has directed the AO for making fresh verification. During the 11.06.2021 giving effect to the orders u/s.143(3)/263 of the Act, which reads as under:-

Ld. AR thus, submitted that from the perusal of the aforesaid order, it is seen that the AO while giving effect to the order of the ld. AO without making any discussion on the issue of allowability of the expenses, has "income from house property" and further interest income as "income from other sources" and no deduction as claimed in the profit and loss account were allowed. He further submitted that from the perusal of the order of the ld. Pr.CIT in para 9.3 at page 14, it is clear that direction has been given to the AO for holding the rental income of Rs.24,69,840/- as income from house property, however, there is no doubt raised about the expenditure claimed by the assessee in its profit and loss account, therefore, if the said expenditures are allowed and further deduction at the rate of 30% against the rental income is allowed u/s.24(1) of the Act, there would be no loss to the revenue. Thus, the order of the ld. Pr.CIT does not satisfy the twin conditions as enumerated under Section 263 of the Act. Accordingly, he prayed for cancellation of the order passed by the ld. Pr.CIT.

On the other hand, ld. CIT-DR vehemently supported the order of the ld. Pr.CIT and submitted that the AO has wrongly assessed the rental income as income from business instead of its correct head i.e. "income from house property". The ld. Pr.CIT has also doubted the deduction claimed against the interest income which were allowed by the AO without making any verification of the interest expenses claimed. He further submitted that during the course of survey proceedings carried out, it was found that the assessee has made various transactions with its sister concerns which has not been verified and, therefore, the assessment order is erroneous as well as prejudicial to the interest of revenue and accordingly, he prayed for the confirmation of the order passed by the ld. Pr.CIT.

We have considered the rival submissions and perused the material available on record. From the perusal of the order of the ld. Pr.CIT with regard to the first issue of rental income, the observations as made in para 9.3 of its order reads as under :- 9.3 Accordingly, the assessment order dated 05.12.2017 is modified and the AO is directed to give effect to this order by charging the rental income of Rs.24,69,840/- as assessee’s income from house property as per law.

From the perusal of the observation made by the ld. Pr.CIT, it is clear that the ld. Pr.CIT has modified the assessment order and the AO was directed to give effect by charging rental income of Rs.24,69,840/- under the head "Income from House Property" as against the “Income from Business and Profession” as shown by the assessee, however, nowhere in the order the ld. Pr.CIT has directed the AO not to allow the deduction of expenses claimed in the profit and loss account which are in the nature of the business expenditure and has no relationship with the rental income. If the deduction u/s.24(1) of the Act @30% is allowed out of the rental income of Rs.24,69,840/-, the assessee would get additional deduction of Rs.7,40,952/- in addition to the expenses claimed in the profit and loss account which were available to it under the head business and profession. Assessee’s claim that the expenses claimed in the profit and loss account are normal business expenditure, incurred on day to day to business activity cannot be ignored. We are of the considered opinion that for the purpose of Section 37 of the Act, the AO is under obligation to examine these expenses and if the same were for the purpose of business, the same deserves to be allowed. In the instant case these expenses were allowed after making verification in the order passed u/s.143(3) of the Act and the ld Pr.CIT in revisionary order u/s.263 of the Act nowhere doubted the incurrance of such expenses nor any directions were given with regard to the allowability of the same. However, the expenses directly relatable to rental income which is to be assessed under separate head i.e. “Income from Other Sources”, needs to be disallowed. From the perusal of the profit and loss account, we find that depreciation on factory building at Rs.181529/- is not allowable as business expenses. With regard to interest expenses claimed by assessee, ld. PCIT directed the AO to verify whether the same could be allowed u/s 57 of the Act against the interest income which is directed to be assessed as “Income from Other Sources”. However, from the effect order it is seen that AO has not allowed deduction of the paid interest u/s 57 of the Act. It is undisputed that assessee has paid interest to Reliance Capital Ltd. on the loan taken. According to assessee, the amount of loan was given to earn interest during the period when the funds remained idle with the assessee., Thus, it has direct nexus with interest income, however, the same is not allowed by the AO in the effect order passed as per directions given u/s.263 of the Act. This amount of interest is otherwise has the character of business expenses and this should be part of the business expenses. Had those business expenses are allowed against the income computed under other heads of Income as directed by