ADITYA VISSAM KALIDINDI,HYDERABAD vs. ITO, WARD -14(1), HYDERABAD

The grounds raised by the assessee read as under :

The brief facts of the case are that, the assessee is an individual and filed his return of income for A.Y. 2018-19 on 30.04.2018 declaring total income of Rs. 15,64,930/- which consists of income from salary, income from business and profession, and income from other sources. The assessee has received gross rental income of Rs. 79,94,440/- on which TDS under Section 194-I of the Income-tax Act, 1961 was deducted by the tenants. The assessee has treated rental receipts as business receipts and estimated business income and applied presumptive rate of tax as per Section 44AD of the Income-tax Act, 1961 and reported total profit of Rs. 7,50,000/- on gross rental receipts. During the course of assessment proceedings, the A.O. called upon the assessee to file explanation as to why rental income as reported under the head “Income from business and profession” should not be assessed under the head “Income from house property”. In response, the assessee submitted that, his main business activity is to develop properties and let out on rent and had also paid GST on rental income and therefore, rental receipts partake the nature of business receipts on which he has rightly reported income as per Section 44AD of the Income-tax Act, 1961. The A.O., after considering the relevant submissions of the assessee, rejected the argument and assessed the rental receipts under the head “Income from house property”. The A.O., after considering gross rental receipts of Rs. 79,94,440/-, allowed standard deduction @ 30% and the remaining amount of Rs. 55,96,108/- has been assessed as income from house property.

Aggrieved by the assessment order, the assessee preferred appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee had challenged the assessment of rental income from letting out of properties under the head “Income from house property” as against assessment of income under the head income from business and profession. The assessee had also filed certain additional evidence in the form of municipal tax paid receipts and interest paid to banks on loan borrowed from the Federal Bank Ltd., and argued that, the A.O. erred in not allowing deduction towards municipal taxes and interest on borrowed capital under Section 24(b) of the Act.

The Ld. CIT(A), after considering the relevant submissions of the assessee, rejected the arguments of the assessee for assessing the rental receipts under the head “Income from business and profession’ on the ground that the assessee's sole income is rental receipts from letting out of property to two tenants and the same cannot be considered as systematic activity or adventure in the nature of trade and commerce which can be assessed under the head “Income from business and profession”. The Ld. CIT(A) had also rejected the additional evidences filed by the assessee for claiming deduction for municipal tax payment and interest payment on loans under Section 24(b) of the Act, on the ground that, the assessee had failed to furnish relevant evidences before the A.O. Further, the assessee had also failed to explain as to why it could not submit relevant evidences before the A.O. Therefore, the Ld. CIT(A) rejected the explanation of the assessee and sustained the addition made by the A.O. towards assessment of rental income under the head “Income from house property”.

Aggrieved by the order of Ld. CIT(A), the assessee is now in appeal before the Tribunal.

The learned counsel for the assessee, Ms. K. Prabhabati, Advocate, referring to grounds of appeal, submitted that, although the assessee has challenged the assessment of rental receipts under the head “Income from house property”, but does not wish to press ground No. 1 on this issue. The learned counsel for the assessee further submitted that, the remaining grounds challenge the deduction towards municipal taxes paid on the property and interest on borrowed capital, and the assessee has furnished relevant evidences before the Ld. CIT(A) to prove the claim of deduction towards municipal taxes and interest on borrowed capital, but the Ld. CIT(A) rejected the explanation of the assessee on the ground that, the assessee could not explain the reasons for not submitting relevant details. However, the fact remains that, the A.O. had completed the assessment without providing adequate opportunities of hearing to the assessee to submit the details. Therefore, she submitted that, the matter may be remitted back to the file of the A.O. to verify the facts and allow deduction as per law.

The learned counsel for the assessee further referring to ground No. 4 of the assessee's appeal, submitted that, the assessee has reported income under the head income from business and profession of Rs.7,50,000/-, which is nothing but estimated profit on gross receipts under Section 44AD of the Act. The A.O., having assessed rental receipts under the head income from house property, had once again made addition towards income from business of Rs. 7,50,000/- as reported by the assessee and therefore, it amounts to double addition on the same income and thus, the same should be deleted.

The learned Senior A.R. for the Revenue, Dr. Sachin Kumar, on the other hand, supporting the order of Ld. CIT(A), submitted that, the application filed by the assessee under Rule 46A of the Income-tax Rules, 1962, is not maintainable, because if we go by the provisions of Rule 46A, the assessee has to satisfy the four conditions provided therein for admission of any additional evidence, and in the present case, going by the facts available on record, the assessee has failed to satisfy as how the additional evidence should be admitted at this stage. Therefore, the additional evidence filed by the assessee for deduction towards municipal tax and interest on borrowed capital cannot be admitted. The learned Senior A.R. for the Revenue further submitted that, even assuming for a moment it may be admitted, but the fact remains that the assessee has borrowed loan from the Federal Bank Ltd., against rental receipts and from the above, it is very clear that, the loan so borrowed has not been used for construction of house property, and as per Section 24(b), only the interest paid on borrowed capital from the bank for the purpose of construction of house property alone can be allowed. Therefore, he submitted that, there is no merit in the arguments of the counsel for the assessee and the order of Ld. CIT(A) should be upheld.

We have heard both parties, perused the material available on record and had gone through the orders of the authorities below. Although the assessee has challenged assessment of rental receipts under the head income from house property as against income from business and profession reported by the assessee, but the learned counsel for the assessee made a statement at bar that the assessee does not wish to press ground No. 1 which challenges assessment of rental income under the head income from house property. Therefore, to this extent, we are in full agreement with the reasons given by the A.O. and Ld. CIT(A) for assessing the rental receipts under the head income from house property. Even otherwise, the assessee has failed to make out a case by furnishing relevant details as to how the rental receipts is assessable under the head income from business and profession and therefore, in our considered view, the A.O. has rightly assessed the rental receipts under the head “Income from house property” after allowing standard deduction @ 30% on gross rental receipts.

Having said so, let us come back to the issue of deduction towards municipal taxes paid on house property and interest paid on borrowed capital from the Federal Bank Ltd. The assessee seeks to claim deduction towards municipal taxes paid on house property by furnishing certain additional evidence in the form of property tax receipts, which are available in the paper book at page Nos. 5 to 7 filed by the assessee. Although the learned Senior A.R. for the Revenue raised objection for admitting additional evidence, but in our considered view, without going into technicalities of the petition filed by the assessee under Rule 46A of the Income-tax Rules, 1962, the additional evidence filed by the assessee should be admitted if such additional evidence is relevant to the issue on hand. Since municipal taxes paid on property is deductible against the rental income, in our considered view, the Ld. CIT(A) ought to have admitted additional evidence filed by the assessee on this issue and adjudicated the issue on merits. Therefore, we admit the additional evidence filed by the assessee for seeking deduction towards municipal taxes paid on property and direct the A.O. to verify the claim of the assessee in light of relevant property tax receipts, documents, if any, furnished in support of his claim.

In so far as the deduction claimed towards interest on borrowed capital under Section 24(b) of the Act, the assessee seeks to claim deduction towards interest on loan borrowed from the Federal Bank Ltd., under Section 24(b) of the Act. The assessee claimed that, he has borrowed loan from the said bank for the purpose of construction of house property and interest paid on said loan is deductible under Section 24(b) of the Act. We have gone through the relevant loan sanction letter and upon perusal of the relevant details, we find that, the bank has granted a loan against rent securitization for Rs. 1,00,00,000/-. Further, the assessee had been receiving rental income much before the date of loan provided by the bank and further, going by the nature of loan, it appears that, the assessee had borrowed loan against rental income and the same has been used for the purpose of business and personal purposes, which is evident from the relevant loan sanction letter and the report submitted by the learned Senior A.R. for the Revenue. If the loan borrowed by the assessee is not for the purpose of construction of house property, then interest, if any, paid on the said loan is not deductible under Section 24(b) of the Act. Since the assessee has not furnished these details before the A.O. and since the Ld. CIT(A) has not admitted the additional details, in our considered view, one more opportunity needs to be granted to the assessee to file his explanation along with relevant details before the A.O. for claiming deduction under Section 24(b) of the Act. Thus, we set aside the issue of interest paid on borrowed capital to the file of the A.O. and direct the A.O. to verify the claim of the assessee in light of the relevant sanction letter and the purpose of loan and decide the issue as per law.

Coming back to ground No. 4 of the assessee which challenges the assessment of income from business and profession of Rs. 7,50,000/-. Admittedly, the assessee has reported income from business and profession of Rs. 7,50,000/- by applying presumptive rate of tax as per Section 44AD of the Act, on gross rental receipts of Rs. 79,94,440/-. The A.O., having assessed the rental income under the head “Income from house property”, ought not to have made further addition towards income reported by the assessee under the head “Income from business and profession” towards profit estimated on gross rental receipts. Since the A.O. has assessed the rental income under the head “Income from house property”, in our considered view, further addition towards profit declared on the said rental income under the head “Income from business and profession” as reported by the assessee amounts to double addition of the same income, and thus, it is not permissible under law. Therefore, we direct the A.O. to delete the addition made towards income from business and profession of Rs. 7,50,000/-.

In the result, the appeal filed by the assessee is partly allowed for statistical purposes.

The Principal Commissioner of Income Tax, Hyderabad. 4. नवभधगीयप्रनतनिनर्, आयकर अपीलीय अनर्करण, हैदरधबधद / DR, ITAT, Hyderabad 5. गधर्ाफ़धईल / Guard file