IMPACT METALAS LIMITED, MEDAK DIST.,HYDERABAD vs. DCIT, CIRCLE-2(1), HYDERABAD, HYDERABAD

Per Smt. P. Madhavi Devi, J.M.

This is assessee’s appeal for the A.Y 2007-08 against

the order of the CIT (A)-9, Hyderabad, dated 29th January, 2016.

The assessee has raised the following grounds of appeal:

“1. The order of the learned Commissioner of Income Tax (Appeals)-9 Hyderabad, is against the law, weight of evidence and probabilities of case. 2. The learned Commissioner of Income Tax erred in confirming the order of the Assessing Officer wherein, the lease rental income of Rs.28,15,047 admitted as business income, was considered as income from property, inspite of a favorable recommendation from the Assessing Officer. 3. The learned Commissioner further erred in confirming the disallowance of interest of Rs.16,08,014/- which is claimed as business expenditure as the loan taken from SBI, Balanagar branch was utilized for the purpose of business, inspite of a favorable recommendation from the Assessing Officer.

assessee submitted that the assessee does not wish to press

ground of appeal No.6 and therefore, the said ground is rejected

as not pressed.

they are general in nature and need no adjudication.

the assessee company, which is in the business of manufacturing

of Aluminium Cans, Accessories, Castings, etc, filed its return of

income for the A.Y 2007-08 on 31.10.2007 declaring ’Nil’ income.

Initially, the return was processed u/s 143(1) of the Act resulting

in a demand of Rs.11,95,930. Subsequently, the case was

subjected to scrutiny and various details were called for, which

were furnished by the assessee, from time to time. On perusal of

the information so filed, the AO observed that the assessee

company leased its own building to M/s. BHEL GE Gas Turbine

Services Pvt. Ltd for a period of 5 years and that for the relevant

A.Y, the assessee company has credited to the P&L A/c. The net

lease rent amount of Rs.28,15,047 after setting off interest paid of

Rs.16,08,014 on loan taken from the gross lease rent of

Rs.44,23,061/-, the TDS certificate received from the tenants also

was for receipt of Rs.44,23,061. Therefore, the AO was of the

opinion that the assessee has short admitted rent to the extent of

Rs.16,08,014. Further, the AO also observed that the assessee

has set off the interest paid of Rs.16,08,014 on loan taken from gross lease rent of Rs.44,23,061 and that the assessee has offered

the lease rent received as “income from other sources”. According

to the AO, as per the provisions of section 22 of the I.T. Act, the

income received on the building and land appurtenant thereto, is

to be treated as “income from house property”. Therefore, the AO

treated it as income from house property and observing that only

the expenditure mentioned u/s 24 is to be allowed, the AO

observed that the interest portion of Rs.16,08,014 is not

allowable. Further, he also disallowed the claim of depreciation of

Rs.18,50,219/-.

advanced interest free loans amounting to Rs.1,73,71,422 to its

sister concerns and observing that there is a direct nexus between

interest bearing loans and the advances made, he disallowed

interest @ 12% on such advances and brought a sum of

Rs.20,84,566 to tax. He also observed that there were advances

outstanding to the tune of Rs.36,90,231. Observing that the

advances are in the nature of personal advances to one of the

Directors of the Company, Shri G.Venkat Reddy, he treated it as

advance made to Directors in the books of the company and

disallowed the interest @ 12% on such advances also. The AO also verified the TDS certificate filed along with the return of income

and observed that the assessee company received an amount of

Rs.94,07,386 as job work receipts, whereas in the P&L A/c, no

such income has been admitted. Therefore, he treated the sum of

Rs.94,07,307 as other sales and advances and brought it to tax as

undisclosed income of the assessee.

unsecured loans amounting to Rs.64,70,785 during the year. The

assessee was asked to substantiate the amounts introduced as

unsecured loans, by proving the identity and creditworthiness of

the creditors and the genuineness of the transactions. Since the

assessee failed to provide the information called for, the AO

treated the sum of Rs.64,70,785 as “income from other sources”.

He also observed from the balance sheet filed along with the

return of income that the assessee company introduced share

application money of Rs.80,00,000 but could not furnish the

details of the share applicants and the genuineness of the

transaction. Therefore, he treated the sum of Rs.80.00 lakhs also

as unexplained investment u/s 68 of the Act and brought it to

tax.

CIT (A) and also filed additional evidence before the CIT (A). The

CIT (A) called for a remand report from the AO who submitted the

same on 12.12.2014. After considering the same, the CIT (A)

granted partial relief to the assessee. Against the addition

confirmed by the CIT (A), the assessee is in second appeal before

us by raising the grounds of appeals which have been reproduced

herein above.

the nature of the lease rental income i.e. whether it is income

from other sources or income from house property or business

income, we find that the assessee had initially offered the income

as income from other sources, while the AO treated it as income

from house property. Before the CIT (A), the assessee had taken

an alternative stand that the lease rental income should be

treated as business income, but the CIT (A) has not agreed to the

assessee’s contention and has confirmed that the income should

be treated as income from house property. We have heard both

the parties and have also perused the lease deed filed by the

assessee. From the recitals in the lease deed, we find that the

assessee had given the land and also the building and structures constructed thereon or to be constructed thereon, as per the

requirements of the lessee, for a period of 5 years. It is seen that

the assessee is required to make the modification/repairs or

construction as per the requirements of the lessee and thereafter,

the lessee is required to take care of the said property. The

assessee is not rendering any services to the lessee except leasing

out of the land and the constructed property thereon. In the

decisions relied upon by the assessee the income from letting out

of the I.T. Parks has been treated as ‘income from business’

because the assessees therein, have not only let out the property,

but also have rendered services for the maintenance of the same

for effective carrying on of the business of such lessees. In the

case before us, the lessees has taken over the possession of the

property and thereafter had to conduct its business without any

assistance from the assessee. Therefore, the income of the

assessee is only from letting out of the property and thus, we

agree with the findings of the CIT (A) that the income has to be

treated as ‘income from house property’ and not as business

income. Therefore, ground of appeal No.2 is rejected.

remand report, has clearly stated that the loan has been taken from SBI Balanagar Branch for the purpose of business and

therefore, it has to be allowed as business expenditure.

Irrespective of the nature of the lease rental income, the assessee

has utilized the said loan for the business purposes of the

assessee which is not disputed by the Revenue. Of course, the

said amount cannot be set off from the ‘income from house

property’ as claimed by the assessee but the AO/CIT (A) can set

off the same from the business income if any, of the assessee.

Therefore, the AO is directed to allow the same as business

expenditure. We find that the security for the loan, is the lease

rental income, but it does not mean that it can be set off against

the rental income. Ground No.3 is therefore, treated as allowed for

statistical purposes.

that the income from lease rental is to be treated as income from

house property, the building cannot be treated as a business

asset and therefore the depreciation thereon of an amount of

Rs.18,50,219/- cannot be allowed. Ground No.4 is therefore,

rejected.

claimed that these advances are trade advances and not

loans/advances as held by the AO. The CIT (A) also held that the

assessee has not filed any evidence in support of its claim that

these are trade advances. Even before us also, the assessee has

not filed any evidence. The assessee has only stated that the

funds have been transferred between the companies, depending

on the business requirements and no other expenses have been

charged for giving the security for the loans taken by such

consumers. The assessee has relied upon the decision of the

Hon'ble Supreme Court in the case of SA Builders Ltd vs. CIT (A)

& Anr (S.C) 288 ITR 001 (S.C) and also the Hon'ble Delhi High

Court in the case of CIT vs. Dalmiya Cements Ltd reported in

(2005) 254 ITR 377 wherein it was held that once it is established

that there was nexus between the expenditure and the purpose of

the business (which need not necessarily be the business of the

assessee itself), , the revenue cannot justifiably claim to put itself

in the armchair of the businessman or in the position of the board

of directors and assume the role to decide how much is

reasonable expenditure having regard to the circumstances of the

case. We find that neither the AO nor the CIT (A) have verified this

claim of the assessee, except for holding that the assessee has not filed the necessary evidence. Therefore, we deem it fit and proper

to remand the issue to the file of the AO for denovo consideration.

Accordingly, assessee’s ground of appeal No.5 is treated as

allowed for statistical purposes.

failed to produce any evidence before us to demonstrate that the

advances were made to various parties for the purpose of

business. Therefore, the order of the CIT (A) on this issue is

confirmed.

filed confirmation letters before the CIT (A) for which remand

report was called for. We find that the AO has observed that the

assessee could not produce the parties for establishing the

genuineness and creditworthiness of the transaction. The learned

Counsel for the assessee submitted that the assessee has

furnished confirmation letters as required by the AO and as

observed by him in the remand report and therefore, the additions

could not have been confirmed. Copies of the confirmation letters

were also filed before us and we find that both the parties are

allegedly agriculturists and with no PAN Nos. Therefore, the creditworthiness of the said parties could not be provided by the

assessee. In view of the same, we do not see any reason to

interfere with the order of the CIT (A) on this issue.

Order pronounced in the Open Court on 3rd September, 2018.

Sd/- Sd/- (S.Rifaur Rahman) (P. Madhavi Devi) Accountant Member Judicial Member

Hyderabad, dated 3rd September 2018. Vinodan/sps Copy to: 1 Shri Mohd. Afzal, Advocate, 11-5-465 Sherson’s Residency, Flat No.402, Criminal Court Road, Red Hills, Hyderabad 500004 2 Dy.CIT, Circle 2(1) IT Towers, Hyderabad 3 CIT (A)-9 Hyderabad 4 Pr. CIT – 2, Hyderabad 5 The DR, ITAT Hyderabad 6 Guard File

By Order

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