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June 28, 2022

Income is offered under house property, expenses on rented property are not allowable as business expenses

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Income is offered under house property, expenses on rented property are not allowable as business expenses

Facts and Issue of the case

The Ld. DR submitted that the assessee was entitled only for statutory deduction of 30% against income from house property whereas Ld. AR submitted that business expenditure was admissible even no business income was earned by the assessee during the year.

The assessee being resident corporate assessee is stated to be engaged in the business of real estate and property development. It transpired that the assessee reflected income from house property and bank interest. However, no business income was reflected in the Profit & Loss Account. As against this, the assessee claimed business expenditure.

Observation by the court

The Ld. AO observed that the assessee did not undertake any project nor it offered any business income and accordingly, business expenditure could not be allowed. The assessee simply debited huge expenses and claimed set-off of the same against income from house property income. Since the assessee could not produce any justification, the business expenditure was disallowed.

During appellate proceedings, the assessee submitted that it had two properties i.e., one at Mahabalipuram and another at Anna Nagar which was let out to M/s. Tata Consultancy Services Ltd. To develop the property at Mahabalipuram, the assessee had applied for approvals from municipal and corporation authorities. The property at Anna Nagar was let out and as per contractual terms, the assessee had an obligation to maintain the property. For the same, the assessee incurred staff and administrative costs and claim the same as business expenditure. The assessee paid interest on loans to acquire the said property which was also claimed as business expenditure. It was submitted that all the expenditure was essential to keep the property commercially exploitable so as to earn rent from the said property. Without incurring this expenditure, the property at Anna Nagar could not be made commercially exploitable. Concurring with the same, the Ld. CIT(A) held that the business expenditure represent expenditure relating to other business activities and accordingly, allowed the appeal of the assessee.

From the facts, it emerges that the property at Anna Nagar has been let out by the assessee and the rental income has been offered and assessed as Income from House Property. Under this head, the assessee is entitled to claim statutory deduction of 30% and interest expenditure irrespective of actual expenditure incurred by the assessee. However, it emerges that besides 30% deduction, the assessee is claiming actual expenditure incurred on Anna Nagar property as business expenditure which is not permissible. The assessee is entitled for those expenditure which fulfil the tests of Sec.37(1). Therefore, on the facts and circumstances of the case, we set aside the impugned order and restore the matter back to the file of Ld. AO with a direction to the assessee to bifurcate the business expenditure. The expenditure incurred on Anna Nagar property would not be allowable expenditure as Business expense whereas other expenditure incurred for business purposes and to maintain corporate personality would be admissible expenditure. The assessee is directed to provide requisite details and substantiate its claim.


The appeal of the assessee is allowed  by the court for statistical purposes.


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