By TIOL News Service

AHMEDABAD, AUG 11, 2014: THE issue before the Bench is - Whether when assessee discontinues manufacturing activities and commences trading from part of premises and also earns rental income by leasing out remaining part, it is entitled to set off business loss from trading against rental income on which Sec 24 benefit was also availe. NO is the HC's answer.

Facts of the case

The assessee was in the business of manufacture of air conditioners. The assessee had given building as well as land on lease for the production of printing inks and received total rental income at Rs.39 lacs. Assessee filed return of income declaring income. The assesse made a claim of expenditure under the head repair & maintenance. Assesse had also claimed traveling and conveyance expenses which were disallowed by itself in the computation of income. Except for these expenses consisted of remuneration to director, salary & wages, visiting fees, insurance expenses and interest expenses. Assessee had also shown sales against which cost of goods sold was shown. Assessee had also shown purchase of one AC, which had been shown as part of the closing stock. Assessee’s case was processed under Section 143(1). The case was later selected for scrutiny assessment. Notice under Section 143(2) was issued, which was duly served upon the assessee. The assessee furnished computation of income as rental income under the head the income from house property and deduction claim under Section 24. The assessee also claimed set off business loss against the income from house property under Section 71 of the Act. The assessee was called upon to justify its claim of set off business loss against the income received from house property. Not satisfied with the explanation of assessee, Assessing Officer opined that as such there was no business or manufacturing activity carried out during the year under consideration and business loss claim and set off against the income shown under the head of house property was not allowable. Assessing Officer disallowed the claim of set off against the income from house property and added to the income of assessee.

In appeal, CIT(A) concurred with the findings of the Assessing Officer and dismissed the appeal. CIT(A) was of the view that the repairs and maintenance was the responsibility of the licensee after 1.4.2008 and hence the expenses shown as repair expenses by the assessee was not incurred for the purpose of the factory premises. Secondly, the payment of notified area committee was also related to his house property given on lease but still the assessee was claiming this expenditure under the head of income from business and profession. It was held that assessee had stopped its manufacturing activity and rented out the entire factory premises to other party still it was showing huge repair expenses to the factory in its books of accounts. It was held that due to the fact that the assessee was not carrying on any business activity, the expenses debited in the P & L account relating to director's remuneration, salary & wages, rent etc. have been incurred for the purpose of earning of house property income. Hence, the assesse's claim that all these expenses should be set off against the house property income was not acceptable as it would amount to allowing double deduction to the assessee.

In second appeal, Tribunal confirmed the orders passed by the Assessing Officer as well as CIT(A).

Assessee contended that Assessing Officer had materially erred in considering Rs.8,71,279/as business expenditure and set off claim by the assessee from the income received from the house property. It is submitted that as such the assessee claimed the business loss of Rs. 8,71,279/as set off from the income received from the house property as provided under Section 71 of the Act. It is submitted that therefore, the AO has materially erred in not properly appreciating the scope of ambit of Section 71 of the Act.

Having heard the parties, the Court held that,

++ there are concurrent findings of fact recorded by the all the authorities below that assessee incurred the expenditure of Rs.8,71,279/- as claimed and consequently loss suffered by the assessee to the aforesaid extent. There are concurrent findings of fact recorded by all the authorities below that as such assessee had stopped the manufacturing activity in the factory premises in question and started only trading activity of selling Air Conditioner and during the year under consideration sold only three A.Cs for an amount of Rs.45,000/. It is required to be noted that as such the factory premises in question, in which, the manufacturing activity was earlier carried was given on lease to one Rex-tone Industries Limited, Mumbai and assessee earned the rental income from the house property of Rs.22,50,000/. That the assessee claimed the benefit under Section 24 of the Act with respect to the rental income of Rs.22,50,000/. The assessee also claimed the business loss of Rs.8,71,279/- by submitting that the assessee had incurred said expenditure while doing the business and claimed that there was business loss of Rs.8,71,279/- and claimed set off of the said business loss from the rental income from the house property. On appreciation of evidence and considering the factual aspect all the authorities below have not accepted the claim of the assessee that it had incurred expenditure of Rs. 8,71,279/- while doing the business and consequently there was business loss to the extent of Rs. 8,71,279/- and therefore, did not allow set off claimed by the assessee from the rental income received from the house property;

++ we are in complete agreement with the view taken by the CIT(A) confirmed by the Tribunal. There is no error committed by the Assessing Officer or CIT(A) or Tribunal in disallowing the claim of set off claimed by the assessee of Rs.8,71,279/from the rental income from the house property claimed under Section 71 of the Act;

++ there are concurrent findings of fact recorded by all the authorities below not accepting the claim of the assessee with respect to the business expenditure of Rs. 8,71,279/and consequently the business loss of Rs.8,71,279/and set off the same claimed by the assessee from the rental income received from the house property.

(See 2014-TIOL-1339-HC-AHM-IT)