2014 (7) TMI 1219 - AT - Income Tax

Income Tax Tribunal Upholds Capital Expenditure Disallowance

IFMR Trust Versus The Assistant Commissioner of Income-tax, Business Circle – XV, Chennai

The Tribunal upheld the Commissioner of Income-tax(Appeals)'s decision to disallow the claimed expenditures as capital in nature, limit deductible ... Income of assessee trust - Assessee indulging in the business carried on by the beneficiary unit - heavy expenditure incurred in connection with setting up of various functional units - Held that:- As rightly held by the Commissioner of Income-tax(Appeals), the entire income was earned by the assessee by way of interest and other incidental charges. Those interest income did not arise to the assessee trust, as a partner of the subsidiary units or as an investor in the subsidiary units. It is neither a partner nor an investor with reference to the newly set up micro units. It is already mentioned above that it is a provider, a facilitator and an organizer. Therefore, the heavy expenditure incurred in connection with setting up of various functional units cannot be claimed as expenditure of the assessee trust. Those expenses could be, perhaps, if law permits, claimed as deductions in the hands of those respective units. In view of the matter, we agree with the Commissioner of Income-tax(Appeals) that various items of expenditure incurred by the assessee and claimed as deductions are in fact not allowable. We also agree with the Commissioner of Income-tax(Appeals) that the income of the assessee has to be necessarily assessed under the head “income from other sources”. At the maximum, the assessee may be characterized as a “private charity”. It is not possible to hold that the assessee is carrying on any business and the income reported by the assessee is income from business. As it is necessary for every institution to incur expenditure for its sustenance and operation. For that purpose, the Commissioner of Income-tax(Appeals) has allowed an over-all deduction of expenditure at 2% of the gross collection of income reported by the assessee trust. We find that the said amount of expenditure is reasonable. Accordingly, we uphold the order of the Commissioner of Income-tax(Appeals). - Decided against assessee. Issues Involved:1. Disallowance of entire expenditure debited in the profit and loss account.2. Disallowance of incubation expenses, consultancy, and legal and professional charges.3. Determination of whether the assessee is carrying on any business.4. Nexus between the nature of income reported and the expenditure incurred.5. Limitation of expenditure to 2% of gross income.Detailed Analysis:1. Disallowance of Entire Expenditure Debited in the Profit and Loss Account:The assessee trust filed its return for the assessment year 2009-10, claiming various expenditures, including incubation expenses, consultancy charges, and legal and professional charges. The Assessing Officer (AO) disallowed these expenditures, considering them capital in nature and not deductible as revenue expenditure. The Commissioner of Income-tax(Appeals) upheld the AO's decision, stating that these expenses could only be allowed in the hands of the respective subsidiary units and not the assessee trust.2. Disallowance of Incubation Expenses, Consultancy, and Legal and Professional Charges:The AO found that the incubation expenses were pre-operative and capital in nature, incurred to promote new units. Similarly, consultancy and legal and professional charges were also deemed capital expenses. The Commissioner of Income-tax(Appeals) agreed, noting that these expenditures were meant for setting up various entities and should be claimed by the respective units, not the assessee trust. The Tribunal upheld this view, agreeing that these expenses were not incurred for the business activities of the assessee trust.3. Determination of Whether the Assessee is Carrying on Any Business:The Commissioner of Income-tax(Appeals) and the Tribunal both concluded that the assessee trust was not carrying on any business. The trust's activities were identified as organizing, providing, and facilitating the creation of productive assets for subsidiary units, rather than engaging in any direct business activities. The Tribunal noted that the trust's income, primarily from interest and incidental charges, did not arise from any business operations.4. Nexus Between the Nature of Income Reported and the Expenditure Incurred:The Commissioner of Income-tax(Appeals) determined that there was no link or nexus between the expenses claimed by the assessee and the income reported. The Tribunal agreed, noting that the income earned by the trust was from interest and other charges, not from any business activities. Therefore, the expenses incurred could not be considered necessary for earning the reported income.5. Limitation of Expenditure to 2% of Gross Income:To meet the reasonable expenditure of running the trust, the Commissioner of Income-tax(Appeals) allowed a deduction of 2% of the gross income from various interest sources. This amounted to Rs. 28,11,556/-. The Tribunal found this allowance reasonable and upheld the decision, agreeing that the trust's income should be assessed under the head 'income from other sources.'Conclusion:The Tribunal dismissed the appeal filed by the assessee, upholding the Commissioner of Income-tax(Appeals)'s decision to disallow the claimed expenditures and limit the deductible expenditure to 2% of the gross income. The Tribunal agreed that the assessee trust was not carrying on any business and that the income should be assessed as 'income from other sources.'