2012 (10) TMI 559 - AT - Income Tax

Tribunal rules on income categorization, business expenses, and disallowances in recent tax case.

The Tribunal partly allowed the assessee's appeal, upholding the treatment of interest and dividend income as 'income from other sources' while ruling ... Interest Income and Dividend Income - taxable as PGBP or income from other sources - Held that:- As Dividend has been specifically defined as income from other sources in section 56(1)and no case has been made out that dividend in this case was incidental to any business activity, it has to be treated as Income from other Sources. The assessee had deposited the surplus funds from which interest income had been received. Therefore, interest income has been rightly assessed as income from other sources - against Assessee. Rental income - taxable as Business Income or not - Held that:- As the object of the assessee was to run the business centre by exploiting the property and not mere letting out the same on rent. It was accordingly held that the income had to be assessed as income from business. The order of CIT(A) is set aside and the claim of the assessee is allowed - in favour of assessee. Rates and Taxes - Held that:- the expenditure had been incurred in relation to land which was not used for the purpose of business the expenditure cannot be allowed while computing the income from business and not against Capital Gains - decided against the assessee. VRS Expenses - Held that:- As income from business centre has to assessed as business income and therefore, provisions of section 35DDA will be applicable in case of the assessee as per which any expenditure in connection with any VRS scheme has to be allowed in five equal instalments starting with the year in which the expenditure was incurred- decided in favour of the assessee. Expenditure of Rs.11,70,000/- on items such as insurance, telephone, security, travelling, motor vehicle etc and the expenditure on remuneration to the manager. already held that the income from the business centre has to be assessed as business income and therefore we hold that the expenditure will be allowed while computing the income from the business centre.in favour of the assessee. Depreciation - held that:- income from business centre has to be assessee as business income. Therefore, depreciation on all the plants and machinery installed in the business centre has to be allowed. We hold administrative expenses of Rs..34,11,991/- should be allowed as business expenditure. Sales Tax - addition of Rs.1,36,141/- being sales tax written back relating to sales in earlier years he AO had disallowed the claim on the ground that the business of the assessee had closed. CIT(A) has however allowed the claim on the ground that the AO had assessed income on account of sundry creditors relating to earlier year under section 41(1) and therefore the claim was allowable - Held that:- Order of CIT(A) allowing the claim is confirmed - decided against the department. Deduction under Section 54EC - Assessee has invested in NABARD Bond on the capital gains arising out sale transferable development rights of Rs..3,54,43,549/-, and this deduction is not in dispute. Hence, this ground has been rendered infructuous. Assessing Officer is directed that the loss shown under the head short term and long term capital gain is allowed to be carried forward - In the result, the appeal of the assessee is partly allowed and that of the revenue is treated as dismissed. Issues Involved:1. Treatment of interest income as 'income from other sources.'2. Treatment of dividend income as 'income from other sources.'3. Treatment of business centre income as 'income from other sources.'4. Continuation of business operations.5. Disallowance of rates and taxes.6. Disallowance of VRS expenses.7. Adhoc allowance of business centre expenses.8. Disallowance of administrative expenses.9. Allowance of professional fees as business expenditure.10. Allowance of employee costs as business expenditure.11. Allowance of depreciation on plant and machinery.12. Disallowance under Section 14A read with Rule 8D.13. Allowance of other administrative expenses as business expenditure.14. Addition of sales tax written back.15. Allowance of VRS expenses against income from other sources.16. Allowance of professional fees against income from other sources.17. Allowance of employee costs against income from other sources.18. Allowance of depreciation on plant and machinery.19. Set off of long-term capital loss against capital gain from sale of development rights.Detailed Analysis:1. Treatment of Interest Income as 'Income from Other Sources':The Tribunal upheld the CIT(A)'s decision to treat interest income of Rs.39,31,000/- as 'income from other sources,' following the precedent set in the assessee's own appeal for the assessment year 2003-2004. The interest income was derived from inter-corporate deposits, fixed deposits, and deposits with mutual funds, which were not linked to any business activity.2. Treatment of Dividend Income as 'Income from Other Sources':Similarly, the Tribunal confirmed the treatment of Rs.25,91,000/- as 'income from other sources,' citing Section 56(1). The dividend income was not incidental to any business activity, aligning with previous judgments.3. Treatment of Business Centre Income as 'Income from Other Sources':The Tribunal reversed the CIT(A)'s decision, ruling that the business centre income of Rs.10,13,931/- should be assessed as 'Profits & Gains from business or profession.' This decision was based on the comprehensive services and amenities provided by the business centre, which indicated a commercial exploitation of the property.4. Continuation of Business Operations:The Tribunal found that the business of the assessee was not closed or discontinued, supporting the assessee's claim.5. Disallowance of Rates and Taxes:The Tribunal upheld the disallowance of Rs.5,26,851/- for rates and taxes related to land not used for business purposes, consistent with the decision for the assessment year 2003-2004.6. Disallowance of VRS Expenses:The Tribunal allowed the VRS expenses of Rs.1,53,507/-, directing the Assessing Officer to allow the expenditure under Section 35DDA, which mandates spreading the expense over five years.7. Adhoc Allowance of Business Centre Expenses:Grounds No.7 and 8 were not pressed as the issue had been rectified by the CIT(A).8. Disallowance of Administrative Expenses:Ground No.8 was not pressed and thus dismissed.9. Allowance of Professional Fees as Business Expenditure:The Tribunal allowed the professional fees of Rs.63,33,868/- as business expenditure, modifying the CIT(A)'s direction to allow these expenses against business income instead of income from other sources.10. Allowance of Employee Costs as Business Expenditure:The Tribunal allowed the employee costs of Rs.13,09,310/- as business expenditure, following the precedent that such costs are allowable against business income.11. Allowance of Depreciation on Plant and Machinery:The Tribunal allowed the depreciation of Rs.202,811/- on plant and machinery, aligning with previous decisions that such depreciation should be allowed against business income.12. Disallowance under Section 14A Read with Rule 8D:The Tribunal directed the Assessing Officer to adopt a reasonable basis for disallowance, following the jurisdictional High Court's decision in Godrej Boyce Mfg. Ltd., which ruled that Rule 8D cannot be applied retrospectively.13. Allowance of Other Administrative Expenses as Business Expenditure:The additional ground was treated as academic and hence infructuous since ground No.3 was allowed.14. Addition of Sales Tax Written Back:The Tribunal dismissed the department's ground, confirming that the sales tax written back should be allowed as the business was not closed.15. Allowance of VRS Expenses Against Income from Other Sources:The Tribunal upheld the allowance of VRS expenses against income from other sources, consistent with previous decisions.16. Allowance of Professional Fees Against Income from Other Sources:The Tribunal dismissed the department's ground, confirming that professional fees should be allowed against business income.17. Allowance of Employee Costs Against Income from Other Sources:The Tribunal dismissed the department's ground, confirming that employee costs should be allowed against business income.18. Allowance of Depreciation on Plant and Machinery:The Tribunal dismissed the department's ground, confirming that depreciation should be allowed against business income.19. Set Off of Long-term Capital Loss Against Capital Gain from Sale of Development Rights:The Tribunal directed the Assessing Officer to allow the loss to be carried forward and adjusted in subsequent years, as the deduction under Section 54EC for the capital gains was not in dispute.Conclusion:The appeal of the assessee was partly allowed, and the appeal of the revenue was dismissed. The Tribunal's decisions were largely based on precedents set in previous assessment years, ensuring consistency in the treatment of various types of income and expenses.