2012 (12) TMI 324 - AT - Income Tax

Tribunal grants assessee's appeals, remands issues for verification. Revenue's appeals dismissed on various expense claims.

Premchand Roychand & Sons Versus The ACIT, Range 12(1), Mumbai

Premchand Roychand & Sons Versus The ACIT, Range 12(1), Mumbai - TMI Issues Involved:1. Computation of income from house property.2. Disallowance of expenditure on telephone, telex, and fax charges.3. Disallowance of settlement amount paid in legal suit.4. Disallowance of expenditure on purchase of paintings.5. Disallowance of motor car expenses.6. Disallowance of professional fees.7. Classification of computer software expenditure as capital or revenue.8. Classification of repairs and maintenance expenses as capital or revenue.Detailed Analysis:1. Computation of Income from House Property:The primary issue was the computation of income from house property, specifically the annual value (ALV) of Flat C in the Madhukunj property. The Assessing Officer (AO) determined the ALV based on market rent, rejecting the applicability of Section 7 of the Bombay Rent Control Act (BRCA) and including notional interest on an interest-free deposit. The Tribunal found that Flat C was let out since July 1970, thus covered under BRCA. Consequently, the ALV should be computed as per standard rent, and the addition of notional interest was deleted.2. Disallowance of Telephone, Telex, and Fax Charges:The AO disallowed 20% of the expenditure on telephone, telex, and fax charges, later reduced to 10% by the CIT(A). The Tribunal noted that the assessee recovered a significant portion of these expenses from tenants, resulting in a net amount. The matter was remanded to the AO to verify the net amount and restrict the disallowance to 10% of this net figure.3. Disallowance of Settlement Amount:The AO disallowed Rs. 3,00,000 paid as a settlement in a legal suit, considering it unrelated to the assessment year. The Tribunal reversed this, recognizing the payment as a business expenditure made to avoid litigation and maintain peace of mind.4. Disallowance of Expenditure on Paintings:The AO treated the expenditure on paintings as capital in nature. The Tribunal disagreed, considering the nature of the assessee's business, which required maintaining a presentable business center. The expenditure was allowed as a business expense, with the caveat that depreciation on this amount would not be allowed.5. Disallowance of Motor Car Expenses:The AO disallowed 20% of motor car expenses for personal use. The Tribunal remanded the matter to the AO to verify the net expenses after considering recoveries from tenants. If the net result showed a gain, no disallowance should be made.6. Disallowance of Professional Fees:The AO disallowed Rs. 72,744 out of Rs. 7,88,809 debited as professional fees, considering it for casual work without substantial justification. The CIT(A) deleted the disallowance, and the Tribunal upheld this decision, noting the AO's failure to provide a valid reason for the disallowance.7. Classification of Computer Software Expenditure:The AO treated the expenditure on computer software as capital in nature, considering it an enduring benefit. The CIT(A) and the Tribunal disagreed, recognizing the rapid obsolescence of software and treating the expenditure as revenue in nature.8. Classification of Repairs and Maintenance Expenses:The AO classified Rs. 9,09,853 of repairs and maintenance expenses as capital expenditure. The CIT(A) allowed most of these expenses as revenue, except for Rs. 1,10,000 for paintings. The Tribunal upheld the CIT(A)'s decision, noting the recurring nature of these expenses necessary for maintaining the business center.Conclusion:The Tribunal allowed the appeals of the assessee for statistical purposes, remanding certain issues for verification by the AO. The appeals of the Revenue were dismissed, upholding the CIT(A)'s decisions on professional fees, computer software expenditure, and repairs and maintenance expenses.