2013 (11) TMI 1282 - AT - Income Tax

Tribunal upholds business income decision, remands disallowance for further examination

The tribunal partly allowed the appeals, upholding the A.O.'s determination of business income without set off of depreciation/losses under section 80-IA, ... Determination of Business Income – Set off of Depreciation/ Losses - Disallowance of Deduction u/s 80-IA(5) of Income Tax Act, 1961 – Held that:- There was firstly nothing in the language of the section to suggest its applicability only for the year/s the eligible business returns profits - The losses/unabsorbed depreciation, irrespective of the year to which these pertain, are placed at par under the provision - Further, placing such an interpretation, as afore-stated, the losses and/or unabsorbed depreciation for the years prior to such year/s would stand to be excluded for aggregation, to no good reason, and in consequence defeat the clear object of the provision - as imminent from its language, i.e., to confine the benefit of deduction thereunder only to the income from such business, which would stand to be breached if the negative income (losses and depreciation allowance) is ignored or excluded - Rather, existence of an alternate source of income vitiates the application of the provision further by extending the tax shelter to such income as well. The year of commencement of operations was the initial assessment year, with effect from which year, irrespective of the years which the assessee may choose to opt for as the holiday period, the loss or unabsorbed depreciation, if any, incurred, was to be taken into account, i.e., aggregated, for the purpose of determination of the quantum of deduction under the provision, of course up to the last of the years for which the deduction is to be determined - The whole premise of the provision is to include such losses for the purpose of determination of the deduction by introducing the 'stand alone' principle, providing for its supersession over the other applicable provisions of the Act - The tax shelter u/s. 80IA(1), it may be emphasized, was to be accorded only to the profits from the eligible source, and which was all what s. 80IA(5) seeks to achieve - This was as the aggregation prescribed by the section was limited only to quantify the deduction u/s. 80IA(1), and which would only be on the unit turning positive, returning profits - As a corollary, the losses/unabsorbed depreciation would stand to be set off against the other incomes under the regular provisions of the Act. Section 80IA(5) being applicable for the current year - whether the assessee's claim for set off of loss/allowance u/ss. 32(2), 70 and 71, i.e., against other income, admittedly from a non-eligible business/source, sustainable in law – Held that:- The Revenue was not correct in law in denying the set off of the unabsorbed depreciation allowance/loss of the assessee's eligible unit/s against its income from other sources in terms of ss. 32(2), 70 & 71 of the Act - The unabsorbed allowance/ loss, however, would stand to be set off in terms of s. 32(2) & 72, against the income of the respective eligible units for the subsequent years, i.e., where so, in computing the assessee's eligible income for determining the quantum of deduction u/s. 80-IA(5), taking the legal fiction of the said provision, which we have found to be applicable for the relevant years, to its logical end - We are, as explained above, unable to consider the twin aspects as disparate, but only as inextricably linked, arising from and integral to the issue before us for adjudication, i.e., the scope and ambit of s.80-IA(5) r/w s. 80-IA(1) of the Act. Income from House Property – Held that:- The stand of both the parties to be only partly correct - Firstly, qua the assessee's claim of the property being used for the purposes of its business; the same only needs to be stated to be rejected - The same was not only not borne out by the record, and stands advanced before us for the first time de hors any material, introducing a new dimension to the case, but is also contrary to assessee's consistent stand throughout that the property was vacant since April, 2004 as it could not find a suitable tenant - Could a property which remains vacant for want of a suitable tenant, could be at the same time be used for own purposes - If so, where was the question of vacancy allowance - And all that the assesse was required to do in that case, was to establish the user of the said house property for the purpose of its business, while, as afore-noted, there was not even any claim in this respect. Claim for Allowance for Vacancy – Held that:- The property was let at a monthly rent of Rs.1,54,843/- (annual rent: Rs.18,58,116/-) continuously from the year 1997 to 2004 - What better proof of the same representing its AV could possibly be – There was nothing on record to show or infer that the property, which, as late as April, 2004, yielded a rent to the tune of Rs.18 lakhs p.a., became incapable of fetching as much and, rather, plummeted to about 1% thereof - That was, an erosion in rental capacity by nearly 99%, and almost overnight - The A.O. in the instant case has kept the AV (at Rs.13,00,681/-), i.e., net of standard deduction at 30%, constant for all the years, i.e., up to A.Y. 2008-09, and which we consider as reasonable, satisfying the only condition placed by law on an otherwise totally factual matter. Assessment of Income from House Property – Held that:- There being nothing on record to suggest the appropriateness of the annual value as adopted by the Revenue, the matter was set aside to the file of the AO to determine the fair rental value with regard to the comparable cases, i.e., the rentals obtaining in the locality for similarly placed properties for the relevant period - The matter is factual, rather than legal - There was no merit in the assessee's argument that the property being not actually let, the notional rent could not be brought to tax - it being trite that it was not the income actually realized, but that which could, fairly speaking, be, or the income potential of the property that is brought to tax u/s.23 of the Act as its annual value (AV) - The provision of section 23(1)(b) come into play only where the property (or part thereof) is actually let out, and which exceeds the fair rental value u/s.23(1)(a). In fact, the assessee does not dispute this position, advancing its case with reference to its claim for vacancy allowance u/s. 23(1)(c). Disallowance u/s.14A with reference to Rule 8D – Held that:- The asssessee would have to exhibit that no interest cost has, as a matter of fact, been incurred in respect of the said investment, if the prescription of the rule is not to apply - The matter thus hinges on the ability of the assesse to establish its claim/s in this regard with reference to its accounts - Following GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER [2010 (8) TMI 77 - BOMBAY HIGH COURT] - Businesses normally have dedicated funds, as for financing projects or asset acquisition or for financing working capital, so that where shown to be so used for the relevant year, the same would (alongside the corresponding assets) merit exclusion in applying the proportionate method - general borrowings, as for 'business purposes', would only stand to be considered as forming part of the general pool of funds – matter restored back to the file of the A.O. and to allow the assessee an opportunity to show as why the interest disallowance u/s.14A(1) should not be worked out following the proportionate method, as directed by the ld. CIT(A) – Decided partly in favour of Assessee. Issues Involved:1. Determination of business income without set off of depreciation/losses of eligible units under section 80-IA.2. Assessment of income from house property.3. Disallowance under section 14A.4. Reopening of assessments.Issue-wise Detailed Analysis:1. Determination of Business Income Without Set Off of Depreciation/Losses of Eligible Units Under Section 80-IA:The principal issue concerns the determination of business income for the relevant years without allowing the set off of depreciation/losses of the assessee's two units, i.e., Windmill 1 and 2, income from which is eligible for deduction under section 80-IA. The Assessing Officer (A.O.) disallowed the set off based on section 80-IA(5), which deems the eligible business to be the only source of income for the relevant years. The assessee argued that section 80-IA(5) should only apply to determine the quantum of deduction under section 80-IA(1) and not for the current year where no deduction was claimed. However, the authorities and the tribunal, relying on decisions like ACIT vs. Gold Mine Shares & Finance (P.) Ltd. and CIT vs. Sonakaya Steering Systems Ltd., upheld the disallowance. The tribunal clarified that the initial assessment year would be the year of commencement of operations, and the losses/depreciation of the eligible units should be carried forward and set off against future profits of the same source to determine the quantum of deduction under section 80-IA.2. Assessment of Income from House Property:For AYs 2007-08 and 2008-09, the A.O. assessed income from a property at Bajaj Bhavan, Nariman Point, Mumbai, which remained vacant after the lease expired in April 2004. The assessee argued that the annual letting value (ALV) should be based on the standard rent or municipal ratable value, which was significantly lower than the rent previously received. The tribunal, however, upheld the A.O.'s determination of ALV based on the rent previously received, as there was no evidence to suggest a drastic reduction in rental value. The tribunal also rejected the assessee's claim for vacancy allowance under section 23(1)(c) since the property was not let out during the relevant years.3. Disallowance Under Section 14A:The A.O. made a disallowance under section 14A with reference to Rule 8D, which the tribunal upheld for AY 2008-09, as Rule 8D was applicable from that year. For earlier years, the tribunal directed the A.O. to allow the assessee to show that it had sufficient funds to finance the tax-exempt investments, and if proven, no disallowance for interest expenditure would arise. The tribunal emphasized that the matter is factual and should be examined based on the assessee's accounts.4. Reopening of Assessments:The assessee challenged the reopening of assessments for AYs 2005-06 and 2006-07, arguing it was based on a change of opinion. The tribunal rejected this argument, noting that the reassessment was initiated within four years from the end of the relevant assessment years, and there was no evidence that the A.O. had previously considered the issue of section 80-IA(5). The tribunal found that the reassessment proceedings were rightly initiated as there was a 'reason to believe' that income had escaped assessment.Conclusion:The tribunal partly allowed the appeals, upholding the A.O.'s determination of business income without set off of depreciation/losses under section 80-IA, the assessment of income from house property based on previous rent received, and the reopening of assessments. The tribunal remanded the matter of disallowance under section 14A for further examination based on the assessee's accounts.