2014 (9) TMI 351 - AT - Income Tax

Tribunal rules in favor of taxpayer, allows deduction under Section 14A

Asstt. Commissioner of Income Tax Versus M/s Magarpatta Township Development & Construction Company Ltd.

Asstt. Commissioner of Income Tax Versus M/s Magarpatta Township Development & Construction Company Ltd. - TMI Issues Involved:1. Deletion of disallowance under Section 14A of the Income Tax Act, 1961.2. Classification of income earned from letting out premises of 'Cyber City' as business income or income under the head 'House Property'.Detailed Analysis:Issue 1: Deletion of Disallowance under Section 14ABackground: The Revenue challenged the deletion of a disallowance of Rs. 20,66,011/- made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, 1961. The AO noted that the assessee had earned dividend income of Rs. 2,75,483/- which was exempt from tax and invoked Section 14A to disallow related expenditure. The assessee argued that the dividend income was incidental business income and not exempt, and further claimed that no borrowed funds were used for the investment in shares or mutual funds.AO's Determination: The AO disallowed Rs. 20,66,011/- as expenditure related to the exempt income, applying Rule 8D of the Income Tax Rules, 1962.CIT(A)'s Decision: The CIT(A) deleted the disallowance, noting that the AO did not record satisfaction as required by Section 14A(2) regarding the correctness of the assessee's claim. The CIT(A) found that the assessee had sufficient own funds and no borrowed funds were used for the investments. Additionally, the dividend was directly credited to the bank account, indicating no related expenditure.Tribunal's Analysis: The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO's power to invoke Rule 8D is conditional upon recording satisfaction regarding the incorrectness of the assessee's claim, which the AO failed to do. The Tribunal referenced the Bombay High Court's judgment in Godrej & Boyce Mfg. Co. Ltd. and concluded that the AO's assertion of dissatisfaction was a bald statement without objective analysis. The Tribunal affirmed that no direct or indirect expenditure was incurred by the assessee in earning the exempt income.Conclusion: The Tribunal dismissed the Revenue's appeal, affirming the deletion of the disallowance under Section 14A.Issue 2: Classification of Income from Letting Out Premises of 'Cyber City'Background: The Revenue contested the CIT(A)'s decision to classify the income from letting out premises of 'Cyber City' as business income instead of income under the head 'House Property'.CIT(A)'s Decision: The CIT(A) held that the income should be assessed as business income, considering the nature of services provided by the assessee.Tribunal's Analysis: The Tribunal referred to its previous decisions in the assessee's case for the assessment years 2007-08 and 2008-09, where it was established that the assessee provided complex integrated services and amenities, which were part of a systematic activity to earn profit. The Tribunal noted that these services were essential for IT/Software/BPO businesses and involved substantial investment in plant and machinery, indicating a business activity rather than mere rental income from property.Conclusion: The Tribunal upheld the CIT(A)'s decision, affirming that the income earned from letting out premises of 'Cyber City' should be classified as business income. The Revenue's appeal on this issue was also dismissed.Final Judgment:The Tribunal dismissed the appeal of the Revenue, affirming the CIT(A)'s decisions on both issues. The disallowance under Section 14A was correctly deleted, and the income from 'Cyber City' was rightly classified as business income.