2015 (2) TMI 153 - AT - Income Tax

Tribunal remands business expenses, upholds hire charges, classifies interest income

The tribunal partially allowed the appeals, remanding the issues of business expenses disallowance and section 14A disallowance to the Assessing Officer ... Disallowance of expenses - no business activity carried on by assessee - Held that:- Claim of the assessee has never been rejected on the ground that the assessee had not carried out any business activity. Even, if we presume that no business activity was carried out during the year, even in that stage, because of the temporary lull due to certain circumstances, the claim of expenditure which was necessary for the continuity of the business, cannot be disallowed. However, we find that the AO has not applied his mind as to the genuineness of the expenses. Hence, we restore this issue to the AO for the limited purposes of the verification of the incurring of expenses and thereafter to allow the expenses found actually incurred by the assessee for business purpose. - Decided in favour of assessee for statistical purposes. Hire charges - income received from ‘other sources’ OR ‘business income’ - Held that:- As furniture and fixtures were rented by the assessee temporarily and the same have already been disposed off during the next financial year. Hence, keeping in view the principle of consistency, we direct that the hire income from furniture and fixtures etc. be treated as ‘business income’. - Decided in favour of assessee. Interest income from FDRs - income received from ‘other sources’ OR ‘business income’ - Held that:- the interest income from FDRs can not be treated as ‘business income’. Merely because, the assessee company is engaged in business, that itself, does not mean that every income earned by the assessee should be treated as ‘business income’. We do not find any infirmity in the orders of the lower authorities in treating the interest income as income from ‘other sources’- Decided against assessee. Disallowance under section 14A - Held that:- Perusal of the assessment order reveals that the AO has not followed the guidelines of objective satisfaction as laid down by the hon’ble Bombay high Court in the case of Godrej & Boyce ( 2010 (8) TMI 77 - BOMBAY HIGH COURT) while making the disallowance . He without recording any reasoning for his dissatisfaction with regard to the working/claim of the assessee, straightway applied Rule 8D against the mandate of the provisions of section 14A of the Income Tax Act. The Ld. CIT(A) also ignored the mandate of the provisions of section 14 A, while confirming the disallowance. Thus estore this issue back to the file of the AO with a direction that the AO will give opportunity to the assessee to place on record all the relevant facts including its accounts and then examine the computation/ calculation made in this regard by the assessee having regard to the accounts of the assessee. - Decided in favour of assessee for statistical purposes. Issues:1. Disallowance of business expenses due to lack of business activity.2. Treatment of hire charges income and interest income as income from other sources.3. Disallowance under section 14A of the Act.Issue 1: Disallowance of Business Expenses:The Assessing Officer disallowed expenses claimed by the assessee due to the absence of business activity during the year, a decision upheld by the CIT(A). However, the assessee argued that business activity was accepted in subsequent years by the AO. The tribunal noted that even if no business activity occurred temporarily, necessary expenses for business continuity should not be disallowed without verifying their genuineness. The matter was remanded to the AO for verification and allowance of actual business-related expenses.Issue 2: Treatment of Hire Charges and Interest Income:The assessee contested the treatment of hire charges and interest income as income from other sources instead of business income. The tribunal upheld hire charges as business income due to temporary asset rental for business purposes, maintaining consistency with prior treatment. However, interest income from fixed deposits was correctly classified as income from other sources, as not all income earned by a business is automatically considered business income. This ground was decided against the assessee.Issue 3: Disallowance under Section 14A:The AO disallowed interest expenditure under section 14A, alleging the use of borrowed funds for investments generating exempt income. The tribunal noted that the AO did not follow guidelines for objective satisfaction as per legal precedents. The issue was remanded to the AO for a thorough examination, directing the AO to allow the assessee to present relevant facts and accounts. The AO was instructed to either accept the assessee's computation or provide a reasoned dissent before resorting to Rule 8D. The assessee was directed to cooperate with the AO in providing necessary details.In conclusion, the tribunal partially allowed the appeals, remanding the issues of business expenses disallowance and section 14A disallowance to the AO for proper verification and consideration of relevant facts. The tribunal upheld hire charges as business income but classified interest income from fixed deposits as income from other sources based on the nature of the income.