2016 (11) TMI 1558 - AT - Income Tax

Tribunal allows appeal on bungalow repairs, emphasizes business purpose in tax matters.

The Tribunal partially allowed the appeal, overturning the disallowance of expenditure on bungalow repairs and renovation as well as the partial ... Disallowance of expenditure incurred on repairs, renovation etc. of bungalow on lease - Held that:- ZSP group has already offered the same to tax in their petition before the Settlement Commission -thus taxing it in the hands of the assessee company will amount to double taxation - also the property does not belong to the assessee company. Merely because the assessee has made a statement u/s 132(4) by admitting the same as additional undisclosed income, the same is not binding on the assessee - thus we are of the considered opinion that the expenditure incurred on repairs and renovation on bungalow has to be allowed as a business expenditure in the hands of the assessee company. Disallowance u/s 14A r.w. Rule 8D - Held that:- AO has not proved any nexus between the expenditure incurred and earning of tax free dividend income - only expenditure, which has been proved to have been incurred in relation to earning of tax free income can be disallowed and section 14A cannot be extended to disallow such expenditure which is assumed to have been incurred for the purpose of earning tax free income - reliance is placed on the judgement Hon’ble Bombay High Court in the case of CIT Vs. Reliance Utilities and Power Ltd [2009 (1) TMI 4 - BOMBAY HIGH COURT] where in it is held that if there were funds available both interest free and overdraft and or loans taken, then presumption would arise that investment would be out of the interest free funds generated or available with the company if the interest free funds were sufficient to meet the investments - hence no disallowance u/s 14A shall be made. Issues Involved:1. Disallowance of expenditure on repairs and renovation of a leased bungalow.2. Partial disallowance under Section 14A of the Income Tax Act.Issue-wise Detailed Analysis:1. Disallowance of Expenditure on Repairs and Renovation of a Leased Bungalow:The core issue was the confirmation of disallowance of Rs. 1,17,88,000/- incurred on repairs and renovation of a bungalow located at 70, Koregaon Park, Pune, taken on lease. The assessee, a company engaged in manufacturing vaccines and other products, declared this expenditure as business expenditure. The Assessing Officer (AO) disallowed this claim, arguing that the expenditure was not incurred for business purposes but was related to a family settlement between two groups, CSP and ZSP. The AO noted that the amount was declared as additional income by Dr. Cyrus Poonawalla during a search action and was not retracted. The AO also argued that the expenditure was to benefit the family and not the business, thus lacking commercial expediency.The CIT(A) upheld the AO's decision, stating that the family arrangement did not justify the payment and the assessee could not prove the expenditure was for business purposes. The CIT(A) also noted that the family arrangement primarily dealt with the equitable distribution of assets and did not mention the expenditure in question.The Tribunal, however, found merit in the assessee’s arguments. It noted that the expenditure was part of a family settlement aimed at ensuring smooth business operations and that the amount had already been taxed in the hands of Poonawalla Finvest and Agro Ltd., a ZSP group company, to avoid double taxation. The Tribunal cited various judicial decisions supporting the claim that expenditure incurred for the smooth running of business is deductible. It also referred to the CBDT Circular No.14, which mandates that tax officers should assist taxpayers in claiming reliefs. The Tribunal concluded that the expenditure should be allowed as a business expenditure and set aside the CIT(A)'s order.2. Partial Disallowance under Section 14A of the Income Tax Act:The second issue involved the partial disallowance of Rs. 5,38,364/- under Section 14A, which pertains to expenditure incurred in relation to earning exempt income. The AO disallowed Rs. 10,53,561/- by applying Rule 8D, while the CIT(A) reduced it to Rs. 5,15,197/-, estimating 10% of the exempt income as attributable to earning such income.The assessee argued that no disallowance was made in the original assessment and that its own capital and free reserves were much more than the investments, thus no nexus between the expenditure and exempt income was proven. The Tribunal agreed with the assessee, noting that the AO had not demonstrated any specific expenditure incurred for earning the exempt income. It cited the decision in Wimco Seedlings Ltd. Vs. DCIT, which held that only proven expenditure related to earning tax-free income can be disallowed. The Tribunal also referred to the Bombay High Court decision in CIT Vs. Reliance Utilities and Power Ltd., which established that if interest-free funds are sufficient to cover investments, no disallowance should be made under Section 14A.Consequently, the Tribunal set aside the CIT(A)'s order and allowed the ground raised by the assessee, concluding that no disallowance under Section 14A was warranted.Conclusion:The Tribunal allowed the appeal partly, setting aside the disallowance of expenditure on the bungalow repairs and renovation as well as the partial disallowance under Section 14A. The judgment emphasized the importance of proving the business purpose of expenditures and the necessity of avoiding double taxation.