2017 (9) TMI 1964 - AT - Income Tax

Tribunal rulings on business loss, rental income, and dividend disallowance under Income Tax Act

The Tribunal partly allowed the assessee's appeal regarding advances written off as business loss, remanding the matter for further verification. It ... Maintainability of the claim qua advances written off - advances as found by AO are to related parties - HELD THAT:- Explanations/details, among others, would be readily available with the assessee if the transactions have actually arisen in the normal course of its business, to which surprisingly no reference has at all been made, even in passing, by the assessee while pleading its’ case. The facts/incidents referred to are only to enable definite findings of fact in the conspectus of the case. We, accordingly, only consider it proper to restore the matter back to the file of the AO to allow the assessee, in the interest of justice, another opportunity to prove its claims, which could be so on various counts and per a number of supporting documents and corroborative circumstances. Needless to add, he shall decide per a speaking order. The burden to prove its claims being on the assessee, an inability on its part to do so shall entitle the AO to draw inference(s) as may be proper under the circumstances. Reference here may be made to the decision in Kapurchand Shrimal [1981 (8) TMI 2 - SUPREME COURT]. Disallowance of personnel and administration expenses - extent of expenditure incurred for or attributable to the property income, which constitutes the principal receipt and, correspondingly, the principal activity during the year - HELD THAT:- It was upon the assessee to show that the expenditure incurred in relation thereto is lower in proportion to that obtaining on the basis of the proportionate receipt in the total turnover - both before the AO as well as the ld. CIT(A) no explanation, muchless materials, stand furnished by the assessee toward the same. The position continues to be the same before us. How, therefore, we wonder, can the AO’s estimate, who is entitled to make the same on the basis of the material and the information on record, be faulted with (refer Consolidate Coffee Ltd. v. State of Karnataka [2000 (11) TMI 136 - SUPREME COURT] - AO is entitled to make a reasonable estimate is well settled. The reasonability of the estimate apart, personnel and administrative expenditure is inadmissible u/ss. 23 & 24, so that the AO has in fact, in allowing proportionate expenditure thereon, been liberal. Under the circumstances, we find no infirmity in the impugned order and, accordingly, confirm the disallowance. Disallowance u/s. 14A in respect of dividend income - HELD THAT:- Almost, the entire disallowance u/s. 14A is qua direct interest expenditure, implying an examination of accounts, as well as of the extent to which the investment has been financed by interest bearing funds. There is, in fact, another, equally relevant aspect of the matter. The investment in shares and units does not form part of the assessee’s business. The bulk (.56.66 lacs) of the expenditure disallowed u/s. 14A is interest expenditure, of which .56.16 lacs is by way of direct interest cost. Now, inasmuch as holding investments or otherwise dealing in shares/units is not the assessee’s business, the interest expenditure, to the extent the same stands apportioned to investments, cannot be regarded as for the purposes of its’ business, or even in respect of property income. The same would therefore stand to be disallowed, either u/s. 36(1)(iii) or u/s. 24(b), as well. A similar argument would apply to the administrative expenditure admissible u/s. 37(1); the expenditure disallowed u/r. 8D(2)(iii) being only that relatable to the tax-exempt income, i.e., that can be said to be expended toward earning the same - Therefore, a disallowance in the impugned sum arises in the computation of the assessee’s total income. We decide accordingly. Issues Involved:1. Maintainability of the claim for advances written off as business loss.2. Disallowance of personnel and administrative expenses.3. Disallowance under Section 14A in respect of dividend income.Detailed Analysis:1. Maintainability of the Claim for Advances Written Off as Business LossThe first issue in the assessee’s appeal concerns the maintainability of the claim for advances written off, amounting to Rs. 67.87 lakhs, given to VK Investments and Holdings Pvt. Ltd. and Naughty Trading Pvt. Ltd. The advances were given for fabric purchase orders, but no goods were supplied, and the companies were subsequently dissolved. The assessee claimed this as a business loss.The Assessing Officer (AO) found that the advances were to related parties and dismissed the claim, suspecting the transactions as a camouflage to derive a tax advantage. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed this view. The assessee, in second appeal, argued that the companies were declared defunct and not dissolved, and had previous purchase transactions with these companies.The Tribunal noted that the Revenue did not object to the claim in principle but doubted the genuineness of the loss due to the relationship between the parties and the timing of the companies being declared defunct. The Tribunal emphasized the need for a clear and definite finding of fact to determine if the transactions were motivated by an improper purpose. The matter was remanded back to the AO for further verification, including the circumstances under which the orders were placed, the financial conditions of the companies, and the utilization of the advanced funds.2. Disallowance of Personnel and Administrative ExpensesThe second issue pertains to the disallowance of personnel and administrative expenses amounting to Rs. 48,15,744, which was worked out at 96% of the total such expenditure. The assessee disclosed rental income and claimed these expenses against it. The AO disallowed the expenditure proportionately, as it could not be allowed against income from house property.The Tribunal upheld the AO’s decision, stating that personnel and administrative expenditure is inadmissible under Sections 23 and 24 of the Income Tax Act. The Tribunal found no infirmity in the AO’s estimate and confirmed the disallowance, noting that the assessee failed to provide any explanation or materials to justify the expenditure.3. Disallowance Under Section 14A in Respect of Dividend IncomeThe only issue in the Revenue’s appeal was the disallowance under Section 14A concerning dividend income of Rs. 1,12,122, which was worked out at Rs. 58,29,423 under Rule 8D. The CIT(A) limited the disallowance to the amount of exempt income, citing the decision in Joint Investments Pvt. Ltd. v. CIT.The Tribunal clarified that Section 14A seeks to disallow expenditure incurred in relation to income not forming part of the total income. The Tribunal noted that the assessee provided no basis for its nil disallowance and that the bulk of the disallowance was direct interest expenditure. The Tribunal emphasized that the disallowance should not exceed the total expenditure claimed by the assessee, as per the Finance Act, 2017.The Tribunal also noted that holding investments in shares and units does not form part of the assessee’s business, and the interest expenditure apportioned to investments cannot be regarded as for business purposes. Therefore, the disallowance under Section 14A was justified. The Tribunal allowed the Revenue’s appeal.ConclusionIn conclusion, the Tribunal partly allowed the assessee’s appeal for statistical purposes and allowed the Revenue’s appeal, emphasizing the need for clear findings of fact and proper verification of claims by the AO. The Tribunal upheld the principles of disallowance under Sections 23, 24, and 14A, ensuring that the disallowances were in line with the Income Tax Act and relevant judicial precedents.