2016 (4) TMI 1435 - AT - Income Tax

Tribunal directs AO to review expenses linked to business income & investigate disallowance under Section 14A.

The Tribunal partially allowed both appeals for statistical purposes, directing the Assessing Officer to further examine and verify specific issues. In ... Allowable business expenses u/s 37(1) - expenses incurred for the running of the business of the assessee OR Income from house property - nature of advertisement expenses and business promotion expenses debited under the head “Administrative and Selling Expenses” - possibility of common expenditure - Revenue’s case is that, for earning of rental income, amount should be disallowed on the ground that, this much amount should be allocated for the earning of the rental income from the amount of expenses debited under the head “Administration & Selling Expenses” as appearing in Schedule “E” above - HELD THAT:- From the clear cut covenants and terms of the agreement, it is abundantly clear that the assessee does not have to incur any administrative expenditure for running and maintenance of the Mall and, therefore, in the light of these facts and background, it cannot be held that any administrative expenditure should be allocated for running of the Mall. On a perusal of expenditure debited under Schedule E, as incorporated above, it is seen that the assessee has debited sum under the head “Advertisement” and under the head “Business Promotion Expenses”. Further, from a perusal of break-up of these expenses which was filed before the CIT(A), we find that certain amounts have been debited for “Mall Upkeep & Promotional receipt”. If these expenditures are related for earning of income from Mall then, definitely it cannot be allowed as an expenditure under section 37(1) i.e. while computing the business income of the assessee, because admittedly, receipts from the Mall is in the form of lease rental which has been assessed under the head “Income from House Property” like in the earlier and subsequent years. This fact needs proper verification and examination by the AO which has not been done in the proper prospective. This matter should be restored back only for the limited purpose of examining the nature of advertisement expenses and business promotion expenses debited under the head “Administrative and Selling Expenses” as enumerated in Schedule E of the Profit & Loss Account. If these expenditures directly attributable to earning of lease rental income then, appropriate disallowance can be made, if at all required. With this direction this issue is treated as partly allowed for statistical purposes. Disallowance made u/s 14A - incurring of any expenditure in respect of earning of the exempt income - HELD THAT:- CIT(A) has referred to the earlier order of the CIT(A) and Tribunal for the assessment year 2008-09, however before us, nothing relating to A.Y. 2008-09 has been filed before us. In any case, we find that, assessee’s claim with regard to non-incurring of any expenditure for earning of exempt income has not been examined by the AO, as per the requirement of section 14A(2) and (3). The AO has blindly followed Rule 8D without complying with the mandatory requirement of section 14A(2) and (3). Therefore, in the interest of justice, we are restoring this issue to the file of the AO to examine the nature of accounts of the assessee and also the contentions raised before us that all these investments are strategic investment made in the subsidiary company and decide the issue afresh and in accordance with the law. Accordingly, ground as raised by the assessee is treated as allowed for statistical purposes. Issues Involved:1. Disallowance of expenses from Business Income.2. Disallowance under Section 14A of the Income Tax Act, 1961.Issue 1: Disallowance of Expenses from Business IncomeThe assessee, engaged in the business of builders and developers, generation and sale of electricity, and renting out properties, reported rental income from leasing out properties, including R Mall. The Assessing Officer (AO) observed that the assessee had not apportioned business expenses attributable to the rental income, despite claiming a 30% standard deduction for repairs under Section 24(1). The AO disallowed Rs. 1,60,77,911/- from business expenses, asserting that some expenses, like salaries and electricity, should be allocated to rental income. The assessee argued that these expenses were general administrative costs necessary for maintaining the corporate setup and not directly attributable to rental income. The CIT(A) upheld the AO's disallowance, noting the assessee's failure to establish a direct correlation between the expenses and business income.Upon appeal, it was highlighted that the assessee had an agreement with M/s Veer Property Pvt. Ltd. for managing the Mall, relieving the assessee from incurring maintenance expenses. The Tribunal found the AO and CIT(A)'s reasoning unsustainable, emphasizing that expenses should be examined in relation to business activities and that the onus was on the revenue to establish the need for allocation. The Tribunal directed the AO to verify the nature of advertisement and business promotion expenses to determine if they were related to rental income and make appropriate disallowances if necessary. This issue was partly allowed for statistical purposes.Issue 2: Disallowance under Section 14A of the Income Tax Act, 1961For AY 2010-11, the assessee earned an exempt income of Rs. 3,42,506/- from a partnership firm. The AO, following Rule 8D, disallowed Rs. 8,44,630/- as expenses attributable to earning the exempt income. The CIT(A) upheld this disallowance. The assessee contended that the capital contribution to the partnership firm was from interest-free funds and that no expenditure was incurred to earn the exempt income. The Tribunal noted that the AO did not examine the assessee's accounts as required under Section 14A(2) and (3). The Tribunal remanded the matter to the AO to verify the availability of interest-free funds and to consider the Delhi High Court's ruling in Cheminvest Ltd. regarding disallowance limits. This issue was partly allowed for statistical purposes.For AY 2009-10, the assessee earned exempt dividend income of Rs. 25,82,722/- and initially computed a disallowance of Rs. 15,56,020/- under Rule 8D, which was later contested. The AO and CIT(A) upheld the disallowance. The Tribunal found that the AO did not comply with Section 14A(2) and (3) requirements and remanded the issue for fresh examination, including the nature of investments and the assessee's claim of strategic investments in subsidiary companies. This issue was allowed for statistical purposes.Conclusion:Both appeals were partly allowed for statistical purposes, with directions for further examination and verification by the AO on specific issues.