2016 (8) TMI 1579 - AT - Income Tax

Tribunal directs AO to reexamine disallowances on business, rental income, Section 14A, 40(a)(ia), 80G

M/s Runwal Developers Pvt. Ltd. Versus Assistant Commissioner of Income Tax- Central Circle – 23, Mumbai

M/s Runwal Developers Pvt. Ltd. Versus Assistant Commissioner of Income Tax- Central Circle – 23, Mumbai - [2016] 50 ITR (Trib) 260 Issues Involved:1. Disallowance of expenses claimed against business income.2. Disallowance of expenses related to rental income.3. Application of the principle that the option beneficial to the assessee should be followed.4. Disallowance under Section 14A of the Income Tax Act.5. Disallowance under Section 40(a)(ia) of the Income Tax Act.6. Disallowance of deduction under Section 80G of the Income Tax Act.Detailed Analysis:1. Disallowance of Expenses Claimed Against Business Income:The assessee, a builder and developer, also engaged in renting properties, claimed expenses of Rs. 1,73,03,946 against business income. The AO observed that while the assessee claimed standard deductions for repairs under house property income, it did not proportionately disallow the expenses related to rental income in its business income computation. The CIT(A) upheld the AO’s decision, noting that the assessee failed to furnish specific details of expenses incurred for business income.2. Disallowance of Expenses Related to Rental Income:The AO disallowed Rs. 1,73,03,946, asserting that the assessee took advantage of the 30% standard deduction for repairs without disallowing corresponding expenses in business income. The Tribunal, referencing its decision in the assessee's case for AY 2010-11, directed the AO to verify and disallow expenses directly attributable to earning lease rental income, such as advertisement and business promotion expenses, if they are not related to business income.3. Application of Principle Beneficial to Assessee:The assessee argued that the AO should have chosen the option more beneficial to it. The Tribunal noted that the AO chose the higher disallowance figure of Rs. 1,73,03,946 instead of Rs. 87,04,840, calculated based on the proportion of rental income to gross revenue. The Tribunal directed the AO to verify and disallow only those expenses directly attributable to rental income.4. Disallowance Under Section 14A of the Income Tax Act:The AO disallowed Rs. 35,30,813 under Section 14A, related to exempt income from share of profit in a partnership firm. The CIT(A) upheld this, citing Rule 8D. The Tribunal, following its decision in the assessee’s case for AY 2010-11, directed the AO to re-examine the disallowance considering the availability of interest-free funds and the principle that disallowance should not exceed exempt income as per the Delhi High Court's decision in Cheminvest Ltd.5. Disallowance Under Section 40(a)(ia) of the Income Tax Act:The AO disallowed Rs. 16,000 for non-deduction of TDS, which the assessee claimed was already disallowed and added back to work-in-progress, leading to double addition. The Tribunal directed the AO to verify the claim of double addition and rectify if found true.6. Disallowance of Deduction Under Section 80G of the Income Tax Act:The AO restricted the deduction under Section 80G to Rs. 49,80,497 as per the tax audit report, against the assessee’s claim of Rs. 50,53,960. The Tribunal remanded the matter to the AO for verification of the assessee’s claim, directing the AO to consider all relevant documents and provide an opportunity for the assessee to substantiate its claim.Conclusion:The Tribunal partly allowed the appeal for statistical purposes, setting aside various issues to the AO for verification and re-adjudication, ensuring compliance with legal principles and providing the assessee an opportunity to substantiate its claims.