2016 (5) TMI 1129 - AT - Income Tax

Tribunal upholds assessment reopening for 2008-09, disallows certain deductions, rules on interest & rental income

The Tribunal upheld the reopening of assessment for the assessment year 2008-09 under Section 147, dismissing the assessee's appeal. Disallowance under ... Reopening of assessment and reason to believe under section 147 - Disallowance under section 40(a)(ia) for non-deduction of TDS - Section 14A and Rule 8D - disallowance of expenditure in relation to exempt income - Condonation of delay and sufficiency of cause - Classification of rent as business income versus income from house propertyReopening of assessment and reason to believe under section 147 - Validity of reopening assessment for AY 2008-09 by issuance of notice under section 148 read with section 147. - HELD THAT: - The Tribunal applied the well established test that at the stage of issuing a notice under section 147 the Assessing Officer must have a 'reason to believe' (a cause or justification) that income has escaped assessment and that such belief need not be a finally established fact. The substituted scope of section 147 requires only the first condition (reason to believe escapement) for jurisdiction to reopen, and the existence of relevant material on which a reasonable person could form that belief is decisive at the initiation stage. The AO had recorded reasons relating to non deduction of TDS on selling/other expenses and relied upon precedent to form belief; the Tribunal found no infirmity in the recourse to reassessment and confirmed reopening. [Paras 3]Reopening of assessment for AY 2008-09 upheld; ground rejecting reopening dismissed.Disallowance under section 40(a)(ia) for non-deduction of TDS - Whether expenditure claimed (commission, advertisement, professional and other charges) is disallowable under section 40(a)(ia) for AY 2008-09. - HELD THAT: - The Tribunal noted conflicting precedents: some decisions hold section 40(a)(ia) inapplicable where the impugned payments were not outstanding at the end of the year. The assessee did not place on record schedules or sundry creditor details to establish non existence of year end liability. Following a coordinate Bench decision, the Tribunal directed verification by the Assessing Officer and remitted the matter for fresh consideration and factual verification of whether the amounts remained outstanding at the close of the previous year. The Tribunal made clear that if the amounts were not outstanding at year end they could not be disallowed under section 40(a)(ia). [Paras 6]Issue remitted to the Assessing Officer for verification of year end outstanding; grounds under section 40(a)(ia) partly allowed for statistical purposes and remitted.Section 14A and Rule 8D - disallowance of expenditure in relation to exempt income - Validity of disallowance under section 14A read with Rule 8D for AY 2008-09 (disallowance of expenditure attributable to exempt dividend income). - HELD THAT: - The Tribunal examined statutory mandate of section 14A and the machinery provision in Rule 8D which presumes/quantifies expenditure in relation to exempt income where the assessee claims nil expenditure. It relied on several precedents (including high court and coordinate Bench decisions) holding that where investments exist and dividend income is exempt, expenditure attributable to such investments is disallowable; statutory presumptions under Rule 8D may be applied. The Tribunal found the AO had recorded satisfaction and correctly applied the statutory scheme; decisions relied upon by the assessee were distinguishable. On computation issues raised, limited remand for correct computation (excluding investments of companies not paying dividend) was recognised in authorities but the principal legal view upheld the AO's disallowance. [Paras 8]Appeal on section 14A ground dismissed; disallowance under section 14A read with Rule 8D sustained and AO's order restored.Condonation of delay and sufficiency of cause - Whether the delay of 914 days in filing the appeal for AY 2009-10 should be condoned. - HELD THAT: - The Tribunal reviewed the reasons advanced for delay and reiterated the established principle that condonation requires sufficient cause beyond the party's control and absence of negligence. The reasons offered were general and attributable to negligence or inaction; the assessee failed to demonstrate due diligence or the absence of negligence. [Paras 10]Delay not condoned; appeal for AY 2009-10 dismissed as not admitted.Classification of rent as business income versus income from house property - Whether rent from Tek Meadows and Tek Towers for AYs 2010-11 and 2011-12 is assessable as income from house property or as business income. - HELD THAT: - The Tribunal followed its earlier decision in ITA Nos.995-997/Mds./2011 and relevant authority of the jurisdictional High Court (as applied there) that where a company provides software/infotech infrastructure, incubation facilities and related movable assets to lessees in the course of its business, receipts from such arrangements are business receipts and not income from house property. The Revenue was unable to point to distinguishing features to take the matter outside that precedent. [Paras 11]Revenue's appeals dismissed; rental receipts treated as business income rather than income from house property for AYs 2010-11 and 2011-12.Interest deduction - ground not pressed - Assessee's challenge to disallowance of interest on loans (whether pressed before the Tribunal). - HELD THAT: - At hearing the assessee's authorised representative did not press this ground. [Paras 9]Ground dismissed as not pressed.Final Conclusion: Reopening of assessment for AY 2008-09 upheld; disallowance under section 14A (AY 2008-09) sustained and AO's order restored; issue under section 40(a)(ia) remitted to the Assessing Officer for verification of year end outstanding balances; appeal for AY 2009-10 dismissed for non condonation of delay; interest deduction ground not pressed and dismissed; Revenue appeals relating to classification of rent for AYs 2010-11 and 2011-12 dismissed with rental receipts held to be business income. Issues Involved:1. Reopening of assessment.2. Disallowance under Section 40(a)(ia) of the Income Tax Act.3. Disallowance under Section 14A of the Income Tax Act.4. Disallowance of interest paid on loans.5. Condonation of delay in filing the appeal.6. Classification of rental income as business income or income from house property.Issue-wise Detailed Analysis:1. Reopening of Assessment:The first issue pertains to the reopening of the assessment for the assessment year 2008-09. The assessee, a domestic company engaged in building promotion, had its assessment reopened by the Assessing Officer (AO) under Section 148 on the grounds that TDS on selling expenses debited in the P&L needed verification. The AO completed the reassessment under Section 143(3) r.w.s. 147, disallowing certain expenditures under Section 40(a)(ia). The assessee appealed against this reopening, but the CIT(A) confirmed the AO's action. Upon further appeal, it was held that Section 147 permits the AO to reassess income if there is 'reason to believe' that income has escaped assessment. The Tribunal found no infirmity in the reopening, confirming the AO's action and rejecting the assessee's ground.2. Disallowance under Section 40(a)(ia):The second issue involves the disallowance of expenses under Section 40(a)(ia) due to non-deduction of TDS on payments such as commission, advertisement expenses, professional charges, and other charges totaling Rs. 1,91,54,887. The assessee argued that these amounts were not outstanding at the end of the year, referencing the Special Bench decision in Merilyn Shipping and Transports. The Tribunal, citing the Coordinate Bench in Shri N. Palanivelu Vs. ITO, remitted the issue back to the AO to verify the claim, directing that if the amounts were not outstanding at the year-end, they should not be disallowed.3. Disallowance under Section 14A:The third issue concerns the disallowance under Section 14A, where the AO applied Rule 8D to compute disallowance at 0.5% of the average value of investments. The CIT(A) upheld this, noting that strategic investment decisions require considerable management attention. The Tribunal supported this view, referencing cases like Pradeep Kar v. ACIT and Smt. Leena Ramachandran, which upheld disallowance under Section 14A for expenses related to earning exempt income. The Tribunal dismissed the assessee's appeal on this ground.4. Disallowance of Interest Paid on Loans:The fourth issue, raised in ITA Nos. 2052 and 2056/Mds./2015, involved the disallowance of interest paid on loans. However, this ground was not pressed by the assessee during the hearing, leading to its dismissal.5. Condonation of Delay in Filing the Appeal:The fifth issue pertains to a delay of 914 days in filing the appeal for the assessment year 2009-10. The assessee attributed the delay to miscommunication and subsequent advice from a new CA. The Tribunal found the reasons too general and unconvincing, emphasizing that sufficient cause must be beyond the control of the party. The delay was attributed to the assessee's negligence and inaction, leading to the dismissal of the appeal.6. Classification of Rental Income:The sixth issue involves the classification of rental income from properties Tek Meadows and Tek Towers. The CIT(A) treated this income as business income, referencing a previous Tribunal decision that rental income from providing software infrastructural facilities should be treated as business income. The Tribunal upheld this classification, dismissing the Revenue's appeal.Conclusion:The Tribunal's order resulted in the partial allowance of the assessee's appeal for statistical purposes, the dismissal of other appeals by the assessee, and the dismissal of both appeals by the Revenue. The order was pronounced on April 13, 2016, in Chennai.