2019 (4) TMI 1103 - AT - Income Tax

Appeal partly allowed, significant deletions in disallowances. Leasehold repairs, prior expenses approved.

The appeal was partly allowed with significant deletions in disallowances related to leasehold repairs, prior period expenses, and a substantial portion ... Disallowance on account of leasehold repairs and maintenance expenses capitalized by the AO - Allowable revenue expenditure u/s 37 - HELD THAT:- The assessee does not become owner of the modification carried out in the rented out premises as the are either held or fastened to the ground and these could not be removed and carried in the present state after modification.Thus, the expenditure are revenue in nature Expenditure incurred by the assessee on suspended lights, outdoor flooring recessed luminaire frame made of brushed metal and installation of epoxy flooring, tiles is for making the rented premises more attractive and presentable with commensurate as dealer of high end vehicles as tenant of premises being in the nature of current repairs and therefore, revenue in nature and allowable as business expenses. Hence, the lower authorities were not justified in treating the same as capital in nature and consequently, capitalizing it. - Decided in favour of assessee Addition u/s 40A (2)(b) - interest paid on Inter Corporate Deposit (ICD) - CIT-A reducing the rate of interest from 12% to 11% - HELD THAT:- The increase in interest rate from 10% to 12% without bringing and substantiated and bringing any evidence on record is not justified, notwithstanding the fact that the assessee has taken ICD loan on interest rate of 10% from M/s. TACL. Further no evidence has been adduced to substantiate the excessiveness of interest rate @12% asper provisions of section 36(1) (iii) of the Act as interest paid is for personal benefit and not for business purpose, when the assessee has been paying interest @11% for other persons. Therefore, the AO was quite justified in restricting the increase in interest rate to 11% with commensurate with other parties. In view of this matter, we find do not find any infirmity in the order of CIT (A), accordingly, same is upheld. Disallowance of prior period expenses on account of rate and taxes - unascertainable liability - HELD THAT:- Though the liability pertained to arrears including the period up to 31.03.2009, but it has been crystallized and determined vide letter dated 30.07.2009.Thus, the liability has been determined and crystallized during the year under consideration and also paid during the year under consideration, hence, same is being business expenditure is allowable as expenses. Since the liability was not ascertainable and quantified hence, provision could not be made in earlier years As decided in EXXON MOBIL LUBRICANTS P. LTD. [2010 (9) TMI 36 - DELHI HIGH COURT]  where the liability for payment was determined and crystallized in the year under question and therefore, allowable and it cannot be held to be prior period merely because the expenses related to a transaction of earlier years.In view of these facts we hold that the liability of prior period expenses has been determined and crystallized vide letter dated 30.07.2009, hence, these expenses on account of rate and taxes are allowable as business expenses. Addition u/s. 14A read with Rule 8D - non recording satisfaction, excluding share application money, establishing link of investment and expenditure and by not considering the average of total assets and not the net assets - HELD THAT:- The presumption would be that the investment in exempt income yielding investment is made out of interest-free funds as held in the case of CIT vs. Reliance Utilities & Power Ltd. [2009 (1) TMI 4 - BOMBAY HIGH COURT] wherein it has been laid down that where the assessee had both interest bearing borrowed funds and interest free own funds and if own funds were sufficient to meet investment yielding tax free income, then it can be presumed that such investments were from interest-free funds and not from borrowed funds. Therefore, we are of the considered opinion that no disallowance on account of interest is called for under Rule 8D (ii) of Income-Tax Rules, 1962. Disallowance of interest in respect of interest under Rule 8D(2)(ii) are not to be considered as same are directly related to business income. Therefore, disallowance of interest of ₹ 20,12,865 is therefore, deleted. AO at the first instance must examine the disallowance made by the assessee or the claim of the assessee that no expenditure was incurred to earn the exempt income. If and only if the AO is not satisfied on this count after making reference to the accounts, that he is entitled to adopt the method as prescribed i.e. Rule 8D of the Rules. Thus, Rule 8D is not attracted and applicable to assessee who have exempt income and it is not compulsory and necessary that an assessee must voluntarily compute disallowance as per Rule 8D of the Rules. Where the disallowance or ‘nil’ disallowance made by the assessee is found to be unsatisfactory on examination of accounts, the assessing officer is entitled and authorised to compute the deduction under Rule 8D of the Rules. Disallowance u/s. 14A are restricted to ₹ 8,516 and balance disallowance is deleted subject to verification by the AO that the assessee has correctly taken the average value of investment after excluding of share capital and reserve& surplus, and only considering exempt income yielding investment and excluding interest of ₹ 20,12,865, which is directly attributable to business income. Issues Involved:1. Disallowance of Rs. 24,97,826 on account of leasehold repairs and maintenance expenses.2. Disallowance of Rs. 1,00,443 on account of interest paid to M/s. Talbros Automotive Components Ltd.3. Disallowance of prior period expenses amounting to Rs. 2,45,794 on account of rates and taxes.4. Disallowance of Rs. 22,21,381 made under section 14A read with Rule 8D.Issue-wise Detailed Analysis:1. Disallowance of Rs. 24,97,826 on account of leasehold repairs and maintenance expenses:The Assessee debited Rs. 2,86,15,199 towards leasehold improvement, repairs, and maintenance. The AO capitalized Rs. 27,97,826 from five invoices, considering them capital in nature, and allowed depreciation at 10%, disallowing the balance Rs. 24,97,826. The CIT (A) confirmed the disallowance, considering the expenses as capital in nature. The Tribunal, however, found that the expenses were for making the rented premises more attractive and presentable, aligning with the business requirements of the Assessee, a dealer of high-end vehicles. The Tribunal noted that similar expenses were allowed in previous assessments and referenced several judgments, concluding that the expenses were revenue in nature and allowable as business expenses. Consequently, the disallowance of Rs. 24,97,826 was deleted.2. Disallowance of Rs. 1,00,443 on account of interest paid to M/s. Talbros Automotive Components Ltd.:The Assessee paid interest at 12% on a loan from a related concern, while paying 11% to other related concerns. The AO restricted the interest payment to 11%, disallowing Rs. 1,00,443. The CIT (A) upheld this, noting the Assessee's failure to substantiate the increase in interest rate. The Tribunal found that while the provisions of section 40A(2)(b) were not attracted, the Assessee failed to justify the increase in interest rate to 12% without evidence. Thus, the disallowance was upheld, and the Assessee's appeal on this ground was dismissed.3. Disallowance of prior period expenses amounting to Rs. 2,45,794 on account of rates and taxes:The Assessee claimed prior period expenses of Rs. 2,45,794 based on a demand raised during the current year. The CIT (A) upheld the disallowance, stating the Assessee did not follow standard accounting principles. The Tribunal, however, found that the liability was crystallized during the current year, referencing the demand letter dated 30.07.2009, and allowed the expenses as business expenditure. Consequently, the disallowance was deleted.4. Disallowance of Rs. 22,21,381 made under section 14A read with Rule 8D:The AO disallowed Rs. 22,21,381 under section 14A, including Rs. 20,12,865 for interest and Rs. 1,08,516 under Rule 8D(2)(iii). The CIT (A) confirmed this disallowance. The Tribunal noted that the Assessee had sufficient own funds to cover the investments and that the AO had not established any direct link between borrowed funds and investments. Following previous Tribunal decisions and relevant case law, the Tribunal deleted the disallowance of Rs. 20,12,865 for interest. For the remaining disallowance under Rule 8D(2)(iii), the Tribunal restricted it to Rs. 8,516, subject to verification by the AO. Thus, the disallowance was partly allowed.Conclusion:The appeal was partly allowed, with significant deletions in disallowances related to leasehold repairs, prior period expenses, and a substantial portion of the disallowance under section 14A. The disallowance on account of interest paid to M/s. Talbros Automotive Components Ltd. was upheld. The order was pronounced in the open Court on 07.02.2019.