2023 (9) TMI 152 - AT - Income Tax

Appeal dismissed for interest disallowance & rental income addition. (4)

Shri Saileshbhai Shambhubhai Hirpara C/o. Nishan Export Versus The Deputy Commissioner of income Tax Circle-1 (2), Rajkot

The appeal challenging the disallowance under Section 14A related to interest paid on a loan was dismissed by the Tribunal, upholding the disallowance ... Disallowance u/s 14A r.w.r. 8D - interest paid by the assessee on LIC loan - Investment in partnership firm by the partner out of loan taken from LIC - HELD THAT:- CIT(A) relied upon the judgment passed in the case of Vishnu Anant Mahajan [2012 (6) TMI 297 - ITAT, AHMEDABAD] and upheld the disallowance made by the Ld. AO as held that it is case of the partner and therefore what is to be examined is whether the share income is excluded from his total income. The answer is obviously in the affirmative and provision contained in section 14A will come into operation and any expenditure incurred in earning the share income will have to be disallowed In the absence of any assistance rendered by the assessee, we do not find any reason to interfere with the order passed by the Ld. CIT(A). Decided against assessee Addition u/s 23(4) - assessee has shown more than one residential properties - assessee is staying at Mumbai being a self-occupied house property, but no rental/deemed rental income has been shown in computation of total income and show cause why the addition on account of deemed rental income should not be made - HELD THAT:- The value has been shown by the Ld. AO on the basis of decision passed in the case of Smt. Radha Devi Dalmia [1980 (3) TMI 62 - ALLAHABAD HIGH COURT] and already allowed standard deduction of 30% under Section 24(a) - Hence, in the absence of any assistance rendered by the assessee, we do not find any reason to interfere with the order passed by the Ld. AO and upheld by the Ld. CIT(A) impugned before us. Decided against assessee ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under section 14A read with Rule 8D of the Income Tax Act is sustainable in respect of interest on loan taken against LIC policies that was applied for investment in a partnership firm whose profits are taxed at the firm level but exempt in the hands of the partner. 2. Whether deemed income under section 23(4) (deemed rent) can be computed at 7% of the value of house property shown in the assessee's books where the assessee claims the property as self-occupied (occupied by family), claims actual letting/rent receipts for another property, or relies on municipal tax as basis for notional rent; and whether the standard deduction under section 24(a) applies against such deemed rent. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Disallowance under section 14A read with Rule 8D in respect of interest on LIC loan used to fund partnership investment Legal framework: Section 14A disallows deduction in respect of expenditure incurred in relation to income which does not form part of total income; Rule 8D prescribes a methodology for determining disallowance attributable to exempt income where such expenditure cannot be directly linked. Precedent Treatment: The Tribunal (Special Bench) decision in Vishnu Anant Mahajan (Special Bench, Ahmedabad) was relied upon by the First Appellate Authority and followed by The Court in the instant matter. Interpretation and reasoning: The assessee argued that the profits of the partnership firm, though exempt in the hands of the partner, were not 'income which does not form part of the total income under this Act' because the partnership firm itself was taxed on such profits; alternatively the assessee contended that the share of profit arose by virtue of partnership rights rather than from invested capital and hence interest paid on borrowed funds was not incurred in relation to exempt income. The Revenue disallowed interest under Rule 8D, restricted to the interest expense claimed, treating the interest-bearing funds as used in relation to exempt income (share of profit). The First Appellate Authority and The Court found the Special Bench precedent applicable and upheld the disallowance in absence of persuasive contrary evidence or argument from the assessee. Ratio vs. Obiter: The reliance on the Special Bench decision to uphold a Rule 8D disallowance in comparable factual circumstances constitutes the ratio applied by The Court. The Court's reaffirmation that Rule 8D disallowance can be applied in such circumstances is binding in this proceeding (ratio). Any discussion of the nature of partnership entitlement vis-à-vis capital contribution and the textual nuances of section 14A/section 144 as advanced by the assessee is treated as factual/legal submissions that were considered but not accepted (obiter to the extent not necessary for the ratio). Conclusions: In the facts before The Court and in view of the Special Bench precedent, the disallowance under section 14A read with Rule 8D in respect of interest paid on the LIC loan used to make investments in the partnership firm is sustainable. The assessee's submissions distinguishing the partnership profit as not being 'exempt' for purposes of section 14A were not accepted, and the ground was dismissed. Issue 2 - Addition of deemed rental income under section 23(4) and allowance of standard deduction under section 24(a) Legal framework: Section 23(4) permits deeming provisions for computation of annual value (deemed rent) where properties are let out or deemed to be let out; judicial authorities have applied a rule-of-thumb valuation (e.g., 7% of book/market value) in certain precedents. Section 24(a) permits a standard deduction of 30% of annual value for repairs and other allowances. Precedent Treatment: The Assessing Officer applied the ratio of a High Court decision (Radha Devi Dalmia) adopting 7% of the value of the property as deemed annual rent. The First Appellate Authority accepted the AO's valuation methodology and allowed the statutory 30% deduction under section 24(a). Interpretation and reasoning: The assessee claimed one flat as self-occupied because occupied by family and frequent visits, asserted rental shown for another flat, and contended that municipal house-tax should be the basis for any notional rent rather than 7% of book value. The AO rejected the assertions for lack of documentary proof (no supporting documents for let-out status or house tax payments) and computed deemed rent at 7% of the balance-sheet value for the vacant/contested properties, then allowed 30% standard deduction under section 24(a). The First Appellate Authority agreed that the AO's approach followed the cited High Court precedent and that the 30% standard deduction had already been allowed; therefore, assessee's contentions were insufficient to overturn the addition. The Court, with no assistance from the absent assessee, declined to interfere with that application of precedent and the factual finding of absence of supporting documents. Ratio vs. Obiter: The holding that where an assessee fails to substantiate claims of self-occupation, actual letting, or municipal-tax-based valuation, the AO may adopt a consistent judicially recognized yardstick (7% of value) to compute deemed rent, subject to allowance of statutory deductions (30% under section 24(a)), constitutes the operative ratio applied by The Court. The rejection of the municipal-tax basis as preferable in the absence of evidence is incidental to the ratio (obiter in part where alternative valuation methods exist but were not supported on facts). Conclusions: The deemed rental addition computed at 7% of the property value as per the balance sheet, with deduction of 30% under section 24(a), was sustained. The assessee's undocumented assertions regarding self-occupation, actual rent receipts and municipal-tax basis were not accepted. The ground was dismissed and the addition of Rs. 4,95,647 was upheld. Cross-references and final determination Both grounds were considered on their respective legal frameworks and relevant precedents; in each instance The Court applied existing judicial authority relied on by the First Appellate Authority and found no merit in the assessee's arguments in absence of documentary support or convincing legal distinction. Consequently, both grounds were dismissed and the appeal was dismissed in entirety.