Tax treatment of exempt-income disallowance, bus depreciation, and sales-linked leasing receipts turns on commercial substance and factual verification.

The note addresses four recurring tax issues: section 14A disallowance is stated to be capped at the exempt income earned in the relevant year, with the Finance Act 2022 Explanation treated as not retrospectively applicable to earlier years; higher depreciation on buses is linked to their functional use in passenger transport as vehicles run on hire; receipts under a property leasing arrangement based on a percentage of gross sales are examined for business-income character by reference to commercial substance, risk sharing and contractual terms; and a claimed cost of improvement for short-term capital gains may require verification to confirm nexus and avoid double allowance. The note also indicates that incomplete agreements or factual records may justify remand for fresh examination.

---

---

Issues: (i) Whether disallowance under section 14A could be restricted to the amount of exempt income earned during the year; (ii) whether buses used in passenger transport were entitled to higher depreciation as buses run on hire; (iii) whether receipts from leasing the property at a percentage of gross sales were business income arising from an adventure in the nature of trade; and (iv) whether the claim of Rs. 18 lakhs as cost of improvement in the computation of short-term capital gain required fresh verification.

Issue (i): Whether disallowance under section 14A could be restricted to the amount of exempt income earned during the year.

Analysis: The restriction made by the first appellate authority was upheld. The governing view applied was that disallowance under section 14A cannot exceed the exempt income earned in the relevant year. The later Explanation inserted by the Finance Act, 2022 was held not to govern the assessment year in question retrospectively, and the binding effect of the existing High Court view was noticed in the absence of any stay.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (ii): Whether buses used in passenger transport were entitled to higher depreciation as buses run on hire.

Analysis: The depreciation claim was sustained on the basis that buses engaged in carrying passengers on routes under permits are used in the business of running them on hire. The authorities relied upon the functional use of the vehicles and the consistent view that a hire arrangement is not confined to an entire vehicle being leased to a single person, but includes transport of passengers for hire in the ordinary course of business.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (iii): Whether receipts from leasing the property at a percentage of gross sales were business income arising from an adventure in the nature of trade.

Analysis: The character of the arrangement was examined on the basis of the contractual terms and the fluctuating percentage-based receipts. The absence of a fixed rent, the sharing of commercial risk, and the manner in which the property was exploited were treated as relevant indicators. However, as the agreements were not before the Tribunal, the matter required a holistic re-examination by the first appellate authority along with consideration of the applicable precedents.

Conclusion: The issue was set aside for fresh adjudication and was allowed for statistical purposes.

Issue (iv): Whether the claim of Rs. 18 lakhs as cost of improvement in the computation of short-term capital gain required fresh verification.

Analysis: The expenditure was accepted as having a nexus with obtaining the necessary land-use permission and with the transaction ultimately brought to tax as business profit. At the same time, since it was pleaded that the amount had already been allowed in the earlier year, the matter required verification to avoid double allowance.

Conclusion: The issue was remanded to the Assessing Officer for verification and was partly allowed for statistical purposes.

Final Conclusion: The Revenue's appeal was substantially rejected, with limited matters being restored for verification or fresh consideration, and the overall disposal was partly in favour of the assessee.

Ratio Decidendi: Where exempt-income disallowance, depreciation on transport vehicles, and characterization of receipts depend on the statutory use and commercial substance of the transaction, the deciding authority must apply the prevailing legal position to the relevant assessment year and may remand where the underlying agreement or factual verification is incomplete.

---