2016 (10) TMI 1405 - AT - Income Tax

No penalty on estimated additions when expenses disallowed without proving concealment of income

M/s. The Phoenix Mills Ltd. Versus DCIT/ACIT-CC-47 Mumbai And (Vice-Versa)

M/s. The Phoenix Mills Ltd. Versus DCIT/ACIT-CC-47 Mumbai And (Vice-Versa) - TMI Issues Presented and Considered1. Whether penalty under section 271(1)(c) of the Income Tax Act is justified for disallowance of personal expenses made on an estimated basis.2. Legality and validity of reopening assessments under section 147 read with section 148 of the Income Tax Act for multiple assessment years, specifically whether reopening was based on change of opinion or failure to disclose material facts.3. Whether the Assessing Officer was justified in reallocating and disallowing various expenses (salaries, advertisement, security charges, repairs and maintenance, miscellaneous expenses, legal and professional fees) from business income to income from house property.4. Validity of additions made on account of deemed rent under section 23(1)(c) for vacant premises.5. Applicability and correctness of disallowance under section 14A read with Rule 8D regarding expenditure attributable to exempt income.6. Allowability of interest expenditure and disallowance under section 36(1)(iii) on borrowing costs.7. Allowability of expenditure incurred for increase in share capital.Issue-Wise Detailed Analysis1. Penalty under Section 271(1)(c) for Disallowance of Personal ExpensesThe Assessing Officer disallowed personal expenses on an estimated basis for AYs 2004-05 and 2005-06. The Commissioner of Income Tax (Appeals) and the Tribunal upheld portions of these disallowances, but the Tribunal restricted the disallowance to less than 10% of the alleged expenses. The penalty was imposed prior to the Tribunal's quantum decision.The Tribunal relied on the Supreme Court's ruling in CIT v. Reliance Petroproducts Pvt. Ltd., which clarified that penalty under section 271(1)(c) requires concealment or furnishing of inaccurate particulars of income. Mere disallowance of expenses, especially on an estimated basis, does not amount to furnishing inaccurate particulars. The Court emphasized that a change in claim or an incorrect claim does not ipso facto attract penalty unless the particulars in the return are inaccurate or false.Applying these principles, the Tribunal concluded that penalty was not justified where disallowance was made on estimate basis and no concealment or inaccurate particulars were found. The penalty imposed was accordingly deleted.2. Legality of Reopening Assessments under Section 147/148The Assessing Officer reopened assessments for AYs 2006-07 to 2008-09 beyond the four-year period, alleging escapement of income due to failure to disclose material facts, particularly regarding allocation of expenses between business income and income from house property.The Tribunal examined the proviso to section 147, which mandates that reopening beyond four years requires both reasonable belief that income has escaped assessment and failure by the assessee to fully and truly disclose material facts. The Tribunal found that all material facts were available and disclosed during original assessments completed under section 153A read with section 143(3), which were conducted post-search. The AO had already considered the relevant facts and formed an opinion.The Tribunal held that reopening based solely on a change of opinion is impermissible. Reliance was placed on several High Court and Supreme Court decisions, including CIT v. Kelvinator (India) Ltd., CIT v. Foramer France, and ITO v. Nawab Mir Barkat All Khan Bhaadur, which uniformly hold that change of opinion does not justify reopening.Since no new tangible material was brought on record and no failure to disclose was established, the reopening notices were held to be illegal and void. The appeals against reopening were allowed.3. Reallocation and Disallowance of Expenses from Business Income to Income from House PropertyThe Assessing Officer disallowed and reallocated various expenses-legal and professional fees, salaries and director remuneration, advertisement and sales promotion, security charges, repairs and maintenance, and miscellaneous expenses-on the basis of proportion of rental income to total income, attributing a portion to income from house property and disallowing them against business income.The assessee contended that its business is a consolidated and composite one involving manufacturing, trading, leasing, and provision of services (common area maintenance, security, promotions) to tenants, with income bifurcated between business income and income from house property. The expenses incurred are integral to the business and are recovered through service charges offered under business income.The Tribunal analyzed the nature of expenses and the lease agreements, which explicitly provide for recovery of service charges including maintenance, security, electricity, and promotional expenses from tenants. The Tribunal noted that the assessee has not claimed depreciation on the leased properties, signifying no intention to claim expenses under house property income.Detailed scrutiny of legal and professional fees revealed most expenses related to general business activities, consultancy, recruitment, and legal matters not directly linked to rental income. Similarly, salary expenses related to staff engaged in business operations, marketing, legal, and administrative functions were indivisible and not attributable solely to rental income. Only a nominal disallowance (Rs. 12 lakhs) was considered reasonable for staff cost related to rental activity.Repairs and maintenance expenses were found largely to be for common area maintenance, essential for business operations and tenant services, not for individual rented premises. The Tribunal restricted disallowance to 70% of building repairs as voluntarily disallowed by the assessee, rejecting AO's allocation of 90% or more to house property income.Advertisement and sales promotion expenses were similarly incurred to promote the mall as a whole and recovered via service charges. The Tribunal allowed the expenses as business expenditure, limiting disallowance to Rs. 12 lakhs considering some promotional benefit to rental income.Security charges were incurred for common area security, recovered from tenants, and thus allowable as business expenses. Miscellaneous expenses were also found to relate to business activities, with the assessee having already disallowed amounts attributable to house property income; further disallowance by AO was disallowed.The Tribunal emphasized the principle that in a consolidated business, expenses cannot be arbitrarily bifurcated based on income heads without tangible evidence linking expenses to specific income streams. Reliance was placed on Supreme Court decisions affirming this principle.4. Additions on Account of Deemed Rent under Section 23(1)(c)The AO added deemed rent for vacant premises under section 23(1)(c), applying rental rates from comparable leased properties. The assessee demonstrated that one property was used for its own business (godown), and others were vacant due to repairs or lack of tenants, subsequently let out in the following year.The Tribunal held that where property is occupied for business purposes or genuinely vacant, addition under section 23(1)(c) is not justified. The assessee was entitled to vacancy allowance. The additions were deleted.5. Disallowance under Section 14A read with Rule 8DThe AO disallowed interest and other expenses attributable to exempt income (dividend income) under section 14A read with Rule 8D. The CIT(A) deleted disallowance of interest after noting the assessee had sufficient own funds exceeding investments, relying on jurisdictional High Court decisions.The Tribunal upheld deletion of interest disallowance but confirmed disallowance under Rule 8D(2)(iii) to the extent of Rs. 6,25,294, noting that AO must record satisfaction on correctness of assessee's claim before making disallowance. Since AO did not record such satisfaction or disprove assessee's detailed working, disallowance beyond offered amount was not justified.Judicial precedents were cited emphasizing the mandatory requirement of AO's satisfaction before invoking Rule 8D disallowance.6. Allowability of Interest Expenditure and Disallowance under Section 36(1)(iii)The AO disallowed interest expenditure on borrowing, questioning the need for borrowing given substantial own funds. The CIT(A) deleted disallowance, holding that AO cannot substitute his commercial judgment for that of the assessee's business decisions.The Tribunal upheld CIT(A)'s deletion, noting that borrowed funds were used for business purposes, including construction of premises let out during the year. Bank overdraft was used for liquidity, and no material was brought to contradict CIT(A)'s findings.Disallowance under section 36(1)(iii) relating to capitalized interest was also deleted following consistent earlier decisions.7. Expenditure Incurred for Increase in Share CapitalThe AO disallowed expenditure incurred for increase in share capital as capital in nature. The CIT(A) and Tribunal confirmed the disallowance, relying on Supreme Court precedents holding such expenses are not allowable as revenue expenditure.Significant Holdings'A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars.''No reopening of assessment can be made merely on the basis of change of opinion on the same set of facts. There must be tangible material and failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment.''In a consolidated business, expenses cannot be bifurcated arbitrarily on the basis of different heads of income without tangible evidence linking expenses to specific income streams.''Disallowance under section 14A read with Rule 8D can be made only after the Assessing Officer records satisfaction regarding the correctness of the claim made by the assessee.''Expenditure incurred for increase in share capital is capital in nature and not allowable as revenue expenditure.''Interest expenditure incurred on borrowed funds used for business purposes is allowable even if the assessee has substantial own funds.'Final determinations include deletion of penalties under section 271(1)(c), quashing of reopening notices beyond four years where based on change of opinion, deletion of additions on deemed rent under section 23(1)(c) for vacant premises genuinely not intended to be let out, allowance of majority of expenses incurred as business expenditure without arbitrary reallocation to income from house property, restriction of disallowance under section 14A to amounts supported by AO's recorded satisfaction, and confirmation of disallowance of expenditure for increase in share capital.