2024 (2) TMI 1607 - AT - Income Tax

Order sends s.35AD deduction back to AO for fresh verification of split agricultural and non-specified business income; upholds salary apportionment

ITAT, Indore set aside the issue of deduction under s.35AD to the file of the AO for fresh verification of bifurcated income from specified (agricultural ... Disallowance of deduction of 35AD - receipts of non- specified business - CIT(A) allowed deduction on the basis of the facts that the assessing officer hasn't made certain verification and determined a random figure as income of the assessee from specified business, without even not verifying the actual expense incurred by the assessee wholly and exclusively for the specified business - HELD THAT:- AO has not given any calculation or basis for estimation of the income from specified business carrying out the activities of warehousing and storage of agricultural produce and sugar. CIT(A) has allowed the claim of the assessee by accepting contention of the assessee that 97.47% of the total storage/warehousing was in respect of agricultural produce and only 2.53% storage facility was used for non-agricultural produce. These details appears to have not been produced before the AO as the AO has specifically mentioned that the assessee had not provided the profit and gain derived by the undertaking from the operating warehouses on which the deduction u/s 35AD has been claimed. Since the assessee has not disputed the fact that warehouse facilities were provided for agricultural produce as well as non-agricultural produce therefore, the only dispute is regarding the bifurcated details of income earned from the specified business activities being the warehouse facility provided for storage of agricultural produce as well as non-agricultural produce. AR has produced bifurcated income and expenditure details. Accordingly in the facts and circumstances of the case this issue of deduction u/s 35AD is set aside to the record of the AO for proper verification and consideration of the bifurcated details of income from specified and non-specified business of the assessee and then adjudicate the issue as per law. Disallowance of salary expenditure by treating the same as capital in nature - assessee has debited a sum in the profit and loss account under the head salary and other expenses (construction) which shows that the salary expenditure is for construction of godown/warehousing and therefore, it is a capital expenditure not allowable u/s 37 - HELD THAT:- We note that an identical issue has been considered by this Tribunal in assesse’s own case for A.Ys.2005-06 to 2008-09, [2012 (5) TMI 395 - ITAT INDORE] 2010-11 [2020 (5) TMI 757 - ITAT INDORE] 2011-12 [2020 (7) TMI 68 - ITAT INDORE] observation that the assessee did not produce detailed working of the basis apportionment is not correct. The appellant has produced and submitted the details of expenses alongwith its apportionment between revenue and capital expenditure before the AO. AO has acted illegally in not considering the order of the Hon'ble ITAT Indore [2012 (5) TMI 395 - ITAT INDORE] for the assessment years 2005-2006 to 2008-2009 in which the similar issue has been allowed in appellants favor. ISSUES PRESENTED AND CONSIDERED 1. Whether deduction under section 35AD is allowable in respect of investments in warehousing where the assessee operates godowns for storage of agricultural produce and non-agricultural produce and the Assessing Officer estimated income from the specified business without providing a basis or verifying bifurcated income/expenditure. 2. Whether the Assessing Officer was justified in denying deduction under section 35AD by estimating income from specified business at a loss based on website information and without accepting or verifying the assessee's bifurcated accounts. 3. Whether salary and related expenses debited under 'salary, allowance and other expenses - construction' are capital in nature and therefore not allowable as revenue expenditure under section 37 (i.e., whether such expenditure must be disallowed as capital expenditure for construction/creation of enduring benefit). 4. Whether the Commissioner of Income Tax (Appeals) erred in reversing the Assessing Officer's disallowance of salary/construction overheads by following earlier tribunal decisions in the assessee's own case. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2 - Allowability of deduction under section 35AD where warehouses store both specified (agricultural produce) and non-specified goods, and AO's estimation without recorded basis Legal framework: Section 35AD grants deduction for capital expenditure incurred for specified businesses (including warehousing for agricultural produce under the provision cited). Eligibility requires that investments be used for the specified business; onus to establish income and expenditure attributable to specified business lies on the taxpayer, subject to verification by assessing authorities. Precedent treatment: No prior conflicting higher-court precedent was held to be binding in the judgment; the Tribunal relied on appellate practice principles that factual bifurcation and apportioned accounting submitted by the assessee merit consideration and verification by the AO. Interpretation and reasoning: The Assessing Officer had denied the section 35AD claim after treating the assessee as leasing warehouses for non-agricultural storage and by estimating profit/loss from specified business (arriving at a loss of Rs.19.45 crores) without furnishing calculations or a stated basis for the estimate in the assessment order. The CIT(A) accepted the assessee's assertion (and subsequent production before the Tribunal) that 97.47% of storage related to agricultural produce and 2.53% to non-agricultural goods, and allowed the deduction. The Tribunal found that the AO had not recorded any computation or basis for his estimate and that the assessee later produced bifurcated income/expenditure details which were not considered at assessment; accordingly the proper course was to remit the issue to the AO for verification and adjudication in accordance with law, giving the assessee an opportunity of hearing. Ratio vs. Obiter: Ratio - where an assessing officer makes an estimate of income attributable to specified business but fails to record or disclose the basis/calculation and where the assessee furnishes bifurcated accounts subsequently, the matter should be remitted to the AO for verification rather than permanently denying the statutory deduction. Obiter - observations criticizing the AO's reliance on website material and remarking on modus operandi are ancillary to the primary remedial direction. Conclusion: The Tribunal set aside the CIT(A)'s allowance for fresh verification by the AO, directing the AO to consider the bifurcated income/expenditure details and to adjudicate the section 35AD claim afresh with due opportunity to the assessee. The AO's prior estimate was held to be unsupported by recorded basis and therefore not sustainable as final treatment. Issue 3 & 4 - Characterisation of salary/other construction expenses (Rs.2,35,67,955) as capital or revenue Legal framework: Expenditure is to be classified as revenue or capital in nature for allowance under section 37; capital expenditure for acquisition/construction of fixed assets is not allowable as revenue expense in the year of payment. Precedent treatment (followed): The Tribunal applied binding earlier tribunal decisions in the assessee's own case for multiple assessment years where identical head-of-expense apportionments were considered and allowed. The CIT(A)'s decision followed those earlier tribunal and appellate outcomes; the current Tribunal upheld that approach as binding on the AO and lower authorities. Interpretation and reasoning: The impugned amount was shown in profit and loss under the major head of construction but the assessee produced details/workings of apportionment between capital and revenue elements (time/man-days basis). The CIT(A) relied on the assessee's earlier favorable determinations by the Tribunal and directed deletion of the AO's disallowance. Given the identity of issue, prior appellate determinations in the assessee's favor and the production of apportionment details, the Tribunal found no illegality or error in the CIT(A)'s order and declined to disturb it. Ratio vs. Obiter: Ratio - where identical factual and accounting treatment has been repeatedly adjudicated by the Tribunal in favour of the taxpayer and apportionment details are on record, the Assessing Officer cannot disallow recurring overheads as entirely capital without distinguishing factual circumstances or rebutting the apportionment. Obiter - references to specific higher court authorities cited by the assessee in earlier proceedings are illustrative of binding effect but not newly applied to change law in this order. Conclusion: The Tribunal upheld the CIT(A)'s deletion of the disallowance of Rs.2,35,67,955 as being consistent with earlier tribunal decisions in the assessee's own case; grounds of appeal challenging that deletion were dismissed. Cross-references and procedural directive Where the taxpayer submits bifurcated income/expenditure details for specified and non-specified activities after an AO's unexplained estimate, the appropriate remedy is verification by the AO on record remitted by appellate authority (see Issues 1-2). Where an identical issue has been repeatedly decided by the Tribunal in the taxpayer's favour with apportionment particulars available, the AO must follow such binding appellate findings and cannot mechanically treat recurring overheads as wholly capital (see Issues 3-4).