2012 (6) TMI 384 - AT - Income Tax

Disallowing expenditure - 50% of Legal & Professional Expenses assessee contented that expenses were incurred in settlement of dispute of the property in which the assessee company was the partner - Held that - The expenditure claimed also includes expenses for development agreement which has been entered into by the partnership firm with third party in respect of the land after the appellant reaching a settlement with its partners - thus any expenditure incurred in this regard cannot be the expenditure of the appellant - in the absence of the exact break up of expenses he reduced the disallowance to 50% - against assessee. Assessment of Income - Rent and service charges from sub-lease under the head Income form House property or Income from Business Held that - Subletting the premises with the consent of LIC by an agreement made in 1990 which was subsequently renewed in stages for 15 years, the assessee s contention that it is monthly tenant with LIC does not hold good - assessee held to be as deemed owner u/s 27(iiib) and subsequently treated the rental income from State Bank of Indore as income from house property against assessee. Disallowance u/s 14A and rule 8D - expenditure attributable to the exempted income Held that - Making disallowance u/s 14A is no more res integra in view of the judgment in Godrej & Boyce Ltd. Mfg. Co. (2010 (8) TMI 77 (HC)) holding that the provisions of section 14A & Rule 8D are not retrospective, Rule 8D applicable from Assessment Year 2008-09 and disallowance for earlier period to be determined on reasonable basis and not under rule 8D partly in favour of assessee. Income from sale of scrap to be treated as income from other sources or from business and profession Held that - On being to show cause why the sale of scrap not to be to be treated as income from other sources assessee has not replied, since assessee is not doing any business, income from sale of scrap is taxable under the head income from other sources against assessee. Cessation of trade liability - CIT (A) deleted the addition made by AO Held that - Waiver of loan liability credited by the assessee under capital reserve account in its books of account is a capital receipt and cannot be deemed as remission or cessation of liability and consequently no benefit has arisen to the assessee in terms of section 41(1) - if the loan was taken for acquiring the capital asset, waiver thereof would not amount to any income exigible to tax there is no material on record to show that the loan was taken for trading purpose - against revenue. Disallowance of interest applying the proviso to Sec. 36(1)(iii) - CIT (A) deleted the disallowance made by AO Held that - Tribunals statement in assessee s own case that the claim of deduction of interest made u/s 36(iii) when part of the income has been treated as income from house property, therefore, the claim of interest u/s 36(iii) is required to be re-examined and adjudicated. The rental income to be treated as income from house property as assessee has not carried out any business activity with only income by way of sub letting the premises in question - the claim of interest is required to be re-examined , remanded back to the file of the AO partly in favour of Revenue for statistical purpose. Write off of fixed assets and miscellaneous assets computation of book profit u/s 115JB - CIT (A) deleted the addition made by AO Held that - No material on record to show as to how the assessee has written off the fixed assets of ₹ 72.06 lakhs in the profit and loss account out of block of assets without considering the relevant provisions of section 32 with no details of miscellaneous expenditures or any basis of the same to write off - the matter should go back to the file of the AO to examine the same afresh issue as it needs further examination - partly allowed in favour of revenue for statistical purpose.

Issues Involved:
1. Disallowance of Legal & Professional Expenses
2. Classification of Income from Rent and Service Charges
3. Disallowance under Section 14A
4. Classification of Income from Sale of Scrap
5. Addition under Section 41(1) for Cessation of Liability
6. Disallowance of Interest
7. Computation of Book Profit under Section 115JB

Issue-wise Detailed Analysis:

1. Disallowance of Legal & Professional Expenses:
The assessee claimed deduction for legal and professional expenses related to a property dispute. The AO disallowed the entire amount, reasoning that the expenses were the liability of the partnership firm, not the individual partner. The CIT(A) allowed 50% of the claim due to the lack of exact expense breakdown. The Tribunal upheld the CIT(A)'s decision, finding no contrary material against the CIT(A)'s findings.

2. Classification of Income from Rent and Service Charges:
The AO classified rental income and service charges as "Income from House Property" instead of "Income from Business," citing Section 27(iiib) r.w.s. 269UA(f). The CIT(A) agreed with the AO. The Tribunal, following its earlier decision in the assessee's case, upheld the classification under "Income from House Property."

3. Disallowance under Section 14A:
The AO disallowed Rs. 23.17 lacs under Section 14A, attributing it to exempt income. The CIT(A) directed the AO to apply Rule 8D. The Tribunal set aside the issue to the AO for re-examination in light of the Bombay High Court's judgment in Godrej & Boyce Ltd., which requires the disallowance to be worked out on a reasonable basis, not under Rule 8D.

4. Classification of Income from Sale of Scrap:
The AO classified the income from the sale of scrap as "Income from Other Sources," not "Income from Business," due to the absence of business activities. The CIT(A) upheld the AO's decision. The Tribunal, following its earlier decision in the assessee's case, upheld the classification under "Income from Other Sources."

5. Addition under Section 41(1) for Cessation of Liability:
The AO added Rs. 35,67,817/- as income under Section 41(1), considering it a cessation of trade liability. The CIT(A) deleted the addition, stating the advance was not a trading liability and was not allowed as a deduction in any previous year. The Tribunal upheld the CIT(A)'s decision, noting the waiver of loan liability was a capital receipt, not taxable under Section 41(1).

6. Disallowance of Interest:
The AO disallowed Rs. 15.96 lacs of interest on old loans, following past disallowances. The CIT(A) deleted the disallowance, following the Tribunal's earlier decision. The Tribunal set aside the issue to the AO for re-examination, considering the classification of rental income as "Income from House Property."

7. Computation of Book Profit under Section 115JB:
The AO added back the write-off of fixed assets and miscellaneous expenses to the book profit, considering them unascertained liabilities. The CIT(A) deleted the additions, relying on judicial precedents. The Tribunal remanded the issue to the AO for further examination, noting the absence of details on the write-offs.

Conclusion:
The Tribunal's order resulted in partial relief for both the assessee and the Revenue, with several issues remanded for re-examination by the AO. The Tribunal upheld the CIT(A)'s decisions on legal and professional expenses, classification of rental income, and the addition under Section 41(1). It remanded the issues of disallowance under Section 14A, interest disallowance, and computation of book profit under Section 115JB for further examination.

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