2014 (9) TMI 351 - AT - Income Tax

Disallowance u/s 14A r.w. Rule 8D Held that - Assessee was found to have earned exempt income by way of dividend on investments made in the mutual funds - The existence of such exempt income prompted the AO to invoke section 14A of the Act while computing the total income of the assessee - invoking of rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is neither automatic and nor is dependent merely on the existence of an exempt income in the hands of the assessee relying upon GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT - the invoking of rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is to be understood as being conditional on recording of an objective satisfaction by the AO with regard to the incorrectness of the claim of the assessee in respect of expenditure in relation to the exempt income, having regard to the accounts of the assessee - the parity of reasoning in relation to invoking of rule 8D of the Rules read with section 14A of the Act applies. In the absence of adherence to the requirements of section 14A(2) of the Act, the AO could not have proceeded to invoke rule 8D of the Rules and subject the interest expenditure for disallowance as per clause (ii) of rule 8D of the Rules - the CIT(A) records another finding which is to the effect that the dividend receipt has been directly credited into the bank account of the assessee, thus leaving no scope for incurring any other expenses for earning exempt income by the assessee - the indirect expenditure sought to be disallowed by invoking clause (iii) to sub-rule (2) of rule 8D of the Rules has also been faulted by the CIT(A) - the AO was not justified in invoking rule 8D of the Rules in order to compute the disallowance u/s 14A(1) of the Act Decided against revenue. Income derived from the letting out of premises Business income or not house property Held that - As decided in assessee s own case for the earlier assessment year, it has been held that CIT(A) in holding that the income earned by way of license of letting out of premises of Cyber City is liable to be assessed as business income and not under the head house property , as held by the AO Decided against revenue.

Issues Involved:
1. Deletion of disallowance under Section 14A of the Income Tax Act, 1961.
2. Classification of income earned from letting out premises of 'Cyber City' as business income or income under the head 'House Property'.

Detailed Analysis:

Issue 1: Deletion of Disallowance under Section 14A

Background: The Revenue challenged the deletion of a disallowance of Rs. 20,66,011/- made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, 1961. The AO noted that the assessee had earned dividend income of Rs. 2,75,483/- which was exempt from tax and invoked Section 14A to disallow related expenditure. The assessee argued that the dividend income was incidental business income and not exempt, and further claimed that no borrowed funds were used for the investment in shares or mutual funds.

AO's Determination: The AO disallowed Rs. 20,66,011/- as expenditure related to the exempt income, applying Rule 8D of the Income Tax Rules, 1962.

CIT(A)'s Decision: The CIT(A) deleted the disallowance, noting that the AO did not record satisfaction as required by Section 14A(2) regarding the correctness of the assessee's claim. The CIT(A) found that the assessee had sufficient own funds and no borrowed funds were used for the investments. Additionally, the dividend was directly credited to the bank account, indicating no related expenditure.

Tribunal's Analysis: The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO's power to invoke Rule 8D is conditional upon recording satisfaction regarding the incorrectness of the assessee's claim, which the AO failed to do. The Tribunal referenced the Bombay High Court's judgment in Godrej & Boyce Mfg. Co. Ltd. and concluded that the AO's assertion of dissatisfaction was a bald statement without objective analysis. The Tribunal affirmed that no direct or indirect expenditure was incurred by the assessee in earning the exempt income.

Conclusion: The Tribunal dismissed the Revenue's appeal, affirming the deletion of the disallowance under Section 14A.

Issue 2: Classification of Income from Letting Out Premises of 'Cyber City'

Background: The Revenue contested the CIT(A)'s decision to classify the income from letting out premises of 'Cyber City' as business income instead of income under the head 'House Property'.

CIT(A)'s Decision: The CIT(A) held that the income should be assessed as business income, considering the nature of services provided by the assessee.

Tribunal's Analysis: The Tribunal referred to its previous decisions in the assessee's case for the assessment years 2007-08 and 2008-09, where it was established that the assessee provided complex integrated services and amenities, which were part of a systematic activity to earn profit. The Tribunal noted that these services were essential for IT/Software/BPO businesses and involved substantial investment in plant and machinery, indicating a business activity rather than mere rental income from property.

Conclusion: The Tribunal upheld the CIT(A)'s decision, affirming that the income earned from letting out premises of 'Cyber City' should be classified as business income. The Revenue's appeal on this issue was also dismissed.

Final Judgment:
The Tribunal dismissed the appeal of the Revenue, affirming the CIT(A)'s decisions on both issues. The disallowance under Section 14A was correctly deleted, and the income from 'Cyber City' was rightly classified as business income.

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