2016 (1) TMI 615 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - Held that - As decided in assessee s own case for previous AY there is no satisfaction recorded by the AO for invoking Rule 8D of the Rules despite the fact that the assessee has disclosed huge expenditure for earning of exempted income and the same was disallowed himself, the correctness of which is not in doubt. The assessee has enclosed details of investment made in group concerns and subsidiary companies and details of dividend income earned. In view of the above facts and circumstances, we are of the view that the AO has not recorded any satisfaction about the correctness or otherwise of the accounts of the assessee wherein the assessee himself has made disallowance of expenses relatable to earning of exempted income and secondly, we are also of the view that the primary object of investment of assessee is for holding controlling stake in group concerns and not for earning of income out of that investment. In both the eventualities, no disallowance can made u/s. 14A of the Act read with Rule 8D of the Rules - Decided in favour of assessee Proportionate disallowance of legal and professional fees and auditor s remuneration - Held that - Legal and professional fee cannot be attributed to earning of management fee from Mena House Oberoi Hotel, Egypt, URA. Even otherwise, during this year, no legal service was provided to this concern for earning of management fees, hence, there is no nexus with the providing of legal services and that of earning of management fees. Same are the arguments for the expenses of auditor s remuneration. Hence, we agree with the argument of ld. Counsel and allow these expenses. As regards to other expenses no argument was advanced on behalf of assessee qua assessee s appeal. Even we could not find any contrary argument on the expenses allowed by CIT(A) from Ld. DR. Accordingly, the issue of revenue s appeal is dismissed and that of the assessee s appeal is partly allowed. Addition made u/s. 2(22)(e) for deemed dividend - Held that - The issue is covered by the order of the Tribunal in assessee s own case for AY 2007-08 and 2008-09 wherein held that the AO applied the provisions of section 2(22)(e) of the Act in case of loan taken by assessee from Oberoi Plaza Pvt. Ltd. and Bombay Plaza Pvt. Ltd. since Oberoi Plaza Pvt. Ltd. is a 100% subsidiary of the assessee and Bombay Plaza Pvt. Ltd. is a 100% subsidiary of Oberoi Plaza Pvt. Ltd. During the course of appellate proceedings, the assessee filed fresh evidence before CIT(A) in the shape of Memorandum of Association which establishes that the object ancillary to the main object includes money lending, thus, for both the companies the business includes lending of money/advance. These documents were not examined by the AO, hence, we are of the view that let it be examined by the AO and decide the issue afresh. - Decided in favour of assessee for statistical purposes. Allowance of ALV of the house property by rejecting the expected rent and accepting the actual rent received by the assessee by CIT(A) - Held that - The issue is covered by the order of the Tribunal in assessee s own case for AY 2007-08 and 2008-09 as held even as per the deeming provision of Section 23(1)(a), in the case of let out property, only the actual rent received was required to be considered as annual value of property. The AO failed to appreciate such estimation of annual letable value as per provision of Section 23(1)(a) was called for only in case of vacant property and not where the property was actually let out since in the case of let out property, the assessee was not entitled to anything over and above the agreed rent. The said action of the AO has resulted in taxing notional income in the hands of the assessee, which never accrued and hence cannot be brought to tax. Accordingly, we are of the view that the CIT(A) has rightly deleted the addition and hence, we confirm the order of CIT(A) on this issue - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under section 14A of the Income-tax Act, 1961.
2. Disallowance of provision for leave encashment.
3. Proportionate disallowance of legal and professional fees and auditor's remuneration.
4. Addition under section 2(22)(e) of the Income-tax Act, 1961.
5. Annual Letting Value (ALV) of the house property.

Detailed Analysis:

1. Disallowance under section 14A of the Income-tax Act, 1961:
The assessee challenged the CIT(A)'s decision to uphold the AO's disallowance under section 14A read with Rule 8D. The Tribunal noted that the AO did not record any satisfaction about the correctness of the assessee's accounts before invoking Rule 8D. The Tribunal referenced its own decision in the assessee's case for AY 2007-08 and 2008-09, where it was held that unless there is a direct or proximate connection between the exempt income and the expenditure incurred, the provisions of section 14A read with Rule 8D cannot be invoked. The Tribunal allowed the assessee's appeal on this issue.

2. Disallowance of provision for leave encashment:
The assessee contested the CIT(A)'s confirmation of the disallowance of Rs. 3,378 for leave encashment. The Tribunal referred to its previous judgment for AY 2007-08 and 2008-09, where it was decided to remit the issue back to the AO to await the Supreme Court's decision on the matter. The Tribunal followed the same approach and remitted the issue back to the AO for fresh adjudication.

3. Proportionate disallowance of legal and professional fees and auditor's remuneration:
The assessee and revenue both appealed on the issue of proportionate disallowance of expenses related to foreign management fees. The AO had allocated Rs. 90,51,130 as pro-rata expenses, which the CIT(A) reduced to Rs. 46,43,429. The Tribunal found that legal and professional fees and auditor's remuneration did not have a nexus with earning management fees from Mena House Oberoi, Egypt. The Tribunal allowed these expenses for the assessee while dismissing the revenue's appeal and partly allowing the assessee's appeal.

4. Addition under section 2(22)(e) of the Income-tax Act, 1961:
The AO treated advances received from Oberoi Investment Pvt. Ltd. and Oberoi Plaza Pvt. Ltd. as deemed dividends under section 2(22)(e). The Tribunal remitted the issue back to the AO to consider the NBFC certificate and Memorandum of Association of Oberoi Investment Pvt. Ltd., which could establish that the company was in the money lending business, thereby excluding it from the provisions of section 2(22)(e). The Tribunal followed its previous decisions for AY 2007-08 and 2008-09 and set aside the issue for fresh examination by the AO.

5. Annual Letting Value (ALV) of the house property:
The revenue appealed against the CIT(A)'s decision to accept the actual rent received by the assessee instead of the expected rent for determining the ALV. The Tribunal upheld the CIT(A)'s decision, referencing its own judgment for AY 2007-08 and 2008-09, where it was held that for let-out properties, the actual rent received should be considered as the ALV. The Tribunal dismissed the revenue's appeal on this issue.

Conclusion:
The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal for statistical purposes. The key takeaways include the Tribunal's emphasis on the necessity of recording satisfaction before invoking Rule 8D, the remittance of the leave encashment issue pending the Supreme Court's decision, and the acceptance of actual rent received for determining ALV of let-out properties.