2016 (6) TMI 1348 - AT - Income Tax

Disallowance of repairs and maintenance expenses - as per AO assessee had claimed 30% deduction on account of Income from house property and, hence, repairs and maintenance expenses were not allowable - assessee earned rental income - claim of the assessee is that this property was not used for letting out and, hence, no disallowance be made to this extent - HELD THAT - As the necessary details of expenses incurred in respect of the properties let out are not specifically available, it expedient to set aside the impugned order and restore the matter to the file of AO for restricting the deduction qua the properties used for the business purpose. The AO is directed to first identify the properties let out fully or partly and, then, disallow the repairs and maintenance expenses relatable to such let out properties. Needless to say, the assessee will be allowed a reasonable opportunity of being heard. Addition of Administrative expenses - AO observed that the business income of the assessee from Fun and fair game - HELD THAT - AO has made an ad hoc 25% disallowance of expenses by observing that the revenue from the business was much less than the expenses incurred. Apart from that, he has not disputed the factum of the assessee having actually incurred these expenses for the purpose of its business. Simply because the business receipts are less, cannot be a reason to disallow the expenditure incurred otherwise for the purpose of business. Disallowance of depreciation - Since the assessee was carrying on the business of Game and toy machines, the AO allowed depreciation on Games and toy machine - HELD THAT - Once there are assets including Plant and machinery, vehicles, computers, etc., which are being used for the purpose of business from earlier years, the AO cannot disallow depreciation on such assets simply by presuming that such assets must not have been used for the purpose of business. AO has admitted that the assessee carried on the business activity of Game and toys. Unable to appreciate as to how this business under the given circumstances can be carried on without the plant and machinery, vehicle, computers, etc., all of which are necessary items for carrying on the business activity. In my considered opinion, the authorities below were not justified in restricting the depreciation on ad hoc basis when the assets were used for the business purpose. - Addition to be deleted.

Summary

Issues:
1. Disallowance of repairs and maintenance expenses
2. Disallowance of administrative expenses
3. Disallowance of depreciation

Issue 1: Disallowance of repairs and maintenance expenses
The appellant contested the disallowance of repairs and maintenance expenses amounting to &8377; 2,75,844. The AO disallowed these expenses as the assessee had claimed a deduction on income from house property, making repairs and maintenance expenses inadmissible. The CIT(A) upheld the disallowance partially, specifically for repairs at two properties. The Tribunal noted that one property was partly let out and partly used as the assessee's office, while the other property was solely let out. The Tribunal directed the matter back to the AO to identify and disallow expenses only for properties let out, emphasizing the need for a fair hearing for the assessee.

Issue 2: Disallowance of administrative expenses
The appellant challenged the disallowance of &8377; 6,17,549 from administrative expenses. The AO made a blanket 25% disallowance due to low business income compared to claimed expenses. The Tribunal found that the expenses were genuinely incurred for business purposes, and the lower income should not be the sole basis for disallowance. Consequently, the Tribunal ordered the deletion of the disallowance, granting relief to the appellant.

Issue 3: Disallowance of depreciation
The appellant disputed the disallowance of depreciation amounting to &8377; 8,34,010. The AO disallowed a portion of the depreciation on various assets, citing low business activity levels. The CIT(A) reduced the disallowance, but the appellant remained aggrieved. The Tribunal observed that the assets in question, such as plant and machinery, were essential for the business of game and toy machines. Therefore, the Tribunal found the restrictions on depreciation unjustified and ordered the deletion of the remaining disallowance, providing relief to the appellant.

In conclusion, the Tribunal partially allowed the appeal, directing the AO to reassess the disallowances in a manner consistent with the actual usage and necessity of the expenses and depreciation for the appellant's business activities.