2011 (10) TMI 749 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of 25% rent paid to L&DO as per lease agreement.
2. Disallowance under Section 14A of the Income Tax Act related to expenses incurred for earning exempt income.

Issue 1: Deduction of 25% Rent Paid to L&DO

The Revenue challenged the CIT(A)'s decision to allow a deduction of Rs. 3,59,23,120/- (for AY 2006-07) and Rs. 2,87,54,025/- (for AY 2007-08) paid to L&DO. The Assessing Officer (A.O.) argued that deductions under Sections 23 and 24 of the Income Tax Act are exhaustive and do not permit such deductions. The assessee, however, contended that 25% of the rent was diverted by overriding title to L&DO as per the lease agreement, and thus not part of its income.

The CIT(A) observed that the lease agreement mandated the payment of 25% of the rent to L&DO, which was a case of diversion of income at source, not application of income. The CIT(A) also noted that the Department had accepted this practice in previous years, and there was no change in facts or legal position to justify a deviation.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the lease agreement's terms were genuine and consistently accepted by the Department. The Tribunal also cited relevant case laws supporting the concept of diversion of income by overriding title.

Issue 2: Disallowance under Section 14A

The A.O. disallowed Rs. 89,55,000/- under Section 14A read with Rule 8D, arguing that expenses related to earning exempt income should be disallowed. The assessee countered that no borrowed funds were used for investments yielding exempt income and that sufficient own funds were available.

The CIT(A) accepted the assessee's argument, noting that the investments were made in earlier years from own funds, and there was no net interest expense charged to the Profit & Loss account. The CIT(A) also referenced various case laws supporting the assessee's position.

The Tribunal upheld the CIT(A)'s decision, noting that the facts showed no expenses were incurred for earning exempt income, and the consistent practice of allowing such claims in previous years supported the assessee's position. The Tribunal rejected the Revenue's request to remand the issue back to the A.O., as the facts were clear and uncontroverted.

Conclusion:

The Tribunal dismissed both appeals filed by the Revenue, affirming the CIT(A)'s decisions on both issues.