2017 (1) TMI 934 - AT - Income Tax

Income from house property - determination of annual value of the income from house property - Held that - We find that assessee was owner of two flats, that same were rented in the earlier years and it had offered the rental income in its returns,that before the AO/FAA it was claimed that during the year under consideration repair and renovation was carried out and the flats were not rented out, that it was also claimed that the flats were used for office premises,that in the subsequent years the AO had not made any addition under the head beings rental income. Once the assessee had produced the bills of repairs and renovation of the flats and the AO had treated the said expenditure as capital expenditure, there was no justification for making any addition under the head house property income. Both the authorities have not proved that the flats were rented out during the year under appeal. As per the settled principles of taxation if any sum has to be taxed the AO has to bring on record the necessary facts for taxing the same. AO had not discharged the onus in that regard. Therefore, reversing the order of the FAA,we decide the first ground of appeal in favour of the assessee. Addition under section 14 A read with Rule 8D - Held that - We find that assessee had not incurred any expenditure nor had it claimed any expenditure with regard to the tax-free income during the year under consideration. Therefore,there was no justification of any kind to make any dis-allowance invoking the provisions of section 14 A of the Act. The basic precondition for making disallowance under the said section is earning of tax-free income and incurring of expenditure by the assessee.As both the preconditions are absent in the case under consideration therefore, in our opinion,the order of the FAA has to be reversed. - Decided in favour of the assessee. TD u/s 194C - disallowance on account of non-deduction of tax at source on advertisement expenses and business promotion expenses - Held that - Matter should be restored back to the file of the AO. He is directed to afford a reasonable hearing to the assessee to prove its claim that tax was actually paid by the recipient. The assessee is directed to produce all the necessary evidence before the AO. Ground number three is decided in favour of the assessee,in part. Non-deduction of tax on payment of interest on car loan - Held that - We find that legal payments were made during the year under consideration and the amounts in question pertain to earlier year. Prior period expenses, as per the taxation principles, can be allowed if they are crystallised during the subsequent year. The AO/FAA has not given any finding as to whether the assessee was following the same accounting policy in the earlier and subsequent years of claiming pre paid expenditure on account of crystallised expenditure in the later years.There is no doubt about the genuineness of the payment and therefore same has to be allowed in one of the years. Considering the peculiar facts and circumstances of the case and the fact that assessee had made the payment after the receipt of the bills in the subsequent year,we are of the opinion that ground number 5,filed by the assessee ,should be allowed. Disallowance of remuneration paid to the directors - Held that - AO had disallowed the entire remuneration paid to the director, that the FAA restricted it to 50%, that the director had offered the remuneration income in her individual return of income, that the return of the director was accepted by the Department, that the AO had not made any enquiry about the assertion made before the assessee before him, that it was claimed that she was attending the day-to-day affairs of the company and had stood as guarantor to the banks, that in the subsequent year the AO had allowed the remuneration (Rs. 6 lakhs) paid to her. Considering these facts we are of the opinion that there was no justification for restricting the expenditure to ₹ 3 lakhs. Reversing the order of the FAA, we decide ground in favour of the assessee. Disallowance of the business promotion expenditure - AO had held that assessee had incurred an expenditure through credit cards, that he did not call for any details in that regard, that he had made an ad hoc disallowance at the rate of 20%, that the FAA had confirmed his order - Held that - In our opinion in case of corporate assessees disallowance on account of personal element can be made only if the expenditure incurred was for the personal use of any of the directors/employee and that expenditure did not have any relation with the carrying out of the business. We don t find that AO/FAA had carried out any such exercise. If the AO had any doubt, it was his duty to make further investigation and pinpoint the actual expenditure not incurred for the business of the assessee. We are of the opinion that making and upholding the disallowance was not justifiable. Reversing the order of the FAA, we decide ground in favour of the assessee.

Summary

Issues Involved:
1. Addition of ?5,00,604/- under the head income from house property.
2. Addition of ?12,500/- under section 14A read with Rule 8D of the Income Tax Rules, 1962.
3. Disallowance of ?1.31 lakhs on account of non-deduction of tax at source.
4. Addition of ?79,722/- for non-deduction of tax on payment of interest on car loan.
5. Addition of ?1.04 lakhs being the pre-paid expenses.
6. Disallowance of ?6 lakhs remuneration paid to the director.
7. Disallowance of ?1.66 lakhs out of the business promotion expenditure.

Detailed Analysis:

1. Addition of ?5,00,604/- under the head income from house property:
The Assessing Officer (AO) added ?5,00,604/- to the total income of the assessee under the head income from house property, based on the ownership of two flats that were previously rented out but claimed to be used for office premises during the year under consideration. The First Appellate Authority (FAA) upheld the AO's decision, stating the assessee could not substantiate the conversion of flats to office premises. However, the Tribunal found that the assessee had produced bills for repairs and renovation and that the AO had treated these expenses as capital expenditure. It was noted that no rental income was added in subsequent years. The Tribunal reversed the FAA's order, deciding in favor of the assessee, as the AO failed to prove the flats were rented during the year under appeal.

2. Addition of ?12,500/- under section 14A read with Rule 8D:
The AO made a disallowance of ?12,500/- under section 14A read with Rule 8D, despite the assessee's claim of not earning any tax-free income during the year. The FAA upheld this disallowance. The Tribunal, however, found that the assessee had not incurred or claimed any expenditure regarding tax-free income during the year. As both preconditions for disallowance under section 14A were absent, the Tribunal reversed the FAA's order, deciding in favor of the assessee.

3. Disallowance of ?1.31 lakhs on account of non-deduction of tax at source:
The AO disallowed ?1.31 lakhs for non-deduction of tax at source on certain advertisement and business promotion expenses. The FAA upheld this disallowance. The Tribunal, considering the second proviso to section 40(a)(ia) inserted by the Finance Act of 2012, directed the AO to verify if the tax was paid by the recipient and to provide a reasonable hearing to the assessee. The Tribunal decided this ground in favor of the assessee, in part.

4. Addition of ?79,722/- for non-deduction of tax on payment of interest on car loan:
Following the reasoning for the third ground, the Tribunal restored the issue to the AO for verification that the recipient of the interest payment had paid tax on the disputed amount. The assessee was directed to produce relevant documents before the AO. This ground was partly allowed.

5. Addition of ?1.04 lakhs being the pre-paid expenses:
The AO added ?1.04 lakhs for pre-paid expenses, stating that expenses pertaining to prior periods could not be allowed in the current year under the Mercantile System of accounting. The FAA upheld this addition. The Tribunal noted that prior period expenses could be allowed if crystallized during the subsequent year and found no doubt about the genuineness of the payment. The Tribunal allowed this ground, reversing the FAA's order.

6. Disallowance of ?6 lakhs remuneration paid to the director:
The AO disallowed ?6 lakhs paid to a director, claiming no services were rendered. The FAA restricted the disallowance to ?3 lakhs. The Tribunal found that the director had declared the income and paid tax thereon, and the AO had allowed similar remuneration in subsequent years. The Tribunal found no justification for restricting the expenditure and reversed the FAA's order, deciding in favor of the assessee.

7. Disallowance of ?1.66 lakhs out of the business promotion expenditure:
The AO disallowed 20% of ?8.31 lakhs, citing a personal element in business promotion expenditure. The FAA upheld this disallowance. The Tribunal noted that disallowance for personal elements in corporate expenses should only be made if the expenditure was for personal use, which was not investigated by the AO/FAA. The Tribunal reversed the FAA's order, deciding in favor of the assessee.

Conclusion:
The appeal filed by the assessee was partly allowed, with the Tribunal reversing the FAA's decisions on several grounds and remanding some issues back to the AO for verification. The Tribunal's detailed analysis highlighted the importance of substantiating claims and the necessity for the AO to bring necessary facts on record for taxation.