2017 (12) TMI 1415 - AT - Income Tax

Addition u/s 14A r.w.r. Rule 8D - Held that - It is the duty of assessee to justify the source of investment mad by the assessee in the investment / PPF irrespective of fact that the own fund of assessee exceeds the impugned investment. We find that the issue of disallowance of interest will accordingly be decided after verifying the details whether the impugned investment was made by the assessee out of her own fund or borrowed fund. Thus, in the interest of justice and fair play we are inclined to restore the issue back to the file of AO with a direction to verify the source of investment made by the assessee in the impugned equity shares / PPF. In terms of above, this ground of Revenue s appeal is allowed for statistical purpose. For disallowance made by the AO under Rule 8D(2)(iii) of I.T Rules, 1962. At the outside, it was observed that assessee has sum motu made the disallowance of ₹15 lacs against the exempted income earned by it during the year. However, the AO has invoked the provision of Rule 8D(2)(iii) without recording the satisfaction as envisaged under the provision of Section 14A of the Act. We also find that in similar facts and circumstance, the Hon ble Co-ordinate Bench of this Tribunal in assessee s own case in immediate preceding AY 2010-11 has deleted the addition Disallowance on account of no business activity - Held that - At the outset, it was observed that assessee has claimed total income business expenses in its profit and loss account for ₹41,49,216/- only and , total expenses disallowed by AO comes to ₹41,48,587/-. Thus, in our considered view further disallowance of ₹15,00,632/- will lead to the double addition in the hands of assessee. Moreover, the amount of disallowance cannot exceed the actual expense claimed by assessee in its income tax return. In this view of the above matter, we do not find any infirmity in the order of Ld. CIT(A). We uphold the same Addition under the head house property - Held that - It is undisputed fact that impugned properties are commercial properties and the assessee conceded the addition made by the Ld. CIT(A) for ₹4.20 lacs as the addition of the same has not been challenged. Therefore, we dismiss the plea of Ld. AR that no addition can be made in respect of commercial property under the head house property . FMV determination - Held that - AR has not brought any documentary evidence suggesting that fair market value as recommended by the Inspector of Department is not as per prevailing market rate. Thus in this view of the above, we find no infirmity in the order passed by Ld. CIT(A). Accordingly, we uphold the same. Hence, this ground of Revenue s appeal is allowed.

Summary

Issues Involved:
1. Deletion of addition made under Section 14A read with Rule 8D.
2. Deletion of disallowance of expenses claimed on earning interest income.
3. Restriction of deemed House Property income.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made Under Section 14A Read with Rule 8D:
The first issue raised by the Revenue concerns the deletion of an addition of ?74,75,470/- made by the Assessing Officer (AO) under Section 14A read with Rule 8D of the Income Tax Rules, 1962. The assessee, an individual deriving income from investments, had earned exempted income and disallowed ?15 lakh suo-motu under Section 14A. However, the AO, observing that the disallowance was not in accordance with Rule 8D, calculated a higher disallowance of ?89,75,470/- and added the remaining ?74,75,570/- to the assessee's total income.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, noting that the assessee's own capital exceeded the investments made in equity shares and PPF, and there was net interest income. The CIT(A) referenced a similar decision in the assessee's case for the preceding year (2010-11), where the disallowance under Section 14A was struck down.

The Revenue appealed, arguing that the assessee failed to demonstrate the source of funds for the investments, as required by the jurisdictional High Court in the case of Dhanuka & Sons vs. CIT. The Tribunal, acknowledging the need to verify the source of investment, restored the issue to the AO for verification, allowing the ground for statistical purposes.

2. Deletion of Disallowance of Expenses Claimed on Earning Interest Income:
The second issue involves the deletion of a disallowance of ?15,00,632/- made by the AO on the grounds that the interest income should be classified under "income from other sources" and no business expenses should be allowed due to the absence of business activity. The AO had already disallowed ?26,48,587/- under Rule 8D(2)(iii) and sought to disallow the balance ?15,00,632/-.

The CIT(A) deleted the disallowance, noting that the total expenses claimed by the assessee were ?41,49,216/-, and the disallowances already made covered this amount. Therefore, any further disallowance would result in double addition. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's ground.

3. Restriction of Deemed House Property Income:
The third issue pertains to the restriction of deemed House Property income from ?8.40 lakh to ?4.20 lakh. The AO, based on the report of a Departmental Inspector, determined a fair market rent of ?20,000 per month per shop for the assessee's five shops, leading to an annual value of ?12 lakh. After allowing a deduction under Section 24(1), the AO added ?8.40 lakh to the assessee's income.

The CIT(A) reduced the addition to ?4.20 lakh, considering the assessee's submission that the rent value was excessive. The Revenue appealed, arguing that the CIT(A) had no basis for reducing the fair market value determined by the Departmental Inspector. The Tribunal, finding no documentary evidence to counter the Inspector's valuation, upheld the CIT(A)'s decision, dismissing the Revenue's ground.

Conclusion:
The Tribunal's decision resulted in a partial allowance of the Revenue's appeal for statistical purposes, with directions for the AO to verify the source of investments under Section 14A. The other grounds raised by the Revenue were dismissed, upholding the CIT(A)'s decisions on the disallowance of expenses and the restriction of deemed House Property income.