2018 (1) TMI 839 - AT - Income Tax

Disallowance of expenses when the business was not fully functional - Held that - Assessing Officer has not disallowed 100% expenditure and he had considered the maximum expenditure as genuine and having been incurred for the purpose of business u/s 37(1) of the Act, which means that the expenditure claimed by the assessee has been considered as excessive. Nowhere in the order of the Assessing Officer there is a whisper as to how the expenditure is excessive and how the expenditure to the extent of ₹ 25,13,385/- is not having been incurred for the purpose of business u/s 37(1) of the Act or there is a personal expenditure. Making of estimation for disallowance under such circumstances and facts of the case is not permissible. Treatment to rental income - business income or income from house property - Held that - The assessee had exploited the asset for commercial exploitation in the form of employees quarters, office premises, etc. Therefore, under such facts and circumstances of the case, we find no infirmity in the order of the CIT(A) who has rightly treated the income as income assessable under the head business income instead of assessable under the head income from house property . Disallowance u/s 14A - Held that - AO has wrongly applied the formula given in Rule 8 of the I.T. Rules. The arguments made by the ld. AR that the investments were old investments except the shares of MTCPL which were revived as part of rehabilitation scheme duly approved by BIFR and on which no dividend income was earned during the year. The assessee having incurred demat charges amounting to ₹ 2,18,304/- which, in fact, relates to earning of dividend income and to that extent, the CIT(A) has rightly disallowed and allowed the balance relief of ₹ 36,95,625/-. - Revenue appeal dismissed.

Summary

Issues Involved:
1. Deletion of disallowance of expenses when the business was not fully functional.
2. Classification of rental income as business income instead of income from house property.
3. Restriction of disallowance under Section 14A of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Expenses:

The Revenue challenged the deletion of disallowance of expenses amounting to ?25,13,385/- by the CIT(A), arguing that the business was not fully functional. The Assessing Officer (AO) had observed that the assessee's income was primarily from interest, dividends, and rent, with no significant business activities. Despite this, the AO allowed partial expenses under Section 37(1) of the Income-tax Act, estimating that 30% of certain expenses were not justifiable.

The CIT(A) deleted the disallowance, noting that the expenses were genuine and incurred for business purposes. The CIT(A) emphasized that actual income generation from the expenditure was not necessary if the expenses were for business purposes, citing several Supreme Court judgments. The Tribunal upheld the CIT(A)'s decision, finding no evidence from the AO to justify the disallowance as excessive or unrelated to business. The Tribunal dismissed this ground of the Revenue's appeal.

2. Classification of Rental Income:

The AO classified the rental income of ?85.02 lacs as "Income from House Property" under Section 22 of the Act, arguing that management of properties does not constitute business. The CIT(A) reversed this, stating that the rental income derived from business assets during a temporary suspension of business should be treated as "business income." The CIT(A) relied on various court decisions, including the Supreme Court's ruling in CIT Vs. Vikram Cotton Mills Ltd, which held that income from temporary leasing of business assets during a business suspension is assessable as business income.

The Tribunal concurred with the CIT(A), noting that the assessee's temporary business suspension was part of a rehabilitation scheme approved by BIFR. The Tribunal found no infirmity in the CIT(A)'s order and dismissed this ground of the Revenue's appeal.

3. Restriction of Disallowance under Section 14A:

The AO disallowed ?39,14,000/- under Section 14A, applying Rule 8D, for expenses related to earning exempt dividend income of ?33,54,00,000/-. The assessee contended that no new borrowings were made, and the investments were from internal accruals, offering a disallowance of ?63,000/- for related expenses.

The CIT(A) restricted the disallowance to ?2,18,304/- for demat charges, observing that only actual expenditure should be disallowed under Section 14A, not notional amounts. The CIT(A) noted that the AO did not record any dissatisfaction with the assessee's claim, a prerequisite for applying Rule 8D, as held in the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO must record dissatisfaction with the assessee's claim before applying Rule 8D. The Tribunal found no infirmity in the CIT(A)'s order and dismissed this ground of the Revenue's appeal.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The order was pronounced in the open court on 10.11.2017.