2018 (7) TMI 1754 - AT - Income Tax

Adding the ALV of the residential property as Income from House Property - whether the said property was used for the purpose of business - Held that - In this case, the assessee failed to prove with any evidence that the said property has been used for its business as guest house. Therefore, the case law relied upon by the assessee is not considered. Thus, we are of the view that the issue needs to be reconsidered by the Assessing Officer in the light of the decision in the case of Tip Top Typography 2014 (8) TMI 356 - BOMBAY HIGH COURT wherein it was held that if the premises is controlled by Rent Control Act, then the Assessing Officer must undertake the determination of rent himself in terms of the said Act or determine it according to the prevailing rate in the locality. Hence, we set aside the issue to the file of Assessing Officer and direct him to re-consider the issue in the light of our discussion herein above. Disallowing the expenses (i.e. depreciation, electricity, maintenance expenses) pertaining to residential property which was used for the purpose of business - AO disallowed expenses incurred on the ground that once standard deduction as provided u/s. 24 is allowed against rental income/ALV, then no other expenses/expenditure incurred on the said property is allowable - Held that - Assessing Officer has allowed Standard Deduction u/s. 24 of the Income tax Act, 1961, against ALV determined from the property to compute Income from House Property . Once standard deduction is allowed, then no further deductions can be allowed towards any expenditure incurred on said property, whether or not such expenses are incurred in the course of carrying out business of the assessee. The expenses, we are of the considered view that the Assessing Officer was right in disallowing expenses towards property. The learned CIT(A) after considering relevant submissions has upheld the additions made by the Assessing Officer. We do not find any error in the order of the CIT(A), hence we are inclined to affirm the findings of the CIT(A) and reject the ground taken by the assessee. Exclusion of investments in Mutual Funds Growth Option while calculation the disallowance u/s 14A r.w.r. 8D - being investment yielding taxable income - Held that - Being consistency with the view taken by the co-ordinate bench, we direct the Assessing Officer to exclude investment in Mutual Fund Growth Option for the purpose of determining of average value of investments. Further, the assessee has filed a working of disallowance u/s. 14A as per which suo moto disallowance made by the assessee works out to ₹ 51,05,383/-, whereas as per the assessment order the Assessing Officer has taken the suo moto disallowance at ₹ 49,80,383/-. Therefore, we set aside the issue to the file of the AO for the limited purpose of verification of fact with regard to the suo moto disallowance made by the assessee to ascertain whether it is ₹ 49,80,383/- or ₹ 51,05,383/-. Hence, we set aside the issue to the file of the Assessing officer and direct him to make necessary enquiries in light of computation filed by the assessee.

Summary

Issues Involved:
1. Addition of Annual Letting Value (ALV) of residential property as Income from House Property.
2. Disallowance of expenses related to the residential property used for business purposes.
3. Exclusion of investments in Mutual Funds Growth Option while calculating disallowance under section 14A read with Rule 8D.

Issue-wise Detailed Analysis:

1. Addition of ALV of Residential Property as Income from House Property:
The primary issue was whether the ALV of a residential property used as a guest house should be added as Income from House Property. The assessee claimed the property was used for business purposes to accommodate outstation directors, thus not subject to ALV under section 22 of the Income Tax Act, 1961. The Assessing Officer (AO) disagreed, noting the property was listed as a taxable asset under section 2(ea) of the Wealth Tax Act, 1957, and the assessee failed to provide adequate evidence of its use as a guest house. The AO computed the ALV at 8% of the property's cost. The CIT(A) upheld this, agreeing that the property, although used for business, still attracted ALV under section 22. The Tribunal found no merit in the assessee's argument, noting the lack of evidence supporting the business use claim and upheld the AO's computation method but directed the AO to reconsider the ALV determination method, suggesting the municipal rateable value or prevailing market rate should be considered.

2. Disallowance of Expenses Related to Residential Property:
The assessee claimed depreciation, maintenance, and electricity expenses for the property, arguing these were business expenses under section 37(1). The AO disallowed these expenses, stating that once the standard deduction under section 24 is allowed, no further deductions are permissible. The CIT(A) upheld this view. The Tribunal agreed, noting that once the standard deduction is applied, no additional expenses can be claimed, regardless of the property's use for business purposes. Thus, the disallowance of expenses by the AO was affirmed.

3. Exclusion of Investments in Mutual Funds Growth Option:
The Revenue's appeal concerned the exclusion of investments in Mutual Funds Growth Option from the disallowance calculation under section 14A read with Rule 8D. The CIT(A) had allowed this exclusion, noting these investments generated taxable income. The Tribunal referred to its earlier decision for A.Y. 2011-12, which supported the exclusion of such investments from the disallowance calculation. The Tribunal directed the AO to exclude investments capable of earning taxable income from the average value of investments for disallowance computation. Additionally, the Tribunal instructed the AO to verify the correct amount of the assessee's suo moto disallowance under section 14A.

Conclusion:
Both the assessee's and the Revenue's appeals were partly allowed for statistical purposes. The Tribunal directed a reconsideration of the ALV determination method and verification of the correct disallowance amount under section 14A. The disallowance of expenses related to the residential property was upheld.