2019 (3) TMI 694 - AT - Income Tax

Disallowance of the expenditure incurred on repair and maintenance - nature of expenditure - revenue or capital expenditure - HELD THAT - D.R. rightly pointed out that purchases of laptop, LED screen and Ram and electric motor pump are clearly capital expenditure in nature and total of the same comes to ₹ 1,17,997/- (Rs.24,328/- ₹ 51,435/- ₹ 42,324/-). Therefore, these would provide enduring benefit to the assessee and as such could not be treated as revenue expenditure. However, the remaining expenses of the appellate order, are in the nature of software charges, office construction expenses, purchase of hard disk, UPS etc., are clearly revenue expenditure in nature, therefore, no addition could be made for the same. In this view of the matter, we set aside the orders of the authorities below and delete the addition on this head except to the extent. AO is directed to restrict the addition. This ground of appeal of assessee is allowed partly. Disallowance u/s 14A - sufficient own capital to make investment - HELD THAT - It is clear that assessee claimed that no expenditure have been incurred for earning exempt income. A.O. has not recorded any satisfaction as to how the claim of assessee was incorrect. No material have been brought on record to justify the addition. Further, assessee has sufficient own capital to make investment in the firm. Therefore. no disallowance under section 14A is permissible. appeal of the assessee is allowed. Enhancement of income by CIT(A) - Treating agricultural income as taxable income - Power of CIT(A)- HELD THAT - it is established that the assessing officer did not consider the agricultural income to be taxable income and assessing officer has considered the issue with reference to disallowance of expenses under section 14A of the Income Tax Act. Therefore, Ld. CIT(A) was not justified in enhancing the income by considering it as source of income on account of Agricultural income considered to be taxable income without any basis as to how the agricultural produce was spontaneous growth. It is also well settled Law that power of enhancement was restricted to the subject matter of the assessment or the source of income, which had been considered expressly or by clear implication by the assessing officer from the point of view of taxability and that the Appellate Commissioner had no power to assess the source of income which had not been taken into consideration by the assessing officer. The Ld. CIT(A), however, as against the Law has considered the new source of income for the purpose of making the addition by enhancing the income of the assessee from different new source, which have not been considered by the assessing officer. Thus, the Ld. CIT(A) clearly acted beyond his power and jurisdiction. Addition u/s 14A by disallowing expenses - HELD THAT - In this case, assessee has not made any investment to earn agricultural income because land was acquired for real estate business purposes. No expenses have been incurred to earn any agricultural income. The assessee has sufficient own funds to make investment in agricultural land. Disallowance under section 14A is also not permissible in the facts and circumstances of the case and our findings on Ground No.3 above, would also support that the addition made by the assessing officer under section 14A of the Income Tax Act, 1961, was also not permissible. We set aside the orders of the authorities below and delete the entire addition made by the assessing officer as well as an enhanced by the Ld. CIT(A).

Summary

Issues Involved:
1. Disallowance of repair and maintenance expenditure.
2. Disallowance under Section 14A of the Income Tax Act.
3. Treatment of agricultural income as taxable income.

Detailed Analysis:

1. Disallowance of Repair and Maintenance Expenditure:
The assessee challenged the disallowance of ?6,04,361/- out of the expenditure incurred on repair and maintenance. The assessing officer observed that certain expenses were capital in nature and disallowed ?7,55,414/-. The Ld. CIT(A) reduced the disallowance to ?6,04,361/- after examining the details and noting that not all expenses conferred enduring benefits. The assessee contended that these were routine expenses and not capital in nature. The Tribunal partially upheld the assessee's appeal, allowing the expenses except for ?1,17,997/- spent on items like laptops and LED screens, which were deemed capital expenditures.

2. Disallowance under Section 14A of the Income Tax Act:
The assessee challenged the disallowance of ?22,17,583/- under Section 14A read with Rule 8D. The assessing officer noted that the assessee claimed exempt income from a partnership firm and made the disallowance. The assessee argued that no expenditure was incurred to earn the exempt income, and it had sufficient interest-free funds. The Ld. CIT(A) upheld the disallowance, relying on various judicial precedents. The Tribunal, however, found that the assessee had sufficient own funds and no proximate cause for the disallowance was established. It set aside the orders of the authorities below and deleted the addition, holding that no disallowance under Section 14A was permissible.

3. Treatment of Agricultural Income as Taxable Income:
The assessee challenged the enhancement of disallowance by the Ld. CIT(A) from ?16,77,347/- to ?3,39,19,015/- by treating agricultural income as taxable income. The assessing officer disallowed ?16,77,347/- under Section 14A, considering the compensation for nursery and plants as exempt income. The Ld. CIT(A) treated the entire compensation of ?3,39,19,015/- as non-agricultural income, holding that the income was from spontaneous growth and not agricultural operations. The Tribunal found that the Ld. CIT(A) had no power to consider a new source of income and that the compensation received was for agricultural produce, supported by government records. It set aside the orders of the Ld. CIT(A) and deleted the addition, holding that the compensation was agricultural income and not taxable.

Conclusion:
The Tribunal's judgment addressed three main issues: the partial allowance of repair and maintenance expenses, the deletion of the disallowance under Section 14A, and the rejection of treating agricultural income as taxable. The Tribunal emphasized the need for proper evidence and the limitations of the appellate authority in considering new sources of income. The appeal was partly allowed, providing relief to the assessee on significant grounds.