2019 (8) TMI 445 - AT - Income Tax

Determination of ALV of house property @10% of original cost of property - House property - HELD THAT - We find that the Tribunal has considered identical issue for AY 2009-10 and after considering relevant facts and also by following the decision in the case of CIT vs. TIP TOP Typography 2014 (8) TMI 356 - BOMBAY HIGH COURT has restored the issue to the file of the AO for Denavo adjudication in light of findings of the Hon ble Bombay High Court that the AO is not bound by Municipal reatable Value, but he can proceed to determine ALV of the house property on the basis of market rate prevailing as on the date. Adhoc disallowance of business promotion expenses - AO has disallowed business promotion expenses on the ground that a similar disallowance has been made for AY 2006-07 by considering the fact that the assessee has debited various business promotion expenses which are in personal nature like hotel expenses, entertainment expenses, gifts and restaurant bills and by no stretch of imagination it can be construed to be incurred for business purpose - HELD THAT - Tribunal has considered identical issue and after considering relevant facts came to the conclusion that considering nature of business of the assessee expenditure incurred towards business promotion is in significant and also it is a customary that the assessee which is in the entertainment business has to incurred certain expenditure for the customers/clients to keep them in good relations - In this view of the matter and consistent with view taken by the Coordinate bench, we direct the AO to delete the additions towards business promotions expenses. Addition u/s 14A - disallowance of expenditure incurred in relation to exempt income - HELD THAT - This year, the assessee has made out a case with necessary details that its own funds is in excess of investments in shares, therefore, no part of interest bearing funds has been used to make investments in shares consequently, no disallowance could be made in respect of interest expenditure. We direct the AO to delete additions made towards proportionate interest expenditure under Rule 8D(2)(ii) I.T. Rules 1962. In so far as disallowance of expenditure under Rule 8D(2)(iii) @ 0.5% of average value of investments, we find that the Tribunal has sustained additions made by the AO towards other expenses on the ground that no convincing arguments have been made either before lower authorities or before us. Facts remain unchanged. Assessee failed to controvert the findings of facts recorded by the Tribunal is incorrect with any evidences. We are of the considered view that there is no error in the findings of fact recorded by the CIT(A) in respect of disallowance of other expenses being 0.5% of average value of investments and hence, the same is confirmed. - Appeal filed by the assessee is partly allowed for statistical purposes.

Summary

Issues Involved:

1. Determination of Annual Letting Value (ALV) of house property.
2. Disallowance of business promotion expenses.
3. Disallowance of interest expenditure under Section 36(1)(iii) and Section 14A of the Income Tax Act.
4. Disallowance of expenditure under Section 14A read with Rule 8D of the Income Tax Rules, 1962.

Detailed Analysis:

1. Determination of Annual Letting Value (ALV) of House Property:

The primary issue concerns the determination of the ALV of a house property. The Assessing Officer (AO) determined the ALV at 10% of the original cost of acquisition, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Tribunal noted that in the assessee’s own case for AY 2009-10, the issue was set aside to the AO to determine the ALV based on the market rate prevailing as per the decision of the Hon’ble Bombay High Court in CIT vs. TIP TOP Typography (368 ITR 330). The Tribunal found that the AO failed to make necessary inquiries regarding the property’s standard rent, fair rent, and municipal rateable value. Consequently, the Tribunal restored the issue to the AO for a fresh adjudication following the guidelines set by the Bombay High Court.

2. Disallowance of Business Promotion Expenses:

The AO disallowed business promotion expenses amounting to ?2,78,160/- on the grounds that they were personal in nature. The CIT(A) partially upheld this disallowance. The Tribunal observed that in the assessee’s case for AY 2009-10, it was established that the expenses were incurred for business purposes and were customary in the entertainment industry. The Tribunal found merit in the assessee’s argument that the expenses were insignificant compared to the business income and were necessary for maintaining good relations with clients. Therefore, the Tribunal directed the AO to delete the disallowance of business promotion expenses.

3. Disallowance of Interest Expenditure under Section 36(1)(iii) and Section 14A:

The AO disallowed interest expenditure under Section 36(1)(iii) and Section 14A, attributing it to borrowings used for acquiring investments yielding exempt dividend income. The Tribunal noted that in the previous assessment year (AY 2009-10), it was established that the assessee had sufficient own funds to cover the investments in shares and securities. Thus, no part of the interest-bearing funds was used for such investments. The Tribunal directed the AO to delete the disallowance of interest expenditure under Rule 8D(2)(ii) of the Income Tax Rules, 1962.

4. Disallowance of Expenditure under Section 14A read with Rule 8D:

The AO disallowed ?3,40,027/- under Rule 8D(2)(ii) and (iii) for expenses related to exempt income. The Tribunal upheld the disallowance of other expenses under Rule 8D(2)(iii) at 0.5% of the average value of investments, as the assessee failed to provide convincing arguments or evidence to counter the findings. The Tribunal confirmed the CIT(A)’s decision on this matter.

Conclusion:

In conclusion, the Tribunal partially allowed the assessee's appeal for statistical purposes. The issue of ALV determination was restored to the AO for fresh adjudication, the disallowance of business promotion expenses was deleted, the disallowance of interest expenditure under Rule 8D(2)(ii) was deleted, and the disallowance of other expenses under Rule 8D(2)(iii) was upheld.