2021 (3) TMI 325 - AT - Income Tax

Allocating expenses to agricultural income and non-agricultural income - Apportionment of the expenses relatable to the earning of exempted agricultural income for making disallowance and consequently erred in sustaining the addition in the computation of taxable total income without assigning proper reasons and justification - HELD THAT - As gone through orders of the authorities below Admittedly, the assessee has maintained separate books of accounts for agricultural activity and for Head Office operations. Further, at Head Office level except interest income, no other business activity was carried out for impugned assessment year. On perusal of expenses claimed at Head Office level, we find that except director remuneration all other expenses are related to business activity of the assessee. As claim of assessee before the AO that director salary is related to agricultural operations because director personally takes care of estate activity. We are of the considered view that if at all allocation of expenses is required between agricultural income and non-agricultural income, then only director s remuneration can be apportioned to agricultural operations and non-agricultural operations. Since assessee himself has admitted that agricultural operations were taken care of by the director, we are of the considered view that remuneration to the director amounting to ₹ 3,00,000/- is related to agricultural operations and hence, direct the Assessing Officer to restrict apportionment of expenses to the extent of director s remuneration. Accordingly, apportionment of all other expenses in the ratio of agricultural income and non-agricultural income has been deleted. AO has assessed interest income under the head income from other sources and further disallowed total expenditure incurred at Head Office on the ground that said expenditure is relatable to agricultural operations of the assessee - AO having accepted fact that Head Office expenses needs to be apportioned between agricultural income and non-agricultural income, has erred in disallowing total expenses for impugned assessment year without there being any change in facts. We are of the considered view that Assessing Officer has erred in disallowing total expenditure incurred at Head Office and considered as expenditure incurred for agricultural operations - for impugned assessment year also, if we consider nature of expenditure incurred at Head Office, director remuneration and other expenditure are similar to expenditure incurred for previous financial year. Further, for immediately preceding financial year, we have considered identical issue and held that except director remuneration no other expenses can be apportioned to agricultural income and non-agricultural income. Therefore, consistent with view taken by us for immediately preceding year, we are of the considered view that only director remuneration can be apportioned to agricultural operations because director is personally taking care of estate activity. Hence, we direct the Assessing Officer to consider director remuneration to agricultural operations. Interest income - Assessing Officer in the immediately preceding year has accepted interest income offered by assessee under the head income from business has suddenly changed head of income to income from other sources without there being any change in facts and circumstances for impugned assessment year. Therefore, we direct the Assessing Officer to consider interest income under the head income from business as claimed by assessee and further direct the Assessing Officer to allow expenditure incurred at Head Office except director salary against interest income.

Summary

Issues:
Apportionment of expenses for agricultural and non-agricultural income, justification of expenses allocation, natural justice principles violation, consistency in apportionment method for different assessment years, categorization of interest income, allocation of director remuneration to agricultural operations.

Analysis:
1. Apportionment of Expenses for Agricultural and Non-Agricultural Income:
The case involved appeals against orders pertaining to assessment years 2014-15 and 2015-16 regarding the apportionment of expenses between agricultural and non-agricultural activities. The Assessing Officer had allocated expenses to agricultural income based on a ratio, leading to a dispute. The Tribunal noted that the assessee maintained separate books of accounts for both activities. It was observed that, except for director remuneration, all other expenses at the Head Office were related to the business activity of the assessee. The Tribunal directed the Assessing Officer to restrict the apportionment of expenses to only the director's remuneration, which was considered to be related to agricultural operations.

2. Justification of Expenses Allocation:
The Tribunal considered the arguments presented by the parties. The assessee contended that the expenses incurred at the Head Office had no bearing on agricultural activity except for the director's remuneration. On the other hand, the Revenue argued that all expenses, including those at the Head Office, were related to the main business activity of agricultural operations. The Tribunal, after examining the facts and submissions, concluded that only the director's remuneration could be apportioned to agricultural operations, thereby allowing the appeal partly for the assessment year 2014-15.

3. Violation of Natural Justice Principles:
The assessee raised a concern regarding the violation of principles of natural justice, claiming that there was no proper opportunity given before passing the impugned order. However, the Tribunal did not find merit in this argument and proceeded to analyze the substantive issues at hand.

4. Consistency in Apportionment Method for Different Assessment Years:
Regarding the assessment year 2015-16, the Tribunal noted that the Assessing Officer had applied a different method of apportioning expenses compared to the previous year. The Tribunal emphasized the importance of consistency in tax proceedings and directed the Assessing Officer to follow the same approach as in the preceding year, specifically regarding the apportionment of director remuneration to agricultural operations.

5. Categorization of Interest Income and Allocation of Director Remuneration:
For the assessment year 2015-16, the Tribunal addressed the categorization of interest income and the allocation of director remuneration. It directed the Assessing Officer to consider the interest income under the head 'income from business' as claimed by the assessee and to allocate director remuneration to agricultural operations, aligning with the decision taken for the previous financial year.

In conclusion, the Tribunal partly allowed both appeals, emphasizing the need for a proper allocation of expenses based on the nature of activities and maintaining consistency in the apportionment method across different assessment years.