2021 (8) TMI 159 - AT - Income Tax

Disallowance of expenses relating to residential premises - allowable business expenses or personal expenses - whether said premises was not utilized by the assessee for carrying out her professional activities? - CIT-A deleted the addition - HELD THAT - The assessee is a creative artist. The assessee was engaged as Choreographer and film producer. For the said purpose, the assessee would require creative space from where she could carry out professional engagements. It could be appreciated that as a Choreographer and a film producer, the assessee would need work space to practice dance moves and also for story sessions and other meetings. In this year, except for this space, she has not claimed any other office set-up The proportionate expenses relating to office in all the earlier years were allowed to the assessee. To meet expanding professional demands and to meet the need for bigger house, the assessee moved to new duplex apartment. The said premises were stated to be similarly used by the assessee for office-cum-residence purposes. The assessee was having 6 units out of which 2 units are stated to be used for professional purposes. The assessee has claimed proportionate expenses relating to these two units. These units form part of the opening block of asset in this year. As per the scheme of the Act, under the concept of block of asset, the assets would lose individual identity and depreciation on asset is allowed on block concept notwithstanding the fact that few of the assets were not used for business / professional purposes. As long as the assets remain part of the block and are not parted with by the assessee, the same remain part of the block of asset and depreciation is allowable to the assessee. Since the depreciation on the block has been allowed to the assessee in earlier years, the same could not be denied to the assessee in this year since individual assets have lost their specific identity. The case laws as cited by Ld. CIT(A) in the impugned order support this view and are quite applicable to the facts of the case. Hence, Ld. CIT(A), in our considered opinion, has clinched the issue in correct perspective. Also as per the requirement of Sec.32, to be eligible to claim depreciation, the assessee must own the asset and the asset must be used for the purpose of business or profession. The assessee, in our opinion, has satisfied, both these conditions since building as well as furniture was owned by the assessee and the same was used for the purpose of profession. The assessee has claimed depreciation proportionately on that part only which has been used for the purpose of profession. Therefore, the deprecation claim on building and furniture would be an allowable allowance u/s 32. We order so. The grounds, thus raised by revenue, stand dismissed. Interest claim u/s 36(1)(iii) - The interest paid on capital borrowed for acquisition of an asset after the date on which the asset is first put to use is also allowed as deduction. The assessee has borrowed loan from Standard Chartered Bank for acquisition of the said property at Oberoi Sky Heights. The interest paid on such loan has been bifurcated between residential portion and office portion and interest paid relating to office portion has been claimed as deduction. It was the submissions of the assessee that office has been acquired for the purpose of her profession and therefore, loan is borrowed for the purpose of profession. Further, the unit was put to use during financial year 2011-12 relevant to Assessment Year 2012-13. Therefore, proviso to Sec.36(1)(iii) would not apply and whole of the interest would be an allowable deduction u/s 36(1)(iii). Society electricity charges - The society charges monthly compensation for providing various services. The appellant has bifurcated and claimed society charges relating to units used as office. Similarly, electricity charges relating to units used as office are claimed as deduction. The said claim is under section 37(1) which provide that any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . Assessee fulfils the prescribed conditions of Sec.37(1). More so, the rule of consistency would debar the Ld. AO to adopt different view, facts remaining the same. The usage of units for professional use was accepted in earlier years and similar expenditure claimed in that year was duly allowed to the assessee. Moreover, the assessee has already produced sufficient documentary evidences in the shape of copy of Service Tax Registration Certificate, copies of commercial contracts entered into with producers / third parties, professional fees / sales invoices raised by the assessee on third parties etc. Assessee has proved that a clearly demarcated part of the premise was used by her as the office which is duly supported by various documents on record. There is nothing on record to disprove this claim. Therefore, we are of the considered opinion that the assessee has well substantiated her claim. - Decided against revenue.

Summary

Issues Involved:
1. Deletion of disallowance of expenses related to residential premises.
2. Justification for claiming expenses on residential premises as business expenses.
3. Admissibility of additional evidence during appellate proceedings.
4. Applicability of the rule of consistency in allowing similar expenses in previous years.
5. Allowability of depreciation on assets used partly for business purposes.
6. Deduction of interest on loan borrowed for professional purposes.
7. Deduction of society and electricity charges for office premises.

Detailed Analysis:

1. Deletion of Disallowance of Expenses Related to Residential Premises:
The primary issue was whether the CIT(A) erred in directing the deletion of disallowance of expenses amounting to ?1,55,74,455/- related to residential premises. The revenue contended that the said premises were not utilized by the assessee for professional activities and relied on the Ward Inspector's report, which stated that the premises were used only for residential purposes.

2. Justification for Claiming Expenses on Residential Premises as Business Expenses:
The assessee, a film director and professional choreographer, claimed that part of her residential premises was used as an office. She provided details of expenses such as interest on office loan, depreciation on office and furniture, society charges, and electricity charges, asserting that half of the premises were used for professional purposes. The AO disallowed these expenses due to a lack of satisfactory explanation and supporting documentary evidence.

3. Admissibility of Additional Evidence During Appellate Proceedings:
During the appellate proceedings, the assessee produced additional evidence to substantiate her claim, leading to a remand report from the AO. The AO reiterated the lack of information in the specified format and opposed the admission of additional evidence. However, the assessee argued that the necessary details were furnished during the assessment proceedings, and similar expenses were allowed in earlier years.

4. Applicability of the Rule of Consistency:
The assessee highlighted that similar expenses were allowed in earlier years, and disallowing them in the current year would violate the rule of consistency. The CIT(A) noted that the assessee had provided sufficient documentary evidence, including service tax registration certificates, commercial contracts, and invoices bearing the address of the premises. The CIT(A) relied on the Tribunal's decision in ACIT V/s M/s Krystal Colloids Private Ltd., which emphasized the concept of block assets and the rule of consistency.

5. Allowability of Depreciation on Assets Used Partly for Business Purposes:
The CIT(A) observed that the assessee, being a well-known choreographer, required a specified business place to earn significant professional income. The assessee had claimed proportionate depreciation on the part of the premises used for professional purposes. The Tribunal upheld this view, stating that the assets formed part of the opening block of assets, and depreciation could not be denied as long as the assets remained part of the block.

6. Deduction of Interest on Loan Borrowed for Professional Purposes:
The assessee claimed interest on a loan borrowed from Standard Chartered Bank for acquiring the office premises. The Tribunal concurred with the assessee's submission that the loan was borrowed for professional purposes, and the unit was put to use in the financial year 2011-12. Therefore, the interest was an allowable deduction under Section 36(1)(iii).

7. Deduction of Society and Electricity Charges for Office Premises:
The assessee claimed society and electricity charges proportionate to the office premises under Section 37(1). The Tribunal found that the assessee fulfilled the conditions prescribed under Section 37(1) and noted that similar expenses were allowed in earlier years. The assessee provided sufficient documentary evidence, including service tax registration certificates, commercial contracts, invoices, photographs, and video recordings, to substantiate her claim.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to delete the disallowance of expenses related to the residential premises. The Tribunal emphasized the rule of consistency, the concept of block assets, and the sufficiency of documentary evidence provided by the assessee to substantiate her claims. The appeal was dismissed, and the order was pronounced on 29th July 2021.