2023 (3) TMI 1301 - AT - Income Tax

Disallowance u/s 14A - both the direct as well as indirect expenditure attributable to earning exempt income needs to be disallowed u/s 14A - HELD THAT - On perusal of the records placed before us, the AO has stated that the assessee had incurred certain amount of interest expenditure for earning exempt income, while the case of the assessee is that no interest expenditure has been incurred at all for earning such interest income. Accordingly, this ground is being set aside to the file of the AO to verify whether in fact, firstly, whether the assessee has claimed any expenditure for earning interest income and secondly whether all investments for earning exempt income were made from his personal account using own personal funds and not the funds from the proprietary concern. If both the above conditions are satisfied i.e. the investments made in earning exempt income for made out of own personal funds by the assessee in his personal capacity and secondly, no interest expenditure has been incurred and claimed for earning such exempt income, we are of the view that no disallowance is called for under section 14A of the Act. Nature of expenses - Disallowances of expenses claimed in Stavya Spine Hospital (SG Road) - HELD THAT - The opening of new hospital at the SG Road in the same line of speciality i.e. spine treatment, would constitute extension/expansion of the existing business and since the said expansion is in the same line of business and the same/common management as the existing hospital at Ashram Road, the expenses should be allowed as revenue expenses. It is not the case of Revenue that the expenses are capital nature or that the same have not been incurred exclusively for the purpose of business of the assessee. Accordingly, other expenses i.e. expenses other than depreciation are concerned, the same should be allowed as revenue expenditure. Depreciation for the year under consideration - claim of the assessee is that the depreciation should be allowed since the assets purchased during the year under consideration are ready to use - HELD THAT - We are in agreement with the arguments of the counsel of the assessee to the effect that once the new hospital is an extension of the existing business, the machinery viz. Air-conditioning unit and electrical fittings have been purchased during the year under consideration, the assessee has shown consultancy receipts from the new hospital unit at SG Road, the new hospital is in the same line of business i.e. Spine Speciality as the existing hospital at Ashram Road, then depreciation on the assets should be allowed to the assessee during the year under consideration. Notably, in the assessment order passed for the year under consideration, the AO held that business of the assessee commenced from assessment year 2015-16, however, in the immediately succeeding assessment year i.e. AY 2014-15, the AO allowed the assessee s claim of depreciation in respect of those assets. Accordingly, keeping in view the totality of facts placed before us for consideration, we are of the view that the assessee is entitled to depreciation on the above assets.

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Disallowance of expenses and depreciation for a new hospital unit.
3. Treatment of income from business and profession as income from other sources.
4. Initiation of penalty under Section 271(1)(c).
5. Levy of interest under Section 234A/B/C.

Issue-wise
Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
Assessment Year 2013-14:
The assessee claimed exempt income of Rs. 5,01,764/- from PPF interest, dividend income, and interest on tax-free bonds. The AO disallowed Rs. 1,55,211/- under Section 14A, stating both direct and indirect expenditure attributable to earning exempt income must be disallowed. The CIT(A) upheld this disallowance, emphasizing that some expenditure must be incurred to earn income, even if not claimed explicitly. The Tribunal observed that if investments were made from personal funds and no interest expenses were claimed, no disallowance under Section 14A is warranted. The matter was remanded to the AO to verify if the investments were made from personal funds and if no interest expenditure was claimed.

Assessment Year 2014-15:
The assessee claimed exempt income of Rs. 4,67,766/-. The AO initially disallowed Rs. 16,05,639/- under Rule 8D(2) but the CIT(A) deleted this addition, accepting that the interest was paid to the builder for property purchase. However, the AO added Rs. 1,63,232/- under Rule 8D(iii). The CIT(A) noted the assessee did not press this issue, thus confirming the addition. The Tribunal directed the AO to verify the correct figure of interest disallowance.

2. Disallowance of expenses and depreciation for a new hospital unit:
Assessment Year 2013-14:
The assessee, a medical professional, started a new hospital unit and claimed expenses, including depreciation. The AO disallowed these expenses, stating the business had not commenced. The CIT(A) upheld this disallowance, noting the hospital activities had not started, and necessary permissions were obtained only in 2015. The Tribunal found that the new hospital was an extension of the existing business under common management. Citing various case laws, it held that expenses related to business expansion should be treated as revenue expenditure. The Tribunal allowed the claim of depreciation, noting the assets were "ready to use" and the business had commenced during the year, as evidenced by consultancy receipts.

3. Treatment of income from business and profession as income from other sources:
This issue was not separately adjudicated in the judgment provided. However, it is implied that the Tribunal's decision on allowing expenses and depreciation for the new hospital unit would impact the classification of income.

4. Initiation of penalty under Section 271(1)(c):
The CIT(A) did not adjudicate the ground challenging the initiation of penalty under Section 271(1)(c). This issue was not further discussed in the Tribunal's order, indicating it may be addressed in subsequent proceedings.

5. Levy of interest under Section 234A/B/C:
The CIT(A) upheld the AO's action of levying interest under Section 234A/B/C. This issue was not separately discussed in the Tribunal's order, suggesting it was not a primary focus of the appeal.

Combined Result:
Both appeals of the assessee for the assessment years 2013-14 and 2014-15 were allowed for statistical purposes, with directions for the AO to verify specific details related to disallowances under Section 14A and the correct figure of interest disallowance. The Tribunal emphasized the principle that expenses related to business expansion should be treated as revenue expenditure and allowed the claim of depreciation for assets "ready to use."

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