2024 (8) TMI 802 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - suo moto disallowance made by assessee - HELD THAT - We hold that the AO had not recorded any objective satisfaction having regard to the accounts of the assessee as to why the suo moto disallowance made by the assessee is incorrect. Respectfully following the decision of HT Media Ltd. 2017 (8) TMI 962 - DELHI HIGH COURT we hold that the disallowance u/s 14A of the Act should be restricted only to Rs 2,00,000/- for the year under consideration. Disallowance made u/s 14A while computing the book profits u/s 115JB - The law is now very well settled by the decision of Vireet Investments P Ltd. 2017 (6) TMI 1124 - ITAT DELHI wherein it was held that the computation mechanism provided in Rule 8D(2) of the Rules cannot be imputed in clause (f) of Explanation 1 to section 115JB(2) of the Act. However, the actual expenditure needs to be disallowed as per clause (f) of Explanation 1 to Section 115JB(2) - Hence we direct the ld. AO to disallow only a sum of Rs 2,00,000/-, being the actual expenditure suo moto disallowed by the assessee under normal provisions of the Act, to be considered for the purpose of computing book profits u/s 115JB. Nature of expenses - allowability of expenditure incurred on Paintings - Revenue or capital expenditure - HELD THAT - We find that the assessee rents out office / commercial space and provides facility management services to its tenants. During the year under consideration, the assessee had earned service income. Owing to the nature of business, the assessee keeps on refurbishing the common areas frequently to attract the foreign visitors, employees of the multinational companies, which, in turn, attracts more clients and also gets higher return from the maintenance income as compared to the other buildings located in the same area. We are completely convinced with the aforesaid submissions of the assessee and hold that the cost of paintings are meant for aesthetic purpose and for having better environment and accordingly to be construed as expenditure wholly and exclusively incurred for the purpose of business of the assessee herein. Our view is further fortified by the decision of Wipro Ltd. 2013 (11) TMI 618 - KARNATAKA HIGH COURT which is directly on the impugned issue in favour of the assessee. Hence we have no hesitation in allowing the cost of paintings as a revenue expenditure. Disallowance on account of currency burnt in fire - contentions of the revenue that no income was offered in terms of section 36(2) of the Act with regard to currency burnt in fire - HELD THAT - Before us, the assessee had filed additional evidences under Rule 29 of the Income Tax Appellate Tribunal Rules, 1963 in the form of record of cross-examinations during the civil suit proceedings initiated against the assessee by the scrap dealer and also evidencing the fact that the scrap dealer had given advance for removal of scrap. These additional evidences containing the records relating to civil suit filed by the scrap dealer seeking compensation for loss suffered by him due to fire at assessee s premises including record of cross examination held in the suit proceedings, were admittedly not placed before the lower authorities. As these evidences are very crucial for adjudication of the issue in dispute before us, we are inclined to admit those additional evidences and deem it fit and appropriate to restore this issue to the file of ld. AO for denovo adjudication in the light of these additional evidences. AR also submitted that the advance received from scrap dealer which was remaining on the liability side was written back to income by the assessee in Asst Year 2019-20 and offered to tax thereon. AO is also directed to verify this fact from the ITR of Asst Year 2019-20. If on verification of the evidences, the ld. AO is convinced that the said sum was indeed advance received from the scrap dealer and the same was burnt in fire, then the loss on account of currency burnt in fire which was written off would be allowable as a trading loss u/s 28 - AO need not disturb the income returned by the assessee for Asst Year 2019-20. If the ld. AO continues to disallow the loss on account of currency burnt in fire in the year under consideration, then correspondingly the amount written back to income in Asst Year 2019-20 should not be brought to tax and ld. AO would have to give effect in Asst Year 2019-20 accordingly, in order to avoid double taxation. Assessee ground allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.
2. Disallowance of depreciation claimed on paintings.
3. Disallowance of amount written off on account of currency burnt in fire.
4. Disallowance under Section 14A while computing 'book profit' under Section 115JB of the Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962:

The assessee challenged the disallowance of Rs. 1,54,06,773/- made by the Assessing Officer (AO) under Section 14A read with Rule 8D. The AO disallowed the expenses without recording any satisfaction as to why the assessee's suo moto disallowance of Rs. 2,00,000/- was incorrect. The Tribunal found that the AO had not recorded any objective satisfaction having regard to the accounts of the assessee, as required by Section 14A(2) and Rule 8D(1). The Tribunal relied on the decision of the Hon'ble Jurisdictional High Court in the case of HT Media Ltd vs. PCIT, which mandates that the AO must first record dissatisfaction with the assessee's claim before applying Rule 8D. Consequently, the Tribunal restricted the disallowance under Section 14A to Rs. 2,00,000/- for the year under consideration.

2. Disallowance of depreciation claimed on paintings:

The assessee incurred expenditure on paintings, which were capitalized as furniture and fixtures and claimed depreciation. The AO disallowed the depreciation, treating the paintings as "personal effects" rather than "capital assets". The Tribunal held that the paintings were used for aesthetic purposes in the business premises, contributing to the business environment and client attraction. The Tribunal allowed the cost of paintings as revenue expenditure, relying on the decision of the Hon'ble Karnataka High Court in the case of CIT vs. Wipro Ltd. Consequently, the depreciation claimed on paintings was disallowed, but the cost was allowed as revenue expenditure.

3. Disallowance of amount written off on account of currency burnt in fire:

The assessee claimed a deduction for Rs. 13,00,000/- written off due to currency burnt in a fire. The AO disallowed the claim, citing a lack of supporting evidence and non-compliance with Section 36(2) of the Act. The Tribunal found that the issue should be examined under Section 28 of the Act as a trading loss. The Tribunal admitted additional evidence and remanded the matter to the AO for denovo adjudication, directing the AO to verify the facts and, if satisfied, allow the loss as a trading loss. The Tribunal also directed the AO to ensure no double taxation by verifying if the amount was offered to tax in the subsequent year.

4. Disallowance under Section 14A while computing 'book profit' under Section 115JB of the Act:

The AO disallowed Rs. 1,54,06,773/- under Section 14A while computing book profits under Section 115JB by applying Rule 8D. The Tribunal held that the computation mechanism of Rule 8D cannot be applied to Section 115JB as per the Special Bench decision in ACIT vs. Vireet Investments P Ltd. The Tribunal directed the AO to disallow only the actual expenditure of Rs. 2,00,000/- suo moto disallowed by the assessee under normal provisions for computing book profits under Section 115JB.

Separate Judgments Delivered:

The Tribunal delivered a common order for the appeals for AY 2008-09, 2009-10, and 2010-11 due to identical issues involved. The decisions rendered for AY 2008-09 were applied mutatis mutandis to AY 2009-10 and 2010-11.

Conclusion:

1. ITA No. 1629/Del/2012 for AY 2008-09: Partly allowed for statistical purposes.
2. ITA No. 6512/Del/2013 for AY 2009-10: Partly allowed.
3. ITA No. 1226/Del/2015 for AY 2010-11: Partly allowed.
4. ITA No. 1227/Del/2015 for AY 2010-11: Partly allowed.

Order Pronounced:
The order was pronounced in the open court on 31/01/2024.