2014 (2) TMI 945 - AT - Income Tax

Allowability of Expenditure Repairs and maintenance Held that - The assessee has incurred the expenditures for not creating any new asset and /or carried out total new premises - The expenditures has been incurred to, only for renovation and to carry out the repairs and replacement of existing door frames, electricity wiring etc- the expenditure has been incurred to put new wooden panel, plastering walls, ceiling and to replace electrical wire - the expenditures cannot be said to be an for renovation of the building -out of the total expenditure of Rs.17,24,609/- the expenditure of Rs. 15,96,849/- is the revenue in nature, the expenditure incurred towards current repairs for renovation and the repairs of the premises in connection with the business of the assessee and the same is to be allowed as revenue expenditure Decided against Revenue. Disallowance u/s 14A of the Act Held that - The AO before invoking the provisions of Rule 8D read with section 14A sub-section (2)(iii) has to give a finding that he is not satisfied with the correctness of the claim of the assessee with regard to such expenditure - the assessee has not on its own made any disallowance on account of investment made and earning of the dividend income - the AO in the assessment order has referred the provision of section 14A (2) of the Act as well as CBDT notification dated 24.3.2008 for applying Rule 8D and to make disallowance under Rule 8D(2)(iii) of the Rules there is no infirmity in the order of ld. CIT(A) and accordingly the disallowance made u/s 14A of the Act sustained Decided against Assessee. Rebate u/s 88E of the Act Held that - Assessee submitted that nowhere it has been mentioned that how the expenses are incurred under indirect expenses and has been considered for making the adjustment while making rebate u/s 88E of the Act revenue could not controvert the contention of the assessee as both the parties agreed that the matter be restored to AO to recalculate the rebate to be allowed to the assessee u/s 88E of the Act thus, the matter remitted back to the AO for recalculation Decided in favour of Assessee.

Summary

Issues:
1. Disallowance of repairs and maintenance expenses
2. Disallowance under section 14A of the Act
3. Computation of rebate under section 88E of the Act

Issue 1: Disallowance of repairs and maintenance expenses

The appeal was filed by the department against the order of the ld. CIT(A) regarding the disallowance of a portion of repairs and maintenance expenses for the assessment year 2008-09. The AO disallowed an amount of Rs.17,24,609 out of the total expenditure of Rs.41,19,865, considering it as capital expenditure. The ld. CIT(A) accepted that a portion of Rs.11,01,465 was revenue in nature and disallowed the balance. The Tribunal observed that the expenses were incurred for renovation and repairs of the existing premises, not for creating new assets. It distinguished the case from total renovation scenarios and allowed the revenue expenditure except for certain items not related to renovation. The Tribunal upheld the decision of the ld. CIT(A) and dismissed the department's appeal while partially allowing the cross-objection filed by the assessee.

Issue 2: Disallowance under section 14A of the Act

The assessee had earned tax-free income of Rs.29,88,190 without allocating any expenditure for earning this income. The AO applied Rule 8D(2)(iii) of the Income Tax Rules, 1962, and disallowed Rs.5,21,173 as expenses under section 14A of the Act. The ld. CIT(A) confirmed this action. The Tribunal noted that the AO must first establish dissatisfaction with the assessee's claim before invoking Rule 8D. Since the assessee did not voluntarily make any disallowance, the Tribunal found the disallowance to be in order and rejected the cross-objection on this issue.

Issue 3: Computation of rebate under section 88E of the Act

Regarding the computation of rebate under section 88E of the Act, the ld. CIT(A) adjusted expenses of Rs.60,06,300 as 49% of the indirect expenses of Rs.1,22,57,755. The Tribunal observed a lack of clarity on how these expenses were considered under indirect expenses for calculating the rebate under section 88E. Both parties agreed to restore the issue to the AO for recalculation after providing the assessee with a hearing opportunity. Consequently, the Tribunal allowed the cross-objection on this ground for statistical purposes.

In conclusion, the Tribunal dismissed the department's appeal while partially allowing the cross-objection filed by the assessee. The judgment provided detailed analyses of each issue, emphasizing the nature of expenses, applicability of rules, and the need for clarity in computations under different sections of the Income Tax Act.