2017 (1) TMI 1254 - AT - Income Tax

Allocation of proportionate expenditure - Held that - We do not agree with the contention of the learned counsel of the assessee to accept the allowance of pro rata expenses towards the short term income(s), due to the following reasons i. that in the first round of proceeding, the claim of allowance of pro rata expenses towards short term income(s) was not accepted by the Tribunal and the matter was restored to the Assessing Officer to identify expenses towards each of the short term income. ii. that the Assessing Officer has not followed the finding of the Tribunal while passing the order in compliance to direction of the Tribunal. iii. that the learned Commissioner of Income Tax (Appeals) has also not taken into consideration the direction of the Tribunal and allowed the relief to the assessee, which was not approved by the Tribunal in first round of proceeding. iv. that the lower authorities are bound to follow the direction issued by the Tribunal and cannot act according to their wish or choice, while complying the direction of the Tribunal. v. that the direct expenses like interest etc. are prima facie not allowable against the lease income etc. on prorata basis. The interest expenses incurred for borrowing funds was required to be examined by the Assessing Officer from terms and conditions of money borrowed. If same were incurred exclusively for long term borrowing, then no interest expenses was required to be allocated against short term income from fixed deposit in banks or inter corporate deposits etc. The Assessing Officer was required to examine all these issues, which he has not done. In view of above, we feel it appropriate to restore the matter back to the file of the learned Commissioner of Income Tax (Appeals), who is directed to follow the direction of the Tribunal given in the first round of proceedings and decide the issue accordingly after giving sufficient opportunity of hearing to the assessee. The grounds of appeal raised by the Revenue are allowed for statistical purposes. Allocation for expenses other than direct expenses towards short-term income - Held that - We agree with the finding of the learned Commissioner of Incometax (Appeals) that the main activity of the assessee was for earning from long-term finance and, therefore, allowing proportionate expenditure was not justified. In our opinion, the estimation of ₹ 25 lakh towards the short-term income by the learned Commissioner of Income-tax (Appeals) is most reasonable and justified. In our opinion, the order of the learned Commissioner of Income-tax (Appeals) on the issue in dispute is well reasoned and no interference on our part is required, accordingly, we uphold the finding of the learned Commissioner of Income-tax (Appeals) on the issue in dispute and the ground of the cross objection of the assessee is rejected.

Summary

Issues Involved:

1. Allocation of common interest expenses towards short-term income for deduction under section 36(1)(viii).
2. Allocation of other common expenses towards short-term income.
3. Compliance with Tribunal's directions regarding the allocation of expenses.

Issue-Wise Detailed Analysis:

1. Allocation of Common Interest Expenses Towards Short-Term Income for Deduction Under Section 36(1)(viii):

The Revenue challenged the CIT(A)'s direction to allocate the entire common interest expense towards short-term income for working out the deduction under section 36(1)(viii). The Tribunal previously rejected the assessee's method of allocating pro rata expenses at 37.38% and remitted the matter to the Assessing Officer (AO) to examine the expenses related to each short-term income. The AO allocated 50% of the common interest expenses, amounting to ?95.22 crores, towards short-term income. However, the CIT(A) directed the allocation of the entire common interest expense of ?190.45 crores towards short-term income. The Tribunal found that neither the AO nor the CIT(A) followed the Tribunal's directions to examine the expenses in detail. The Tribunal restored the matter to the CIT(A) to follow the Tribunal's initial directions and decide the issue accordingly.

2. Allocation of Other Common Expenses Towards Short-Term Income:

The assessee claimed that expenses of ?15.80 crores towards brokerage and issue expenses, personal and administrative expenses, depreciation, preliminary expenses written off, and prior period expenses should be proportionately allocated for short-term income. The CIT(A) allowed a deduction of ?25 lakhs out of these expenses, considering the main establishment worked primarily for long-term income but acknowledging some expenses were incurred for short-term income. The Tribunal upheld the CIT(A)'s decision, finding the allocation of ?25 lakhs reasonable and justified.

3. Compliance with Tribunal's Directions Regarding the Allocation of Expenses:

The Tribunal emphasized that the lower authorities are bound to follow its directions. The AO's allocation of 50% of common interest expenses was not based on any scientific method and did not comply with the Tribunal's directions. The CIT(A) also did not consider the Tribunal's directions properly. The Tribunal restored the matter to the CIT(A) to follow its initial directions and examine the expenses related to short-term income in detail.

Conclusion:

The Tribunal allowed the Revenue's appeals for statistical purposes, directing the CIT(A) to follow its initial directions and examine the expenses related to short-term income in detail. The cross-objection of the assessee was dismissed, upholding the CIT(A)'s allocation of ?25 lakhs towards short-term income expenses.