2018 (5) TMI 1320 - AT - Income Tax

Addition taking the annual letting value of the property at 8% of the value of the properties as recorded in the balance sheet - Held that - No merit in the contention of the assessee that where the property is used for the business purpose through the private limited companies promoted by him has to be construed as the assessee is carrying on business for the reason that companies as promoted by the assessee are separate legal entities and assessee can not be said to have carried on business through these entities. However, alternative contention of the assessee has merit that in absence of any rent receipt by the assessee the ALV can not be assessed by applying 8% on the investment value but has to be assessed on the basis of Annual Rateable Value by MC. Considering all we restore the issue to the file of AO to decide that ALV on the basis of Annual Rateable Value by MC. The ground is allowed for statistical purposes. Disallowance u/s 14A - apportionment of expenditure - Held that - In this case, the AO has made disallowance by applying the provision of rule 8D(iii) towards administration expenses which is not correct and has to be deleted as assessee has not incurred any expenses. The case of the assessee is squarely covered by the decision of the co-ordinate bench of the Tribunal in the case of Justice Sam P. Bharucha vs. ACIT (2012 (12) TMI 409 - ITAT MUMBAI) wherein it has been held that the apportionment of expenditure is only applicable where the assessee has incurred composite/indivisible expenses in respect of taxable and non taxable income and where it is not possible to determine the actual expenditure in relation to the exempt income or when no expenditure has been incurred in relation to exempt income, then principle of apportionment embedded in section 14A has no application. - Decided in favour of assessee.

Summary

Issues:
1. Addition of annual letting value of properties for commercial use
2. Disallowance under section 14A of the Act

Issue 1: Addition of Annual Letting Value for Commercial Use
The appeal was against the addition of &8377; 5,41,262 by the AO as the annual letting value (ALV) of the properties was estimated at 8% of the recorded value in the balance sheet. The assessee argued that the properties were used for commercial purposes by companies where the assessee was a shareholder and director, and therefore, ALV estimation was incorrect. The CIT(A) dismissed the appeal, stating the properties were used by separate legal entities. The Tribunal noted that the companies were distinct legal entities and the business conducted through them did not equate to the assessee conducting business. The Tribunal found merit in the alternative argument that ALV should be determined based on the Annual Rateable Value by the Municipal Corporation in the absence of rent receipts. Relying on previous decisions, the Tribunal allowed the appeal for statistical purposes and remanded the issue to the AO for reassessment.

Issue 2: Disallowance under Section 14A of the Act
The appeal challenged the disallowance of &8377; 1,58,123 under section 14A of the Act by the CIT(A) and AO. The AO applied rule 8D for disallowance as the assessee had exempt income without corresponding expenditure disallowance. The Tribunal observed that the assessee had not claimed any expenses except bank charges, indicating no actual expenditure related to earning exempt income. Citing a precedent, the Tribunal held that where no actual expenditure was incurred in relation to exempt income, the provisions of rule 8D were not applicable. The disallowance under rule 8D(iii) was deemed incorrect and deleted. Following the precedent, the Tribunal allowed the ground raised by the assessee, partially allowing the appeal for statistical purposes.

In conclusion, the Tribunal partly allowed the appeal on both issues, remanding the ALV assessment to the AO and deleting the disallowance under section 14A of the Act.