2018 (6) TMI 889 - AT - Income Tax

Allowability of expenditure - proof of commencement of business - Held that - It was noted that the issue of commencement of business was already settled by the ITAT in assessee s own case for AY 2007-08 2013 (1) TMI 964 - ITAT MUMBAI where it was held that business was very much in existing and, therefore, it cannot be said that there was no business activity carried out by the assessee. If by any reason in various other proceedings, where working was in pipe line and working could not be started then also the expenses claimed on these activities are to be allowed in accordance with the business activities - thus pursuant to the direction of the ITAT, the AO has accepted the assessee s claim of commencement of business and allowed the expenditure in relation thereto - Decided in favor of assessee. Interest from ICD amounting and Interest from debenture - assessable under the head Income from other sources or Income from business and profession - Held that - This incomes has been taxed as income from other sources on the ground that this interest has been earned from surplus fund lying with the company. Similar issue was also decided against the assessee in the earlier years. No infirmity in the action of the CIT(A) in holding that this income has to be taxed as income from other sources. Disallowance of expenditure u/s 57 against the income under head income from other sources - Held that - this ground is misplaced inasmuch as the CIT(A) has directed the AO to verify this aspect as to whether finance cost pertains to the earning of the interest income and thereafter decide the issue - hence we do not find any infirmity in the direction of the CIT(A) in this regard - thus allowed for statistical purpose. Disallowance u/s. 14A - Held that - We find that the CIT(A) has actually remitted the issue to the file of the AO to examine certain claims of the assessee and assessee should be granted adequate opportunity of being heard - thus allowed for statistical purpose.

Summary

Issues Involved:
1. Existence and commencement of business activity.
2. Classification of interest income.
3. Deduction of business expenditure against interest income.
4. Disallowance under Section 14A of the Income Tax Act.

Detailed Analysis:

1. Existence and Commencement of Business Activity:
The Revenue contended that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in holding that the assessee's business activity was in existence based on observations for a previous year, despite no business income being shown in subsequent years. The Assessing Officer (AO) had observed that the assessee did not show any income from business operations and questioned the justification of the business expenses claimed. The assessee argued that it had acquired requisite permissions and was in the process of consolidating land holdings, thus incurring various expenses. The CIT(A) referred to a previous ITAT decision for assessment year 2007-08, which had accepted the commencement of business and allowed related expenses. The ITAT upheld the CIT(A)’s decision, noting that the issue was already settled in favor of the assessee in previous years and there was no reversal by the High Court.

2. Classification of Interest Income:
The assessee argued that interest from Inter Corporate Deposits (ICD) and debentures should be assessed under ‘Income from business and profession’ instead of ‘Income from other sources’. The AO had classified these as income from other sources, noting that the interest was earned from surplus funds. The CIT(A) upheld the AO’s decision, citing previous years' decisions where similar income was taxed under ‘Income from other sources’. The ITAT agreed with the CIT(A), maintaining that the interest income should be classified as income from other sources.

3. Deduction of Business Expenditure Against Interest Income:
The assessee contended that even if the interest income is assessable under ‘Income from other sources’, business expenditure should be set off against it. The CIT(A) directed the AO to verify if the finance cost pertained to earning the interest income or the business of the assessee. The ITAT found no infirmity in this direction and upheld the CIT(A)’s decision, ensuring that the AO would consider the business expenditure as per the law.

4. Disallowance Under Section 14A of the Income Tax Act:
The AO made a disallowance under Section 14A, noting that the assessee had significant mutual fund investments and earned dividend income, which is exempt. The CIT(A) directed the AO to verify the assessee's claims regarding inadmissible interest expenditure and average investments. The ITAT remitted the issue back to the AO with further directions:
- Disallowance under Section 14A cannot be made for investments that do not yield dividend income during the year.
- Disallowance of interest is permissible only if the assessee does not have sufficient own funds to make the investment.

The ITAT directed the AO to consider these observations, which are backed by jurisdictional High Court decisions, and provide the assessee with an opportunity to be heard.

Conclusion:
The ITAT dismissed the Revenue’s appeal and allowed the assessee’s appeal for statistical purposes, directing the AO to re-examine certain issues with specific guidelines. The judgment emphasized adherence to previous rulings and proper verification of claims related to business commencement and expense deductions.