2019 (6) TMI 587 - AT - Income Tax

Disallowance u/s 14A - HELD THAT - No disallowance is to be done under 14A if no exempt income is earned . See CHEMINVEST LIMITED VERSUS COMMISSIONER OF INCOME TAX-VI 2015 (9) TMI 238 - DELHI HIGH COURT and BALLARPUR INDUSTRIES LIMITED 2016 (10) TMI 1039 - BOMBAY HIGH COURT . Disallowance on purchase of tenancy right - revenue or capital expenditure - HELD THAT - We find that assessee has paid the aforesaid sum as compensation for obtaining the premises on lease for a period of five years. Assessee had paid the sum in AY 2011-12. Assessee has amortized the aforesaid sum at the rate of 20% for the period of five years of the lease. Revenue allowed the aforesaid amortisation in the earlier two years. AO has disallowed the expenses for the current year. On the facts and circumstances it is clear that assessee has not spent the amount for purchase of any capital asset. On the touchstone of decision from in the case of Madras Auto Service 1998 (8) TMI 1 - SUPREME COURT the entire amount was allowable as revenue expenditure. However the assessee has been claiming the sum proportionately over the period of lease. This has been allowed in earlier two years. In absence of any change in facts and circumstances in our considered opinion there was no reason for the AO to take a different stand. - Decided against revenue.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act.
2. Disallowance on purchase of tenancy right.

Analysis:
1. Disallowance under section 14A:
The Revenue appealed against the deletion of disallowance under section 14A by the Ld. CIT(A). The AO calculated a substantial disallowance under Rule 8D(2) due to the assessee's investments potentially generating exempt income. However, the Ld. CIT(A) ruled in favor of the assessee, stating that since no exempt income was earned, no disallowance under section 14A was permissible. The ITAT upheld this decision, citing previous case laws supporting the assessee's position, emphasizing that if no exempt income is earned, disallowance under section 14A is not warranted.

2. Disallowance on purchase of tenancy right:
The AO disallowed a payment made by the assessee for the purchase of tenancy rights, considering it as capital in nature. The Ld. CIT(A) examined the facts and submissions, where the assessee argued that the payment was a revenue expenditure as no enduring benefit or capital asset was acquired. The Ld. CIT(A) agreed with the assessee, allowing the payment as a revenue deduction based on commercial considerations. The Revenue appealed this decision. The ITAT reviewed the case and noted that the payment was made for obtaining premises on lease, not for purchasing a capital asset. Citing the Madras Auto Service case, the ITAT concluded that the payment was a revenue expenditure, as the assessee benefited from using the premises without acquiring a capital asset. The ITAT upheld the Ld. CIT(A)'s decision, dismissing the Revenue's appeal.

In conclusion, the ITAT upheld the Ld. CIT(A)'s decisions in both issues, dismissing the Revenue's appeal in its entirety.