2020 (11) TMI 224 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D on interest expenditure - assessee company is a partner in partnership firm and share of profit has been claimed as exempt u/s 10(2A) - HELD THAT - Situation in the present case amply display that institution of legal proceedings would be useless and AO has failed to understand the situation and failed to appreciate the settlement reached by the assessee. AO also not brought on record whether assessee is likely to receive the rent in near future rather he accepted the fact that it is irrecoverable. The rental income can be brought to tax only when the assessee has actually received or likely to receive or certainty of receiving in the near future. In the given case, the assessee has no certainty of receipt of any rent and as and when assessee reaches an agreement to settle the dispute, it is equal to satisfying the forth conditions in the Rule 4 of the I. T. Rules, 1962. Therefore, in our considered view, the addition of rent is unjustified. Accordingly, we direct AO to delete the addition. Resultantly, Ground no. 1(i) is allowed. TDS on unrealised rent - licensee has deducted TDS and declared the same in the TDS return - HELD THAT - Assessee has not received rental income for the previous assessment year and any Security/ Rental deposit available is to be adjusted first for old outstanding and if there is any amount remaining unadjusted, the extra rental advance will be adjusted in the current assessment year outstanding. It is undisputed that the rental advance was adjusted for previous assessment year dues and nothing was available for outstanding rent of current assessment year. Therefore, there is no reason for Ld. CIT(A) to give such direction. Therefore, we are inclined to accept the submission of the assessee. Accordingly, this ground of assessee also allowed. Common administrative expenses for the purpose of disallowance u/s 14A - HELD THAT - We are partly in agreement with Ld. CIT(A) that sometimes, the determination of disallowance under rule 8D is absurd. We may have to go by practical or depending on the facts of the case. The Ld. CIT(A) has accepted that the common other administrative expenses are ₹ 78,52,422/-. Assessee has incurred these other administrative expenses for the whole business and Ld. CIT(A) has missed this point and the other administrative expenses incurred for the remaining activities. We do not agree with him on this aspect. The right way of calculating this share of other administrative expenses are to calculate the portion of exempt income to the total income earned by the assessee. In this case, assessee has earned total income of ₹ 71,53,93,800/- and earned exempt income of ₹ 243,71,741/-. The ratio of exempt income to total income is ₹ 3.41%. Therefore, we direct AO to disallow 3.41% of the other common administrative expenses for the purpose of disallowance u/s 14A.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act.
2. Non-disclosure of rental income.
3. Treatment of security deposit.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The assessee, a company engaged in leasing commercial properties, declared exempt income from a partnership firm. The Assessing Officer (AO) applied Rule 8D and disallowed ?1,47,97,219 under Section 14A, arguing that investment decisions require substantial market research and management. The AO contended that the assessee could not earn exempt income without incurring expenses, including administrative and managerial costs. The Commissioner of Income Tax (Appeals) [CIT(A)] reduced the disallowance to ?43,97,356, calculating 56% of administrative expenses as attributable to the investment activity. However, the Tribunal found that the CIT(A) missed considering the total administrative expenses for the entire business. The Tribunal directed the AO to disallow 3.41% of the common administrative expenses based on the ratio of exempt income to total income, partially agreeing with the CIT(A) but also recognizing the need for a more practical approach.

2. Non-disclosure of Rental Income:
The assessee did not disclose rental income of ?3,85,85,341 from M/s Spanco BPO Services Ltd due to non-receipt of payment. The AO added the rental income to the total income, stating that the assessee failed to fulfill the fourth condition of Rule 4 of the Income Tax Rules, 1962, which requires instituting legal proceedings for recovery or proving that such proceedings would be useless. The Tribunal observed that the assessee had not received the rent and that initiating legal proceedings would be futile due to the tenant's financial problems. The Tribunal concluded that the addition of rental income was unjustified and directed the AO to delete the addition, recognizing that the assessee had no certainty of receiving the rent.

3. Treatment of Security Deposit:
The CIT(A) directed the AO to bring to tax the security deposit retained by the assessee upon the tenant vacating the premises. The assessee argued that the security deposit should be adjusted against the outstanding rent from previous years. The Tribunal agreed with the assessee, noting that the security deposit was adjusted for previous dues, leaving no amount for the current year's outstanding rent. Consequently, the Tribunal accepted the assessee's submission and allowed this ground.

Judgment Summary:
The Tribunal partly allowed the appeal, directing the AO to delete the addition of ?3,85,85,341 as rental income and to disallow 3.41% of the common administrative expenses under Section 14A. The Tribunal also accepted the assessee's treatment of the security deposit, recognizing its adjustment against previous outstanding rent. The appeal was thus partly allowed, with specific directions provided for recalculating the disallowance and recognizing the practical aspects of the assessee's circumstances.