2021 (10) TMI 504 - AT - Income Tax

Disallowance u/s.14A r.w.r. 8D - Suo moto disallowance by assessee - HELD THAT - Upon perusal of assessment order, we find that though suo-moto disallowance has not been considered by Ld. AO, however AO has recorded such satisfaction and thereafter computed the disallowance u/r. 8D. Therefore, this plea is to be rejected. Another argument is that while computing the disallowance, only those investments are to be considered which have yielded exempt income during the year. This plea is also to be rejected since after amendment to Rule 8D w.e.f. 02/06/2016, the computation u/r. 8D has undergone change and it has been made clear that the amount equal to 1% of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income, shall be disallowed. Therefore, post 02/06/2016, the plea to exclude the non-income yielding investment is to be rejected. Though the assessee has identified direct expenses towards earning of exempt income but it has not made any disallowance of indirect expenditure - application of Rule 8D would not be automatic or mechanical and the disallowance has to be computed having regards to the accounts of the assessee - disallowance u/s. 14A r.w.r. 8D stand restored to the file of Ld. AO for de novo adjudication in the light of our above observations. This ground stand partly allowed for statistical purposes. Repair Maintenance disallowance - assessee incurred expenditure which was in the nature of installation of lawn tennis court, repairs of boundary wall, supply of aluminum sheets, electrical works, purchase of water closet, fabrication charges, hardware items etc - HELD THAT - We find that the expenditure on installation of tennis court is nothing but re-laying of the surface of the courts. The repairs to boundary wall is on account of plastering, painting, water proofing, stone fixing, chemical coating etc. The aluminum sheets are for the purpose of window replacement etc. Similar is the nature of other expenses. All these expenses, in our opinion, are not capital expenditure by which the assessee has acquired any new assets but the same are more in the nature of repair renovation expenses. The benefit may be enduring in nature but nevertheless, the expenditure could not be termed as capital expenditure. Similar is the view of Tribunal in assessee's own case for A.Y. 2009-10 2017 (12) TMI 1265 - ITAT MUMBAI - Therefore, we direct Ld. AO to allow the same as revenue expenditure and reverse the depreciation granted on these items. This ground stand allowed.

Summary

Issues:
1. Disallowance under section 14A read with rule 8D of the Income-tax Rules, 1962
2. Treatment of one-time membership entrance fees as capital receipt
3. Treatment of amount spent on repairs and maintenance as capital expenditure

Analysis:

1. Disallowance under section 14A:
The appellant, engaged in the service sector and entertainment industry, earned exempt dividend income and offered a suo-moto disallowance of direct expenses. The Assessing Officer (AO) computed disallowance under Rule 8D, which was challenged. The argument that the AO did not consider the suo-moto disallowance was rejected as the AO had recorded satisfaction before applying Rule 8D. The contention to exclude non-income yielding investments post an amendment to Rule 8D was also dismissed. The Tribunal held that the application of Rule 8D should not be automatic, and the disallowance should be computed based on the assessee's accounts. The matter was remanded back to the AO for fresh adjudication. The ground was partly allowed for statistical purposes.

2. Treatment of one-time membership entrance fees:
This issue was decided against the assessee based on previous Tribunal orders. Ground No. 2 was dismissed.

3. Treatment of repairs and maintenance expenses:
The AO treated expenses on repairs and maintenance as capital expenditure, allowing depreciation. The Tribunal examined the nature of expenses, such as installation of a tennis court and repairs to the boundary wall, and concluded that these were repair and renovation expenses, not capital expenditure. Relying on a previous Tribunal decision, the Tribunal directed the AO to treat these expenses as revenue expenditure and reverse the depreciation granted. This ground was allowed.

In conclusion, the appeal was partly allowed based on the above orders. The judgment was delivered on 1st October 2021 by the Appellate Tribunal ITAT Mumbai, with separate opinions by the members C.N. Prasad and Manoj Kumar Aggarwal. The legal representatives for the appellant and respondents were Madhur Agarwal and Brajendra Kumar, respectively.