2021 (10) TMI 619 - AT - Income Tax

Nature of expenses - Disallowance of legal expenses and service tax paid - revenue or capital expenditure - expenditure related to stock-in-trade - HELD THAT - On perusal of order of learned Commissioner (Appeals)-II, Bombay for assessment years 1990-91 and 1991-92, we find that the first appellate authority has very clearly and categorically held that the immovable properties located at Hyderabad are stock-in-trade of the assessee. The aforesaid decision of learned first appellate authority has also been approved by the Tribunal while dismissing revenue s appeal - Thus, once the immovable properties located at Hyderabad have been held as stock-in-trade, they cannot be treated as capital asset in terms of section 2(14)(i) - Thus, any expenditure related to stock-in-trade has to be considered as revenue expenditure. On perusal of order of Commissioner (Appeals)-II, Bombay for assessment years 1990-91 and 1991-92, we find that the first appellate authority has very clearly and categorically held that the immovable properties located at Hyderabad are stock-in-trade of the assessee. Thus, once the immovable properties located at Hyderabad have been held as stock-in-trade, they cannot be treated as capital asset in terms of section 2(14)(i) of the Act. Thus, any expenditure related to stock-in-trade has to be considered as revenue expenditure. - Decided in favour of assessee. Disallowance u/s 14A of the Act r.w.r. 8D - suo-moto disallowance made by assessee - HELD THAT - As total administrative and management expenses claimed by the assessee is little more than ₹ 13 lakhs; whereas, the assessee has disallowed an amount of ₹ 7.84 lakhs under section 14A of the Act. Admittedly, the disallowance computed by the assessing officer only relates to administrative expenditure under rule 8D(2)(iii). Therefore, when the assessee has disallowed more than 50% of the total expenditure claimed, no further disallowance is called for. Assessee s claim that the disallowance should be restricted to ₹ 2 lakhs as held by the Tribunal in assessment year 2006-07, we are unable to accept such contention. Firstly, in assessment year 2006-07, rule 8D was not applicable. Secondly, the assessee itself has computed the disallowance at ₹ 7.84 lakhs. In fact, in assessee s own case for subsequent assessment years, i.e. assessment years 2009-10, 2011-12, 2012-13 and 2013-14, the Tribunal has consistently held that the disallowance u/s 14A r.w.r. 8D should be restricted to suo motu disallowance made by the assessee - No infirmity in the decision of learned Commissioner (Appeals) on the issue. Accordingly, ground 2 in revenue s appeal and grounds 4,5 and 6 in cross objection are dismissed. Disallowance u/s 14A r.w.r. 8D while computing the book profit u/s 115JB - HELD THAT - As this issue is now squarely covered by the decision in case of ACIT vs Vireet Investments P Ltd 2017 (6) TMI 1124 - ITAT DELHI - Therefore, we uphold the decision of learned Commissioner (Appeals). This ground is also dismissed.

Summary

Issues:
1. Disallowance of legal expenses and service tax paid thereon.
2. Disallowance made under section 14A of the Act r.w.r. 8D.

Issue 1: Disallowance of Legal Expenses and Service Tax:

The only issue in the assessee's appeal pertains to the part disallowance of legal expenses and service tax. The revenue challenges the partial relief granted by the Commissioner (Appeals) on the same issue. The legal expenses in question were related to various legal proceedings concerning the acquisition of interest in the estate of the erstwhile Nizam of Hyderabad. The assessing officer disallowed a significant portion of the legal expenses, considering them as capital in nature. However, the Commissioner (Appeals) allowed some expenses as revenue expenditure, especially those related to properties treated as stock-in-trade by the assessee. The Tribunal upheld the assessee's claim that the legal expenses were revenue expenditure as they were incurred in relation to stock-in-trade properties. The Tribunal concluded that the legal expenses claimed by the assessee were allowable as revenue expenditure, thereby allowing the assessee's appeal and dismissing the revenue's appeal on this issue.

Issue 2: Disallowance under Section 14A of the Act r.w.r. 8D:

Regarding the disallowance made under section 14A of the Act r.w.r. 8D, the assessing officer computed a disallowance due to exempt income earned by the assessee. The Commissioner (Appeals) noted that the assessee had already made a reasonable disallowance, and thus, no further disallowance was required. The Tribunal agreed with the Commissioner (Appeals) that since the assessee had already disallowed a significant amount, no additional disallowance was warranted. The Tribunal rejected the revenue's contention to restrict the disallowance to a specific amount as held in a previous assessment year, stating that the disallowance should be limited to the amount voluntarily disallowed by the assessee. The Tribunal upheld the Commissioner (Appeals)'s decision on this issue, dismissing the relevant grounds in the revenue's appeal and cross objection.

In conclusion, the Tribunal allowed the assessee's appeal, while dismissing the revenue's appeal and the assessee's cross objection. The legal expenses were considered allowable as revenue expenditure due to their connection with properties treated as stock-in-trade. Additionally, the disallowance under section 14A of the Act r.w.r. 8D was deemed unnecessary as the assessee had already made a reasonable disallowance. The Tribunal upheld the decisions of the Commissioner (Appeals) on both issues, thereby settling the matters in favor of the assessee.