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2022 (3) TMI 1027 - AT - Income TaxClaim of deduction of Incubation Expenses from Income from Other Sources - The two streams of income were shown as other income and therefore the same were non-operational income - CIT(A) allowed the claim - HELD THAT - Assessee had not debited any expenditure towards incubation expenses . It was also observed by the bench that the assessee had not carried out any Segment-I business activity i.e. incubation of new entities during the year under appeal and it had carried out only Segment-II business activity. This vital fact was lost sight by the lower authorities. The allowability of the expenses in the Profit Loss account was to be adjudicated based on the findings to be given with regard to various streams of income in the form of shared services / infrastructure services etc. by the lower authorities and the head of income thereon. AO was directed to go through relevant agreements and give findings as to whether the same would fall within the objects of the assessee trust so as to fall within the ambit of business income of the assessee. If the same was to construed as income from other sources even then the allowability of expenses would have to be considered in the light of the provisions of Sec.57(iii) of the act. It was agreed position that findings given in earlier years with regard to incubation of new entities would not apply to the facts during the years under appeal. Accordingly entire assessment was restored to the file of Ld. AO for de-novo adjudication. Ignoring the same and without making due examination / verification as directed by the Tribunal Ld. AO merely held that the activities undertaken by the assessee were in continuation of incubation activities. The two streams of income were shown as other income and therefore the same were non-operational income. The two streams of income were shown as other income and therefore the same were non-operational income. Another allegation was that the assessee was exercising significant control over related parties and since the expenses were already claimed by its 100% subsidiaries the assessee could not claim these expenses as the same would be against the principle that one could not profit from trading with oneself. These findings are mere allegations and not fact-based findings. Nothing has been brought on record to support this conclusion. The Ld. AO did not follow the directions of the Tribunal and did not make any efforts to go through the agreements etc. to render a finding as to whether the streams of income as earned by the assessee could be considered as business income of the assessee. It merely held that these activities were in continuation of incubation activities as evident from the website. Further the allowability of expenses u/s 57(iii) was not considered by Ld. AO. Therefore the findings of Ld. AO are bereft of any merits and contrary to the directions of the Tribunal CIT(A) in our opinion has clinched the issue in correct perspective and diligently examined the main objects of the assessee. Since Ld. AO had failed to carry out the directions of Tribunal Ld. CIT(A) rightly went ahead to examine the activities carried out by the assessee. After analyzing the Trust Deed concrete findings were rendered that shared and Infrastructure activities could not be held to be in the nature of business activities and therefore the same would be assessable under the head income from other sources . As per statutory mandate the expenditure expanded by the assessee to earn such an income would be an allowable deduction u/s 57(iii). Since the directions of Ld. CIT(A) are in accordance with law we concur with the findings of Ld. CIT(A) in the impugned order and accordingly dismiss the appeal of the revenue.
Issues Involved:
1. Deletion of additions made by the Assessing Officer. 2. Disallowance of Incubation Expenses. 3. Disallowance of Consultancy and Legal & Professional charges. 4. Classification of income as 'income from other sources' versus 'business income'. 5. Allowability of expenses under Section 57(iii) of the Income Tax Act. Issue-Wise Detailed Analysis: 1. Deletion of Additions Made by the Assessing Officer: The revenue contested the deletion of additions amounting to ?12,84,12,920 made by the Assessing Officer (AO) for AY 2011-12. The AO had argued that the cost was not recovered from the concerned companies, and the related entities could claim such cost allocation in their hands. The Tribunal noted that the assessee's activities were not in the nature of business but rather supportive, and the income was to be assessed as 'income from other sources'. The Tribunal upheld the CIT(A)'s decision, confirming that the assessee could not claim these expenses as business expenses since they were not incurred for business activities. 2. Disallowance of Incubation Expenses: The assessee argued that the incubation expenses amounting to ?2,20,47,402 were for feasibility studies and development of rural households, which were part of its Segment-I business activities. The Tribunal found that the assessee's activities did not constitute a business as per the trust deed. The expenses were not allowable as business expenses but could be considered under Section 57(iii) if they were for earning income from other sources. The Tribunal upheld the disallowance of these expenses as they were not directly related to earning income. 3. Disallowance of Consultancy and Legal & Professional Charges: The assessee claimed consultancy charges of ?27,98,660 and legal & professional charges of ?41,77,147, arguing that these were incurred for its investment activities. The Tribunal noted that these expenses were capital in nature and related to preparing feasibility reports and research activities for setting up new units. As such, they were not allowable as business expenses but could be considered under Section 57(iii) for income from other sources. The Tribunal upheld the disallowance, agreeing with the CIT(A) that these were not business expenses. 4. Classification of Income as 'Income from Other Sources' versus 'Business Income': The Tribunal examined whether the income from shared services, infrastructure services, and interest on loans/investments should be classified as 'business income' or 'income from other sources'. It was found that the assessee's activities were supportive and not business-oriented as per the trust deed. The income was therefore classified as 'income from other sources'. The Tribunal directed the AO to examine relevant agreements to determine if the income could fall within the objects of the trust. The AO's failure to follow this direction led the Tribunal to uphold the CIT(A)'s classification of the income as 'income from other sources'. 5. Allowability of Expenses under Section 57(iii): The Tribunal upheld the CIT(A)'s decision that expenses incurred to earn income from other sources should be allowed under Section 57(iii). The AO's restriction of expenses to 2% of gross receipts was found to be incorrect. The Tribunal confirmed that the shared and infrastructure services were not business activities, and thus, the related expenses were allowable under Section 57(iii). The CIT(A)'s detailed examination of the trust deed and the nature of expenses led to the conclusion that these expenses were necessary for earning the income classified under 'income from other sources'. Conclusion: The Tribunal dismissed all the appeals, confirming that the income from shared services and infrastructure services was to be classified as 'income from other sources'. The related expenses were allowable under Section 57(iii), but the specific disallowances for incubation expenses and consultancy/legal charges were upheld. The AO's failure to follow the Tribunal's directions and properly examine the agreements led to the confirmation of the CIT(A)'s findings.
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