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TMI Blog2016 (4) TMI 1435X X X X Extracts X X X X X X X X Extracts X X X X ..... um under the head Advertisement and under the head Business Promotion Expenses . Further, from a perusal of break-up of these expenses which was filed before the CIT(A), we find that certain amounts have been debited for Mall Upkeep Promotional receipt . If these expenditures are related for earning of income from Mall then, definitely it cannot be allowed as an expenditure under section 37(1) i.e. while computing the business income of the assessee, because admittedly, receipts from the Mall is in the form of lease rental which has been assessed under the head Income from House Property like in the earlier and subsequent years. This fact needs proper verification and examination by the AO which has not been done in the proper prospective. This matter should be restored back only for the limited purpose of examining the nature of advertisement expenses and business promotion expenses debited under the head Administrative and Selling Expenses as enumerated in Schedule E of the Profit Loss Account. If these expenditures directly attributable to earning of lease rental income then, appropriate disallowance can be made, if at all required. With this direction this iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed the expenses, which was related to the rental income. 3. On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in not appreciating the fact that in earlier years no such disallowance was made by the Assessing Officer in the Assessment Order passed u/s 143(3) of the Income Tax Act, 1961. 4. On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of Learned Assessing officer in disallowing the claim of expenses amounting to Rs.8,44,630/- by invoking the provisions of section 14A of the Income Tax Act, 1961 without appreciating the facts and circumstances of the case . 2. The brief facts qua first issue are that, assessee is in the business of builders and developers, generation and sale of electricity and has also rented out properties during the year. The AO noted that, assessee has leased out immovable property owned by it in the form of R Mall, LBS Marg, Mulund (West), Mumbai. From leasing of such property, the assessee has earned leave and license fees of Rs.5,36,46,388/-. Besides this, the assessee has also earned other rental income of Rs.3,82,456/- and Rs.19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenses stated to have been incurred in the course of other business activity may have been used for earning of rental income also, for example, salary paid to the employees, electricity charges paid for the office and other such expenses may have a component towards earning of rental income. Thus, there has to be some allocation of the expenses and accordingly, disallowance should be worked out. The assessee has claimed huge standard deduction of 30% and municipal tax as deduction from rental income, but while calculating the business income, the assessee has not apportioned any of the expenses towards its rental receipts. Lastly, in the earlier years, the assessing officers and departmental authorities had not examined this aspect of the matter, therefore, this is the new issue which has been raised in this year. So accordingly, he made a disallowance of Rs.1,60,77,911/- in the following manner:- 6.5 It is very difficult to pin point at the expenses that have been directly incurred for the sake of earning rental income by the assessee. Even the assessee has not given any such working, even though it was asked to do so, without prejudice, in the notice dated 02.01.2013. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmissions and also the finding of the AO, observed that, despite opportunity given by the AO as well as in the course of the appellate proceedings, the assessee could not establish direct correlation with the expenses which were directly related to the business income other than rental income. under the head Administration and Selling Expenses assessee has debited salary amount of Rs.292.85 lakhs; Directors remuneration of Rs.21 lakhs; Conveyance expenses of Rs.24.60 lakhs; electricity expenses of Rs.28.95 lakhs; office repairs and maintenance expenses of Rs.11.5 lakhs; professional fees of Rs.47.28 lakhs; Society charges of Rs.12.06 lakhs; Staff welfare expenses of Rs.13.06 lakhs; and travelling expenses of Rs.14.44 lakhs, which assessee could not prove that same was exclusively for the purpose of other business income and did not relate to earning of rental income. The onus is on the assessee to show that the expenditure have been incurred wholly and exclusively for the purpose of the business. He also referred to certain decisions for the proposition that, the burden to prove that expenditure have been incurred for the business is on the assessee. These decisions have been r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shops in the Mall directly and uses it for the maintenance. The entire electricity, air-conditioner charges for the common areas are all run and maintained by this company, therefore, in view of this agreement, the assessee does not have to incur any expenditure at all. How, this company runs its maintenance business or incurs any expenditure, the same is not the concern of the assessee at all therefore, the Ld. CIT(A) has completely misdirected himself in holding that, the assessee has failed to establish the expenses incurred by M/s Veear Property Pvt Ltd. Thus, on these facts, no apportionment of expenses should be made. 7. On the other hand, Ld. DR strongly relied upon the order of the of the CIT(A) and submitted that the assessee is running composite activities, that is, construction business and also renting out of the properties. If a composite activity is being carried out then, possibility of common expenditure cannot be ruled out. Thus, some allocation of expenses towards the earning of rental income has to be made from Administration and Selling Expenses . In any case before the CIT(A), the assessee itself has offered that 2% of the expenditure should be disallowed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18,827,459 Under the head Mall Upkeep and Promotional expenses , the assessee has debited Rs.11,67,480/-, break-up of which is as under: SCHEDULE -G: Mall upkeep and Promotional Expenses Electricity Charges 1,311,036 (41,018) Insurance Charges - 254,330 Repairs Maintenance Expenses - 38,005 Licence fees 137,584 172,633 Legal professional fees - 1,500 Water charges (281,140) 593,333 1,167,480 1,018,783 Out of this amount, the assessee had already disallowed expenditure of Rs.13,11,036/- on account of electricity charges, as stated by the assessee and also admitted by the Department. Under the head Administration Selling Expenses , the assessee had debited Rs.72,008,371/-. The details of these expenses are appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EXPENSES 344,189 Car parking refund 3,00,000 - Sundry balances W/off 56,293 - Society Charge for Flats - 228,089 Society Charges for Sion Office 1,206,952 - Staff Welfare Expenses 1,360,764 1,594,243 Telephone Expenses 1,787,842 1,479,259 Trvelling Expenses 1,444,932 759,405 Training Expenses - 84,270 Web Designing 28,930 100,722 Donations 6,00,000 8,225,000 (Subletting charges Payable) 1,214,388 1,243,764 72,008,371 52,996,206 9. The revenue s case is that, for earning of rental income, amount of Rs.1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the AO as well as by the CIT(A) for making the disallowance for Administrative expenses in the aforesaid manner cannot be sustained. 10. Moreover, it has been brought on record that, assessee had entered into an agreement for renting, managing and maintenance of R. Mall with M/s Veear Property Pvt Ltd. vide agreement dated 20.03.2009, the recital itself clearly envisages that, the assessee is not in a position to manage the mall, since they do not have any expertise and equipments for running and managing the Mall, therefore, they have requested the said company to run and manage the Mall. Further the same very company has been managing the Mall since 27th April, 2004. Till date the said company has an expert team, experience, equipments and other necessary infrastructure required for running and managing the Malls. In the said agreement, it has been clearly mentioned that the parties have entered into the agreement on principal to principal basis. Clause 2 clearly provides that, there will not be any charge or fees payable by the company. The relevant clauses 2 to 5 reads as under:- 2. It is herewith clarified that there will not be any charges or fees payable by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be held that any administrative expenditure should be allocated for running of the Mall. 11. However, on a perusal of expenditure debited under Schedule E, as incorporated above, it is seen that the assessee has debited sum ofRs.28,66,136/- under the head Advertisement and sum of Rs. 49,14,399/- under the head Business Promotion Expenses . Further, from a perusal of break-up of these expenses as given in page 26 of the paper book which was filed before the CIT(A), we find that certain amounts have been debited for Mall Upkeep Promotional receipt . If these expenditures are related for earning of income from Mall then, definitely it cannot be allowed as an expenditure under section 37(1) i.e. while computing the business income of the assessee, because admittedly, receipts from the Mall is in the form of lease rental which has been assessed under the head Income from House Property like in the earlier and subsequent years. This fact needs proper verification and examination by the AO which has not been done in the proper prospective. Accordingly, we are of the opinion that, this matter should be restored back only for the limited purpose of examining the nature of ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eminvest Ltd. vs CIT, reported in [2012] 347 ITR 272, no disallowance can be made if there is no exempt income and here in this case if the exempt income is Rs. 3,42,000/- and that to be from the partnership firm, then disallowance cannot be made beyond this income. 16. On the other hand, Ld. DR strongly relied upon the order of the CIT(A) and submitted that, the disallowance has to be made strictly, in accordance with Rule 8D. 17. After considering the rival submissions and on perusal of the relevant finding given in the impugned orders, we find that, only exempt income which has been earned is on account of share profit from a partnership firm amounting to Rs.3,42,506/-. Initially, in response to the show cause notice, the assessee has worked out disallowance at Rs.8,44,630/-, however, later on, the assessee claimed that, no expenditure has been incurred in respect of earning of the exempt income. Such a claim of the assessee before the AO has not been examined having regard to the accounts maintained by the assessee, which is a mandatory condition provided under sub-section (2) and (3) of section 14A. Before us, Ld. Counsel had submitted that, the investment in the form of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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