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Income Tax Appellate Tribunal, DELHI BENCH: ‘B’ NEW DELHI
Before: SHRI G.D. AGARWAL & SHRI K.NARASIMHA CHARY
2 ORDER PER K. NARASIMHA CHARY, JM Challenging the order dated 22.01.2015 in Appeal No.786/13-14 passed by the Learned Commissioner of Income-tax(Appeals)-23, New Delhi {“CIT(A)”} in relation to Assessment Year 2011-12, whereas revenue filed of 2015, assessee filed Cross Objection No.321/Del/2015.
Brief facts of the case are that the assessee company is engaged in the business of export of batteries of submarines, aircraft and ships and other related equipments. At relevant point of time, the assessee filed the return of income on 28.9.2011 declaring nil income by claiming dividend income of Rs.8,80,720.- as exempt u/s 10(34)/(35) of the Income-tax Act, 1961 (“the Act”). Assessment was, however, completed by order dated 19.3.2014 at Rs.74,51,200/- by making addition of Rs.3,10,780/- u/s 14A of the Act read with Rule 8D of the Income-tax Rules, 1962 (“Rules”), Rs.35,680/- as unexplained investment, Rs.31,33,754/- on account of service tax in the annual rental value of the property let out by the assessee and Rs.39,70,800/- on account of unexplained expenses in respect of the Sonali Farms said have been taken on rent by the assessee.
In the appeal preferred by the assessee, learned CIT(A) by way of impugned order restricted and sustained the disallowance by invoking Section 14A of the Act read with Rule 8D to Rs.1,92,854/-, and deleted the rest of it. Learned CIT(A), however, deleted the other three additions.
3 4. Challenging the deletion of Rs.31,33,754/- on account of inclusion of service tax in the annual rental value of the property let out by the assessee and Rs.39,70,800/- on account of disallowances of the expenses incurred in respect of the Sonali Farm, the Revenue preferred 14A of the Act read with 8D of the Rules to an extent of Rs.1,92,854/-, assessee preferred the Cross Objection.
First, coming to the Revenue’s appeal, Grounds Nos. 1 & 4 are general in nature. Ground no.2 relates to the deletion of addition of Rs.31,33,754/- on account of inclusion of service tax. It could be seen from the assessment order that on finding that the assessee was collecting the service tax to the tune of Rs.44,76,792/- from the tenants and paid to the Government but had not shown the same in the annual rental value, learned AO treated the service tax as part of the rental value of the property and after allowing deduction of 30% u/s 24(a) of the Act, learned AO added Rs.31,33,754/- to the income of the assessee. Learned CIT(A) dealt with this issue very extensively and while placing reliance on the CBDT Circular No.4 of 2008 dated 28.4.2008 and also further observing that for the Asstt. year 2009-10 and 2010-11, this issue was decided in the first appeal in favour of the assessee, held that the service tax does not partake the nature of income and is deletable.
No circumstances are brought to our notice as to why and how the CBDT Circular No.4/2008 does not bind the revenue and shall not be followed by the learned AO. When the service tax is clearly held not to partake the nature of income of the assessee and there are no grounds for us 4 to take any view to the contrary, we find it difficult not to accept the contention of the assessee.
Furthermore, in for Asstt. Year 2010-11, a coordinate bench of this Tribunal in assesee’s own case by placing reliance on CBDT Circular No.4/2008 held that the service tax component does not constitute the income of the landlord and deleted the same. We, therefore, do not find any legality or irregularity in the finding of the learned CIT(A) that the service tax component cannot be brought to tax in the hands of the assessee and we accordingly dismiss ground No.2 of revenue’s appeal.
Now coming to Ground No.3 of revenue’s appeal challenging the deletion of Rs.3,97,800/- added on account of disallowance of an expense incurred in respect of Sonali Farms, learned AO recorded a finding that all the expenses of Sonali Farms are borne by the assessee company and the assessee failed to place on record any documentary evidence recording the existence of any guest house of the assessee company. Learned CIT(A) on this aspect recorded a factual finding that inasmuch as the assessee has been into the business of export and is required to entertain clients and customers from abroad , the premises was hired for legitimate business purposes. The rental and other expenses debited by the assessee in Sonali Farms are duly declared and taxed as income from house property by Mr. Suresh Nanda, the owner of the premises.
Learned CIT(A) further observed that these facts are not controverted by the revenue and in such a situation, it is not open for the revenue to disbelieve for incurring of the expenditure. Then the question that arises is whether the expenditure was incurred for business purposes.
5 In the alternative, learned CIT(A) said that if any expenditure was incurred by the assessee company in respect of the personal expenses of Mr. Nanda, the same could have been additionally brought to tax as perquisite in his individual capacity.
It is clear that the learned AO did not find the expenses to be bogus or not for the business purposes. In such an event, is it open for the revenue to disallow such an expenditure is the mute question which falls for our consideration. We have gone through the material placed before us and we find that from Schedule 12 forming part of the profit and loss account incorporated at page 20 that the entire amount of Rs.39,70,800/- is comprises of Rs.36 lacs as rent for this guest house and Rs.3,70,800/- as the service tax on such rent of guest house. Except rent including the service tax, no other expenditure is incurred by the assessee on Sonali Farms, as such, we find it difficult to agree with the learned AO that all the expenses of Sonali Farms are borne by the assessee company. It is not all the expenses of Sonali Farm were borne by the assessee company, but it is only the rent with service tax in respect of the guest house in the Sonali Farm, the assessee company incurred. We, therefore, on facts find that there is need to interfere with the findings of the learned CIT(A) on this aspect. Ground No.3 being devoid of any merit, is hereby dismissed.
Now coming to the assessee’s Cross Objection, we find that it is an admitted fact that assessee suo moto disallowed Rs.40,000/- as expenses incurred for earning the exempt income. The assessment order speaks that having obtained the explanation of the assessee as to why the provisions u/s 14 read with Rule 8D cannot be invoked, the AO stated that the reply of the assesse company has been examined and found that the disallowance was 6 not computed as per Rule 8D of the Income-tax Rules. This is the reason why the learned AO proceeded to calculate the disallowance by applying the formula under Rule 8D of the Rules. If we go through the provisions of law, Section 14A reads as follows: “Expenditure incurred in relation to income not includible in total income. 14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.”
It clearly stipulates that it is only when the AO having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act, learned AO can resort to computation of disallowance amount under Rule 8D of the Rules. It is, therefore, clear that the threshold to be crossed by the learned AO to reach 7 the formula under Rule 8D is first to examine the accounts of the assessee to find out the correctness or otherwise of the claim in respect of the expenditure in relation to the exempt income and if he is not satisfied then by recording the reasons thereof, Ld. AO has to reach Rule 8D for the purpose of computation of disallowance. So also Rule 8D(1) clearly stipulates that where the AO having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the expenditure in relation to the exempt income then he shall determine the amount of expenditure in accordance with the provisions of sub rule (2) thereof.
It is, therefore, clear that Section 14A(2) and Rule 8D(1) in one voice say that the disallowance made by the assessee has to be tested with reference to the accounts of the assessee in relation to the exempt income and law does not require that the assessee invariably shall compute the disallowance in accordance with Rule 8D of the Income-tax Rules in the first instance itself. It is so because there may not be any direct expenditure or interest expenditure, and so on and so forth. It is, therefore, inevitable for the AO first to look into the books of accounts of the assessee in order to find out whether the expenditure computed by the assessee is correct with reference to the exempt income and in case only when he is not satisfied with such correctness, AO has necessarily to cross this threshold to reach Rule 8D of the Rules. It is evident from the facts recorded above, that the AO has not undertaken such an exercise but straight felt that the non computation of the expenditure in accordance with Rule 8D empowers him to compute the disallowance in accordance with formula given in Rule 8D of the Rules. Obviously, the course adopted by the learned AO cannot be endorsed.