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Facts
The assessee, Mudaliar and Sons Hotels Pvt. Ltd., appealed against an order confirming the disallowance of expenses amounting to Rs. 50,05,240 under section 37(1) and Rs. 46,69,792 under section 14A. The assessee claimed these expenses were incurred for maintaining its corporate structure and day-to-day activities. The Assessing Officer disallowed them, stating no business activity was carried out, and no exempt income was earned to warrant a Section 14A disallowance.
Held
The Tribunal held that expenses incurred for maintaining the corporate structure after business commencement are allowable, even if no business activity was conducted in the year. The issue of employee cost and other expenses was restored to the Assessing Officer for verification. Regarding Section 14A, the Tribunal noted that no exempt income was earned by the assessee and followed the Delhi High Court ruling that the amendment to Section 14A is prospective, thus disallowance under Section 14A was not sustainable.
Key Issues
Whether expenses incurred for maintaining corporate structure are allowable when no business activity is carried out in the year, and whether disallowance under Section 14A is sustainable when no exempt income is earned.
Sections Cited
Section 37(1), Section 14A, Rule 8D(2)(ii)
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Income Tax Appellate Tribunal, MUMBAI BENCH “D” MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI SUNIL KUMAR SINGH
This appeal by the assessee is directed against order dated 01.06.2023 passed by the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2013-14, raising following grounds:
1. The Commissioner of Income-tax (Appeals) at the National Faceless Appeal Centre (hereinafter referred to as 'the CIT(A)') erred in confirming the CIT(A)') erred in confirming the order passed under section order passed under section 143(3) of the Act by the Assistant Commissioner of Income 143(3) of the Act by the Assistant Commissioner of Income 143(3) of the Act by the Assistant Commissioner of Income- tax, Circle 1(2)(2), Mumbai (hereinafter referred to as tax, Circle 1(2)(2), Mumbai (hereinafter referred to as tax, Circle 1(2)(2), Mumbai (hereinafter referred to as 'Assessing Officer') ignoring the facts, statutory provisions 'Assessing Officer') ignoring the facts, statutory provisions 'Assessing Officer') ignoring the facts, statutory provisions and judicial pronouncements and therefore the impugne and judicial pronouncements and therefore the impugne and judicial pronouncements and therefore the impugned appellate order is, to this extent, erroneous and bad in law. appellate order is, to this extent, erroneous and bad in law. appellate order is, to this extent, erroneous and bad in law.
2. On the facts and in the circumstances of the case and in 2. On the facts and in the circumstances of the case and in 2. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in confirming the disallowance law, the CIT(A) has erred in confirming the disallowance law, the CIT(A) has erred in confirming the disallowance made by the Assessing Officer under section 37(1) of the made by the Assessing Officer under section 37(1) of the made by the Assessing Officer under section 37(1) of the Act of Rs 50,05,24 Act of Rs 50,05,240 on account of expenses incurred by the 0 on account of expenses incurred by the appellants in the ordinary course of business by treating appellants in the ordinary course of business by treating appellants in the ordinary course of business by treating that the appellants have not carried on any business. that the appellants have not carried on any business. that the appellants have not carried on any business. 2.1. On the facts and in the circumstances of the case and 2.1. On the facts and in the circumstances of the case and 2.1. On the facts and in the circumstances of the case and in law, the CIT(A) and the Assessing Officer in law, the CIT(A) and the Assessing Officer have erred in have erred in not appreciating that during the relevant assessment year, not appreciating that during the relevant assessment year, not appreciating that during the relevant assessment year, the appellants are engaged in the business of inter the appellants are engaged in the business of inter the appellants are engaged in the business of inter- corporate loans & advances and investments; and derived corporate loans & advances and investments; and derived corporate loans & advances and investments; and derived income from interest and sale of investments. income from interest and sale of investments. 2.2. On the facts and in the 2.2. On the facts and in the circumstances of the case and circumstances of the case and in law, the CIT(A) and the Assessing Officer have erred in in law, the CIT(A) and the Assessing Officer have erred in in law, the CIT(A) and the Assessing Officer have erred in ignoring the fact that the appellants have suo ignoring the fact that the appellants have suo ignoring the fact that the appellants have suo-moto disallowed expenses of Rs 78,97,583 under certain heads disallowed expenses of Rs 78,97,583 under certain heads disallowed expenses of Rs 78,97,583 under certain heads on a conservative basis following a consistent practice on a conservative basis following a consistent practice on a conservative basis following a consistent practice which has been accepted year on year by the Assessing ich has been accepted year on year by the Assessing ich has been accepted year on year by the Assessing Officer. 2.3. On the facts and in the circumstances of the case and 2.3. On the facts and in the circumstances of the case and 2.3. On the facts and in the circumstances of the case and in law, the C1T(A) and the Assessing Officer have erred in in law, the C1T(A) and the Assessing Officer have erred in in law, the C1T(A) and the Assessing Officer have erred in making a disallowance of mandatory and statutory making a disallowance of mandatory and statutory making a disallowance of mandatory and statutory expenses incurred by the app expenses incurred by the appellants which are necessary ellants which are necessary and expedient for running and protecting the interest of the and expedient for running and protecting the interest of the and expedient for running and protecting the interest of the business of the appellants. business of the appellants. 2.4. On the facts and in the circumstances of the case and 2.4. On the facts and in the circumstances of the case and 2.4. On the facts and in the circumstances of the case and in law, the CIT(A) and the Assessing Officer have failed to in law, the CIT(A) and the Assessing Officer have failed to in law, the CIT(A) and the Assessing Officer have failed to appreciate that Tax appreciate that Tax Audit Report ('TAR') is applicable only Audit Report ('TAR') is applicable only where business is carried on by the assessee. In doing so, where business is carried on by the assessee. In doing so, where business is carried on by the assessee. In doing so, the CIT(A) and the Assessing Officer also failed to the CIT(A) and the Assessing Officer also failed to the CIT(A) and the Assessing Officer also failed to appreciate that the appellants have complied with all the appreciate that the appellants have complied with all the appreciate that the appellants have complied with all the statutory requirements and none of the expenses statutory requirements and none of the expenses statutory requirements and none of the expenses claimed by the appellants have been disallowed in the TAR. by the appellants have been disallowed in the TAR. by the appellants have been disallowed in the TAR.
2.5. Without prejudice to the above, on the facts and 2.5. Without prejudice to the above, on the facts and 2.5. Without prejudice to the above, on the facts and circumstances of the case and in law, CIT(A) and the circumstances of the case and in law, CIT(A) and the circumstances of the case and in law, CIT(A) and the Assessing Officer failed to appreciate the settled legal Assessing Officer failed to appreciate the settled legal Assessing Officer failed to appreciate the settled legal position and binding judicial pr position and binding judicial pronouncements wherein it onouncements wherein it has been categorically held that statutory expenses are has been categorically held that statutory expenses are has been categorically held that statutory expenses are allowable even when no business is carried on by an allowable even when no business is carried on by an allowable even when no business is carried on by an assessee.
3. On the facts and in the circumstances of the case and in 3. On the facts and in the circumstances of the case and in 3. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in confirming the addition m law, the CIT(A) has erred in confirming the addition m law, the CIT(A) has erred in confirming the addition made by the Assessing Officer under section 14A of the Act read by the Assessing Officer under section 14A of the Act read by the Assessing Officer under section 14A of the Act read with Rule 8D(2)(ii) of the Income Tax Rules, 1982 (The with Rule 8D(2)(ii) of the Income Tax Rules, 1982 (The with Rule 8D(2)(ii) of the Income Tax Rules, 1982 (The Rules) of Rs 43,07,817 on account of expenses incurred by Rules) of Rs 43,07,817 on account of expenses incurred by Rules) of Rs 43,07,817 on account of expenses incurred by the appellants in earning exempt income. the appellants in earning exempt income. 3.1. On the facts and in the circumstan 3.1. On the facts and in the circumstances of the case and ces of the case and in law, the CIT(A) and the Assessing Officer have erred in in law, the CIT(A) and the Assessing Officer have erred in in law, the CIT(A) and the Assessing Officer have erred in not appreciating that during the relevant assessment year, not appreciating that during the relevant assessment year, not appreciating that during the relevant assessment year, the appellants have not derived any exempt income. the appellants have not derived any exempt income. the appellants have not derived any exempt income. 3.2. Without prejudice to the above, once the Assessing 3.2. Without prejudice to the above, once the Assessing 3.2. Without prejudice to the above, once the Assessing Officer has himself accepted that interest expense of Rs himself accepted that interest expense of Rs 1,20,02,204 is directly relatable to interest income earned 1,20,02,204 is directly relatable to interest income earned 1,20,02,204 is directly relatable to interest income earned by the appellants, the CIT(A) and the Assessing Officer have by the appellants, the CIT(A) and the Assessing Officer have by the appellants, the CIT(A) and the Assessing Officer have grossly erred on the facts and in the circumstances of the grossly erred on the facts and in the circumstances of the grossly erred on the facts and in the circumstances of the case and in law, in holding th case and in law, in holding that such interest expense has at such interest expense has been incurred to earn notional exempt income based on been incurred to earn notional exempt income based on been incurred to earn notional exempt income based on conjectures and surmises. conjectures and surmises.
On the facts and in the circumstances of the case and in 4. On the facts and in the circumstances of the case and in 4. On the facts and in the circumstances of the case and in law, the CIT (A) and the Assessing Officer have grossly law, the CIT (A) and the Assessing Officer have grossly law, the CIT (A) and the Assessing Officer have grossly erred in disallowing sum of Rs erred in disallowing sum of Rs 43,07,817 under section 14A 43,07,817 under section 14A of the Act r.w. Rule 8D of Rules resulting in double of the Act r.w. Rule 8D of Rules resulting in double of the Act r.w. Rule 8D of Rules resulting in double disallowance disallowance disallowance since since since total total total remaining remaining remaining expenses expenses expenses of Rs of of Rs Rs 50,05,240 have already been disallowed under section 50,05,240 have already been disallowed under section 50,05,240 have already been disallowed under section 37(1) of the Act. 37(1) of the Act.
At the outset, the Ld. counsel for the assessee sub At the outset, the Ld. counsel for the assessee sub At the outset, the Ld. counsel for the assessee submitted that initially the assessee filed appeal on 06.07.2023 which was within initially the assessee filed appeal on 06.07.2023 which was within initially the assessee filed appeal on 06.07.2023 which was within the limitation period, but in view the limitation period, but in view of defects of non of non-verification of appeal by the Managing Director appeal by the Managing Director pointed out by the pointed out by the Registry, which was not removed by the assessee, t was not removed by the assessee, the appeal was dismissed as non al was dismissed as non- maintainable by the Bench with liberty to file a by the Bench with liberty to file a fresh appeal. by the Bench with liberty to file a Subsequently, the assessee rectified the above defects and file , the assessee rectified the above defects and file , the assessee rectified the above defects and filed afresh appeal in prescribed form No. 36 duly verified by the Director afresh appeal in prescribed form No. 36 duly verified by the Director afresh appeal in prescribed form No. 36 duly verified by the Director of the company as there of the company as there was no managing director in the Company in the Company. The Ld. counsel referred to the affidavit filed by the Director of the The Ld. counsel referred to the affidavit filed by the Director of the The Ld. counsel referred to the affidavit filed by the Director of the company explaining the delay of 204 days in filing the appeal. The company explaining the delay of 204 days in filing the appeal. The company explaining the delay of 204 days in filing the appeal. The Ld. counsel submitted that there is no mala submitted that there is no malafide intention on the fide intention on the part of the assessee f part of the assessee for the aforesaid delay and no benefit would or the aforesaid delay and no benefit would accrue the assessee on account of not filing the fresh appeal within accrue the assessee on account of not filing the fresh appeal within accrue the assessee on account of not filing the fresh appeal within the due date.
2.1 We have heard rival submission of the parties on the issue of We have heard rival submission of the parties on the issue of We have heard rival submission of the parties on the issue of condonation of the delay in filing the appeal. In view of the condonation of the delay in filing the appeal. In view of the condonation of the delay in filing the appeal. In view of the sufficient cause explained by the assessee by way of the affidavit, sufficient cause explained by the assessee by way of the affidavit, sufficient cause explained by the assessee by way of the affidavit, we feel it appropriate to condone the delay in filing the appeal and we feel it appropriate to condone the delay in filing the appeal and we feel it appropriate to condone the delay in filing the appeal and admit the same for adjudication. admit the same for adjudication.
Briefly stated, facts of the case are that the assessee filed its , facts of the case are that the assessee filed its , facts of the case are that the assessee filed its return of income for the year under cons for the year under consideration on 30.11.2013 ideration on 30.11.2013 declaring total income at Rs. Nil. The return of income filed by the total income at Rs. Nil. The return of income filed by the total income at Rs. Nil. The return of income filed by the assessee was selected for scrutiny and statutory notices under the assessee was selected for scrutiny and statutory notices under the assessee was selected for scrutiny and statutory notices under the Income-tax Act, 1961 (in short ‘the Act’) were issued and complied tax Act, 1961 (in short ‘the Act’) were issued and complied tax Act, 1961 (in short ‘the Act’) were issued and complied with. In the scrutiny proceedings, the Assessing Officer noticed that In the scrutiny proceedings, the Assessing Officer noticed that In the scrutiny proceedings, the Assessing Officer noticed that the assessee company was engaged in the inter the assessee company was engaged in the inter-corporate loans and corporate loans and advances and earned income only from interest. The Assessing advances and earned income only from interest. The Assessing advances and earned income only from interest. The Assessing Officer noticed following expenses amounting to Rs.2,49,05,027/- Officer noticed following expenses amounting to Rs.2,49,05,027/ Officer noticed following expenses amounting to Rs.2,49,05,027/ claimed by the assessee : claimed by the assessee : Si. No. Details Amount (in Rs) Amount (in Rs) 1. Employee Benefit Expenses Employee Benefit Expenses 35,05,738/- 2. Finance Costs Finance Costs 1,20,02,204/- 1,20,02,204/ 3. Depreciation and amortization expenses Depreciation and amortization expenses 7,64,179/- 4. Other Expenses Other Expenses 86,32,906/- Total 2,49,05,027/- 2,49,05,027/ 4. Further, the Assessing Officer noticed that the assessee Further, the Assessing Officer noticed that the assessee Further, the Assessing Officer noticed that the assessee treated the entire interest income of Rs.1,63,68,105/- as income treated the entire interest income of Rs.1,63,68,105/ treated the entire interest income of Rs.1,63,68,105/ and claimed interest under the head “income under the head “income from other sources” and claimed interest expenses (finance cost) of Rs.1,20,02,204/ expenses (finance cost) of Rs.1,20,02,204/- as deduction u/s 57 of as deduction u/s 57 of the Act. Out of the remaining expenses of Rs.1,29,02,823/ e Act. Out of the remaining expenses of Rs.1,29,02,823/ e Act. Out of the remaining expenses of Rs.1,29,02,823/-, the assessee disallowed the expenses of depreciation of Rs.7,64,179/- assessee disallowed the expenses of depreciation of Rs.7,64,179/ assessee disallowed the expenses of depreciation of Rs.7,64,179/ and other expenses of Rs.71,33,404/ her expenses of Rs.71,33,404/-, leaving balance expenses of eaving balance expenses of under the head ‘profit and gains of business or Rs.50,05,240/- under the head ‘profit and gains of business or under the head ‘profit and gains of business or profession’. The Assessing Officer however of the view that no profession’. The Assessing Officer however of the view that no profession’. The Assessing Officer however of the view that no income under the head ‘profit and gains of business or profession income under the head ‘profit and gains of business or profession income under the head ‘profit and gains of business or profession was offered by the assessee and therefore remaining expenses of was offered by the assessee and therefore remainin was offered by the assessee and therefore remainin Rs.50,05,240/- were were also not in the nature of allowable allowable expenses. The assessee explained that those expenses were incurred for The assessee explained that those expenses were incurred for The assessee explained that those expenses were incurred for maintaining property and for running day maintaining property and for running day-to-day activity of the day activity of the company, hence same same should be allowed as business expenses. The should be allowed as business expenses. The Assessing Assessing Assessing Officer Officer Officer noticed noticed noticed that that that assessee assessee assessee had had had not not not claimed claimed claimed depreciation on property on property and therefore no asset was was used for the purpose of business. In view of the discussion made in the purpose of business. In view of the discussion made in the purpose of business. In view of the discussion made in the impugned order, the Assessing Officer held that expenditure of impugned order, the Assessing Officer held that expenditure impugned order, the Assessing Officer held that expenditure Rs.50,05,240/- was not incurred was not incurred wholly and exclusively for the wholly and exclusively for the purpose of the business and therefore, he disallowed the same. The e business and therefore, he disallowed the same. The e business and therefore, he disallowed the same. The Assessing Assessing Assessing Officer Officer Officer further further further noticed noticed noticed that that that investment investment investment of of of Rs.14,47,89,975/- was made by the assessee towards assets for was made by the assessee towards assets for was made by the assessee towards assets for earning exempted dividend income, b rning exempted dividend income, but no disallowance was made ut no disallowance was made by the assessee and therefore, invoking Rule by the assessee and therefore, invoking Rule 8D of the Income of the Income-tax Rules, 1962 read with section 14A of the Act, read with section 14A of the Act, The Assessing Officer The Assessing Officer made disallowance of Rs.46,69,792/ made disallowance of Rs.46,69,792/-.
On On On further further further appeal, appeal, appeal, the the the Ld. Ld. Ld. CIT(A) CIT(A) CIT(A) upheld upheld upheld both both both the the the disallowances made by the Assessing Officer. allowances made by the Assessing Officer.
Before us, the Ld. counsel for the assessee file Before us, the Ld. counsel for the assessee file Before us, the Ld. counsel for the assessee filed a Paper Book containing pages 1 to 104. containing pages 1 to 104.
The ground No. 1 of the appeal is general in nature and same The ground No. 1 of the appeal is general in nature and same The ground No. 1 of the appeal is general in nature and same is not required to be adjudicated upon specifically, accordingly is not required to be adjudicated upon specifically is not required to be adjudicated upon specifically same is dismissed as infructuous. The ground No. 2 to 2.5 of the dismissed as infructuous. The ground No. 2 to 2.5 of the dismissed as infructuous. The ground No. 2 to 2.5 of the appeal relate to disallowance of Rs.50,05,240/ appeal relate to disallowance of Rs.50,05,240/- invoking section invoking section 37(1) of the Act.
7.1 We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused We have heard rival submissions of the parties and perused the relevant material on record. T the relevant material on record. The detail of disallowance of he detail of disallowance of Rs.50,05,240/- is available on page 7 of the Ld. CIT(A) for ready is available on page 7 of the Ld. CIT(A) for ready is available on page 7 of the Ld. CIT(A) for ready reference said details is reproduced as under: reference said details is reproduced as under: Employee Expenses Employee Expenses 35,05,738/- Filling Fee 511/-
Rate & Taxes (BMC) Rate & Taxes (BMC) 3,09,704/- Electricity and Water Exp Electricity and Water Exp 8,03,538/- Travelling Exp 70,498/- Bank Charges 8,734/- Printing & Stationary Printing & Stationary 79,056/- Postage and Courier Charges Postage and Courier Charges 19,872/- Payment to Auditors Payment to Auditors 98,315/- Interest on taxes 778 Mis. Exp 1,08,451/- Total 50,05,240/- 7.2 On perusal of the above, On perusal of the above, we find that expenses of we find that expenses of Rs.3,09,704/- pertain pertains to rate and taxes (DMC) and expenses of to rate and taxes (DMC) and expenses of Rs.8,03,853/- pertain pertains to electricity and water expenses. The Ld. to electricity and water expenses. The Ld. counsel before us submitted that tho sel before us submitted that those expenses are are related to the property which was to be used to be used for the purpose of lease. We find that he purpose of lease. We find that the assessee has not demonstrated whether it was engaged in the the assessee has not demonstrated whether it was engaged in the the assessee has not demonstrated whether it was engaged in the business of lease of the property and whether said business was business of lease of the property and whether said business was business of lease of the property and whether said business was commenced during the year under consideration or not. Unless during the year under consideration or not. Unless during the year under consideration or not. Unless business of leasing business of leasing is commenced, no expenses against said no expenses against said business could be allowed in the year under consideration. Before business could be allowed in the year under consideration. business could be allowed in the year under consideration. us, the Ld. counsel for the assessee submitted that no such us, the Ld. counsel for the assessee submitted that no such us, the Ld. counsel for the assessee submitted that no such disallowance has been made in the preceding assessment years or disallowance has been made in the preceding assessment years or disallowance has been made in the preceding assessment years or in the succeeding years, therefore follo in the succeeding years, therefore following the rule of the wing the rule of the consistency, no disallowance should be made in the year under consistency, no disallowance should be made in the year under consistency, no disallowance should be made in the year under consideration. Before us, consideration. Before us, the Ld. counsel has not demonstrated the Ld. counsel has not demonstrated that the business of the leasing was commenced in the year under the business of the leasing was commenced in the year under the business of the leasing was commenced in the year under consideration, therefore, therefore, said expenses related to property ed to property are not allowable in the year under consideration. However, as far as the allowable in the year under consideration. However, as far as the allowable in the year under consideration. However, as far as the other expenses out of expenses of Rs.50,05,240/ s out of expenses of Rs.50,05,240/- are concerned, are concerned, if those expenses pertain to the maintaining those expenses pertain to the maintaining of corporate structure of corporate structure of the assessee after com the assessee after commencement of business activity, s of business activity, same are allowable to the assessee despite no business activity was carried allowable to the assessee despite no business activity allowable to the assessee despite no business activity out in the year under consideration. in the year under consideration. In view of the facts and n view of the facts and circumstances of the case, we feel it appropriate to restore this circumstances of the case, we feel it appropriate to restore this circumstances of the case, we feel it appropriate to restore this issue back to the file of the issue back to the file of the Assessing Officer for verification Assessing Officer for verification whether the expenses of employee cost and other expenses were whether the expenses of employee cost and other expenses were whether the expenses of employee cost and other expenses were incurred in relation to business which incurred in relation to business which had already commenced and already commenced and allow the claim of expenses accordingly. The ground No expenses accordingly. The ground No expenses accordingly. The ground Nos. 2 to 2.5 of the appeal of the assesse the appeal of the assessee are accordingly allowed for statistical accordingly allowed for statistical purposes.
The ground No. 3 and 4 of the appeal relate to disallowance The ground No. 3 and 4 of the appeal relate to disallowance The ground No. 3 and 4 of the appeal relate to disallowance u/s 14A of the Act r.w.r. 8D of the Rules u/s 14A of the Act r.w.r. 8D of the Rules.
8.1 We have heard rival submissions of the parties on the issue in We have heard rival submissions of the parties on the issue in We have heard rival submissions of the parties on the issue in dispute and perused the relev dispute and perused the relevant material on record. On perusal of ant material on record. On perusal of the records, we find that no exempt income was earned by the the records, we find that no exempt income was earned by the the records, we find that no exempt income was earned by the assessee in the year under consideration. We also note that Hon’ble assessee in the year under consideration. We also note that Hon’ble assessee in the year under consideration. We also note that Hon’ble Delhi High Court in the case of Delhi High Court in the case of Era Infrastructure (India) Ltd. Era Infrastructure (India) Ltd. 141 taxmann.com 289 (Delhi) held that amendment to section 14A by (Delhi) held that amendment to section 14A by (Delhi) held that amendment to section 14A by the Finance Act, 2022 for making disallowance even no exempt the Finance Act, 2022 for making disallowance even no exempt the Finance Act, 2022 for making disallowance even no exempt income is earned, is held is held to be prospective in nature and prospective in nature and not applicable over the instant assessment year, applicable over the instant assessment year, therefore, being no therefore, being no exempted income in the n the year under consideration, t year under consideration, the disallowance made by the Assessing Officer cannot be sustained. The ground made by the Assessing Officer cannot be sustained. The ground made by the Assessing Officer cannot be sustained. The ground Nos. 3 and 4 of the appeal of the assessee are accordingly allowed. . 3 and 4 of the appeal of the assessee are accordingly allowed. . 3 and 4 of the appeal of the assessee are accordingly allowed.
In the result, the appeal of the assessee is partly allowed for In the result, the appeal of the assessee is partly allowed for In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open Court on nounced in the open Court on 30/12/2024. /12/2024.