Case Law Details

Case Name : Motilal Chunilal & Muktalal Shaw (HUF) & Ors. Vs Asstt. CIT (ITAT Kolkata)
Appeal Number : ITA No. 1903/Kol/2016
Date of Judgement/Order : 28/08/2019
Related Assessment Year : 2012-13

Motilal Chunilal & Muktalal Shaw (HUF) & Ors. Vs Asstt. CIT (ITAT Kolkata)

The question raised in appeal is challenging the action of CIT(A) in confirming the addition made on account of Section 14(A) r.w.s. 8D(2)(ii)&(iii) of the Rules..

The assessee earned dividend of Rs. 52,012/- and claimed the same as exempt income. The AO by invoking Rule 8D(ii) and (iii) disallowed an amount of Rs. 24,152/- and added to the said disallowance to the total income of the assessee. The CIT(A) by placing reliance on the Circular no. 5/114 dated 11.12.2014 held that the expenses which are related to earning of exempt income have to be considered for disallowance irrespective of the fact whether any such income has been earned during the financial year or not.

The contention of the Ld. AR is that the assessee has its own sufficient funds for investments and the disallowance under Rule 8D(2)(ii)&(iii) is not maintainable.

ITAT find from the perusal of balance sheet as on 31.03.2012 that the assessee has balance of fund at Rs. 5,59,80,394.72 and therefore, ITAT find force in the arguments of the Ld. AR that the assessee did not utilize any borrowed funds for its investments and the disallowance made under Rule 8D(2)(ii) is not maintainable. Therefore, taking into consideration the submission of the Ld. AR along with the balance sheet ITAT restrict the disallowance to an extent of Rs. 4,000/- and Rs. 20,152/- made under Rule 8D(2)(ii) is deleted. and hence ground raised by the assessee is allowed in part.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal filed by the Assessee is against the Order dated 28.06.2016 passed by the Commissioner of Income Tax (Appeals)-13, Kolkata [hereinafter ‘CIT(A)’] for AY 2012-13.

2. Ground no.-1 is general in nature and therefore, requires no adjudication.

3. Ground no.-2 is raised challenging the action of CIT(A) in confirming the addition made on account of payment of interest in the facts and circumstances of the case.

4. Heard both parties and perused the materials available on record.

5. It is noted from the record that the assessee has a property in Park Street which was let out for commercial purposes. The assessee claimed deduction on payment of interest on a loan availed from Vijaya Bank. According to AO a sum of Rs. 2,00,00,000/- was paid to M/s. Abiskar Corporation on 07.04.2006 for seeking surrender of tenancy right of a shop bearing no. 20K, Park Street, Kolkata. The balance Rs. 1,00,00,000/- stated to have been utilized for repair and renovation of the aforesaid property. The AO denied the deduction on account of payment of interest on the said loan of Rs. 3,00,00,000/- by observing that the payment of Rs. 2,00,00,000/- to M/s. Abiskar Corporation to surrender tenancy rights is capital in nature. Rs. 45,00,000/- was not spent towards repairs and renovation of house property rather used for non-business purpose and no evidence filed showing utilization of balance of Rs. 55,00,000/-. Thereby, the AO denied a deduction on account of interest expenses to an extent of 23,80,713/- vide his Order dated 30.03.2015 under Section (hereinafter ‘U/s’) 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’). The CIT(A) in the first appellate proceedings confirmed the view of the AO by giving reasons as under:

“5. I have gone through the contention of the assessee, the order passed by the AO and the submissions made by the Appellant. The decision of this appeal is given as under:-

The Ground number 2 relates to the disallowance of interest of Rs.23,80,731/- on loan which was set off against income from rent and maintenance charge. While disallowing the same the AO has concluded that the assessee is eligible for standard deduction under section 24(a) at the rate of 30% and deduction under Section 57 is also limited to that expenditure which have been incurred wholly for the income. For the deduction of interest provided in section 24(b) does not cover situation where funds were borrowed for paying compensation to a tenant for vacating the property. From the fact it is clear that the borrowed fund has been used for paying compensation to the tenant. The AO has further observed that the payment of compensation to get property vacated is capital in nature. Hence, interest expenses towards capital expenditure are not allowable expenditure.

On the contrary the appellant has simply stated that “The loan was taken to pay off an old tenant against surrender of its tenancy and consequential extensive internal repairs after the vacation to make it ready of letting out again and income offered to tax accordingly. The said loan was utilized wholly and exclusively for this specific purpose. Extensive internal repairs of the existing commercial property were carried on so as to make it conducive for commercial exploitation. Details of various expenditure incurred were produced at the time of Assessment but the same was rejected by the A.O without bringing any adverse cogent evidence on record.”

The appellant further asked to substantiate its claim of repair and maintenance on which expenses were claimed but no detail regarding such repair and renovation were submitted. In fact the AO has given reference of reply of the appellant where no proof of such expenses was submitted the relevant portion of assessment order of the AO is reproduced as under:-

“AR was asked to submit the evidence regarding repair and renovation expenditure and along with that, copy of municipal authorities permission. Because as per Kolkata municipal rules any major repair or renovation work job can only be done after taking permission from the corporation building department. In this instance as the amount involved is Rs. 1 crore it must be a major repair or renovation work.

As no detail of repair or renovation and no document was submitted in support of that assessee claim that the amount of Rs. 1 crore was untilled for the purpose of earning or enhancing income is not accepted. Amount of interest paid on that amount is disallowed as business expenditure and added back to the total income of the assessee”.

Considering the fact stated above the AO as rightly disallowed the interest debited against income from house property which is not permissible as per section 24(a) and it is also not in the ambit of section 24(b). I do not find any infirmity with the order of the AO. Hence, the action taken by the AO regarding disallowance of the case is upheld and the appeal of the appellant is dismissed on this ground.”

6. On perusal of the reasons given by the CIT(A) along with the submissions made by the Ld. AR we find that the assessee computed the income earning from the said property under the head income from house property. The deductions allowable from income from house property are contemplated U/s 24 of the Act. There is no dispute in granting deduction which is a standard deduction U/s 24(a) of the Act to the assessee. Further, it is noted that the assessee made a claim under Clause (b) of Section 24 of the Act claiming to have repaired the said property on getting peaceful possession from the erstwhile tenant. But, however, it is seen from the assessment Order the AO held a sum of Rs. 45,00,000/- were not spent on repairs and renovation on the said property and no documentary evidence were filed in respect of the balance amount of Rs. 55,00,000/-. Before us also the Ld. AR did not bring on record any evidence contrary to the finding of both the authorities below. The assessee filed paper book containing pages 1-26 but however, no such evidences were filed before this Tribunal showing that the assessee actually incurred the said Rs. 1,00,00,000/-towards repairs and renovation. Therefore, in our view that the finding, both the Authorities below, are to be upheld in the absence of any documentary evidence substantiating the claim of assessee.

7. Further, the assessee made an alternative claim before us if not deduction is not allowable U/s 24(b) of the Act a deduction may be given U/s 57(iii) of the Act. On perusal of the Clause (iii) of Section 57 of the Act it is noted that the deductions are contemplated to the income computed under the head income from other sources, whereas as, in this present case the statement of total income as filed by the assessee in its paper book shows the assessee earned income from house property and claimed standard deduction U/s 24(a) of the Act @ 30%. So therefore, it is clear that the income of the assessee are computed under the head income from house property and therefore, the application of deductions contemplated in the Section 57 of the Act does not arise at all, as the deductions are available U/s 57 of the Act if the income chargeable under the head income from other sources. Thus, the submissions of Ld. AR are alternative deduction is not acceptable and are rejected.

8. Coming to the payment of Rs.2,00,00,000/- to M/s. Aavishkar Corporation and claiming deduction on payment of interest thereon, it is noted that except for agreement between persons representing the said Aavishkar Corporation no such other evidence brought on record like a deed of rental agreement showing that M/s. Aavishkar Corporation is the tenant of assessee and it is noted that the AO did not dispute the same. The Only contention of the AO was that the payment of Rs. 2,00,00,000/- to M/s. Aavishkar Corporation to surrender its tenancy rights is capital in nature and when the deduction U/s 24(b) of the Act is given, no such other deduction is available. We find that on perusal of the agreement dated 07.04.2006 to surrender tenancy rights it is noted that the persons representing M/s. Aavishkar Corporation accepted and acknowledged receipt of Rs. 2,00,00,000/- from the assessee and would vacate and give peaceful possession to the assessee on or before 07.05.2006 i.e. within two months. As discussed in the aforementioned paragraphs, there was no evidence to show that a sum of Rs. 1,00,00,000/- spent for renovation and repairs before the Authorities below as well as before this Tribunal. Therefore, the claim of payment of interest as deduction cannot be seen separately to the fact that no evidence showing incurring of expenditure on account of repairs and renovation were not filed before us as well as both the Authorities below. Therefore we find no infirmity in the Order of CIT(A) for the reasons as set out in para no.-5 of impugned Order which is reproduced hereinabove and it is justified. Thus, ground no.-2 filed by the assessee is dismissed.

9. Ground no.-3 is raised by the assessee challenging the action of the CIT(A) in confirming the addition made on account of payment of brokerage in the facts and circumstances of the case.

10. Heard both parties and perused the material available on record.

11. It is noted that the AO found that the assessee debited an amount of Rs. 1,10,300/- under the head brokerage expenses in its profit and loss account. The AO held that when the standard deduction U/s 24 of the Act is granted no other deduction is available under the statute and denied the same. The CIT(A) confirmed the view of AO and the addition made thereon for the reason stated hereunder:

“Ground number 3 relates to the adding back an amount of Rs. 1,10,300/- on account of brokerage claim paid by the appellant for procuring tenants on the ground that the standard deduction of 30% has already been allowed out of rental income. This expenditure was claimed under section 57(iii) of the I.T. Act, 1961. This expenditure was claimed to be incurred wholly and exclusively for earning income. Under the head Income from House property a standard deduction of 30% is allowed u/s. 24(a) to cover up for various expenses incurred for earning Rental Income including maintenance expenses and other related expenditure like brokerage which was incurred for the services of a Broker, in looking for suitable tenant. No other deduction is permissible other than the standard deduction of 30%, Even if, no expenditure is incurred for earning of rental income even then the standard deduction of 30% is allowed unconditionally. The standard deduction has been provided to take care of all related expenditure incurred for earning rental income. Any expenditure beyond 30% or in addition to the standard deduction is not permissible as deduction no matter how relevant it was for earning of rental income. It is assumed that blanket deduction takes care of all expenses incurred for earning rental income. Therefore, claim of expenditure on brokerage amounting to Rs. 1,10,300/- cannot be allowed as a deduction over and above the 30% standard deduction.

I agree with the view of the AO. Once the income has been shown under the head of income from house property no separate deduction is allowable as per law. Therefore, the disallowance made on this account is upheld and the ground of appeal is dismissed.”

12. Before us the Ld. AR reiterated the same submissions as advanced both the Authorities below. There is no dispute granting of standard deduction to the income earned under the head income from house property. The claim of granting deduction U/s 57(iii) of the Act was denied by the CIT(A) only on the ground that the deduction is not permissible under law other than the standard deduction of 30% U/s 24(a) of the Act. Admittedly, an amount of Rs. 1,10,300/- has been debited under the brokerage expenses relating to earning income from house property. Therefore, as rightly pointed by the CIT(A) that the deduction U/s 57(iii) of the Act is not permissible when the assessee availed already standard deduction U/s 24(a) of the Act. Therefore, we find no infirmity in the Order of CIT(A) and it is justified. Ground no.-3 raised by the assessee is dismissed.

13. Ground no.-4 is raised challenging the action of CIT(A) in confirming the addition made on account of Section 14(A) r.w.s. 8D(2)(ii)&(iii) of the Rules.

14. Heard both parties and perused the material available on record.

15. The assessee earned dividend of Rs. 52,012/- and claimed the same as exempt income. The AO by invoking Rule 8D(ii) and (iii) disallowed an amount of Rs. 24,152/- and added to the said disallowance to the total income of the assessee. The CIT(A) by placing reliance on the Circular no. 5/114 dated 11.12.2014 held that the expenses which are related to earning of exempt income have to be considered for disallowance irrespective of the fact whether any such income has been earned during the financial year or not.

16. The contention of the Ld. AR is that the assessee has its own sufficient funds for investments and the disallowance under Rule 8D(2)(ii)&(iii) is not maintainable.

17. We find from the perusal of balance sheet as on 31.03.2012 that the assessee has balance of fund at Rs. 5,59,80,394.72 and therefore, we find force in the arguments of the Ld. AR that the assessee did not utilize any borrowed funds for its investments and the disallowance made under Rule 8D(2)(ii) is not maintainable. Therefore, taking into consideration the submission of the Ld. AR along with the balance sheet we restrict the disallowance to an extent of Rs. 4,000/- and Rs. 20,152/- made under Rule 8D(2)(ii) is deleted. Ground no.-4 raised by the assessee is allowed in part.

18. In the result appeal of the assessee is allowed in part.

Order pronounced in the open court on 28.08.2019.

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