2014 (12) TMI 1166 - AT - Income Tax

Determination of total income - disallowance of revenue expenditure incurred towards flooring and wiring in the assessee s hotel premises - 153A Assessment - contention of the assessee that since no incriminating evidence relating to this transaction was found in the course of search u/s.132 of the Act the resultant disallowance was not called for in the assessment of income u/s.143(3) rws 153A - Held that - Respectfully following the decision of the Hon ble High Court of Karnataka in the case of Canara Housing Development Co. ( 2014 (8) TMI 642 - KARNATAKA HIGH COURT ) we hold that once the assessment is reopened the Assessing Officer can take note of the income disclosed in the earlier return any undisclosed income found during the course of search and also any other income which is not disclosed in the earlier return of income OR which is not unearthed in the course of search under section 132 of the Act in order to find out and determine what is the total income of each year and then pass the order of assessment. Treatment of expenditure incurred on renovation and cost of improvement of building leased as capital expenditure - revenue disallowing the assessee s claim that the said expenditure be allowed as revenue expenditure - Held that - Whenever an expenditure was incurred in the process of earning profits it has to be allowed as revenue expenditure. In such a case the expenditure incurred by the assessee would be out of the ambit and purview of the provisions of Explanation 1 to Section 32 of the Act of the Act. In the case on hand it is not in dispute that the expenditure was incurred for renovation. These expenses were incurred only for the purpose of carrying on day to day business and earn profits and do not result in the bringing into existence of any capital asset. Therefore in our view the learned CIT (Appeals) was not right in upholding the disallowance of the expenditure by holding it as capital in nature. We accordingly reverse the findings of the authorities below on this issue and allow the assessee s claim for deduction of expenditure incurred towards renovation of plant design system computer cabling fire detection and alarm system plumbing air conditioning work electrical works interior work etc. on the hotel/building taken on lease. Interest under section 234B and 234C - Held that - As the assessee has filed returns of income for the three assessment years 2008-09 to 2010-11 under section 153A of the Act declaring the additional income disclosed/admitted in the partners statement under section 132(4) of the Act in the course of search as its income. In view of the above discussion from para 9 to 9.5.4 of this order we uphold the decision of the learned CIT (Appeals) confirming the action of the Assessing Officer in levying interest under section 234B and 234C of the Act. Quantum of profit on suppression of unrecorded sales - Held that - We concur with the view of the learned CIT (Appeals) that the said additions made by the Assessing Officer on account of profits earned on suppressed sales for Assessment Years 2008-09 to 2010-11 are unsubstantiated and therefore uphold the order of the learned CIT (Appeals) deleting the said additions as the conclusions arrived at by the Assessing Officer are farfetched and the additions made on account of profit on suppressed/undisclosed sales are not substantiated by any material evidence

Summary

Issues Involved:
1. Disallowance of revenue expenditure as capital expenditure.
2. Chargeability of interest under sections 234B and 234C.
3. Addition of profits from alleged unrecorded sales.

Detailed Analysis:

1. Disallowance of Revenue Expenditure as Capital Expenditure:
The assessee contested the disallowance of Rs. 29,86,511 incurred towards flooring and wiring in the hotel premises, which was claimed as revenue expenditure but treated as capital expenditure by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Tribunal observed that the expenditure was incurred for efficient running of the business and did not result in the creation of any new asset or enduring benefit. The Tribunal held that the expenditure was revenue in nature and not capital, reversing the findings of the authorities below. The Tribunal emphasized that the expenditure was part of the profit-earning process and did not bring any new capital asset into existence. The Tribunal allowed the assessee's claim for deduction of the expenditure.

2. Chargeability of Interest under Sections 234B and 234C:
The assessee argued that the additional income disclosed during the search was voluntarily made and not related to any incriminating document or material found during the search. Therefore, interest under sections 234B and 234C should not be charged. The CIT(A) upheld the AO's action, stating that the charging of interest under these sections is mandatory as per the Hon'ble Supreme Court's decision in CIT v. Anjum M.H. Ghaswala. The Tribunal agreed with the CIT(A), stating that the returns filed in response to notices under section 153A are treated as returns filed under section 139(1) and that the assessee's contentions were of no consequence. The Tribunal upheld the decision of the CIT(A) confirming the levy of interest under sections 234B and 234C.

3. Addition of Profits from Alleged Unrecorded Sales:
The AO made additions towards gross profit from alleged unrecorded sales based on certain text messages found in the mobile phone of a partner of the assessee firm. The CIT(A) deleted these additions, stating that the AO's conclusions were far-fetched and not substantiated by any material evidence. The Tribunal upheld the CIT(A)'s decision, noting that no incriminating material was found during the search to substantiate the claim of unaccounted sales. The Tribunal found the AO's reliance on text messages as insufficient evidence and agreed with the CIT(A) that the additions were unsubstantiated. The Tribunal dismissed the revenue's appeals on this issue.

Conclusion:
The Tribunal partly allowed the assessee's appeals by reversing the disallowance of revenue expenditure as capital expenditure and upheld the CIT(A)'s decision on the chargeability of interest under sections 234B and 234C. The Tribunal also dismissed the revenue's appeals regarding the addition of profits from alleged unrecorded sales, agreeing with the CIT(A) that the additions were unsubstantiated.