The Income Tax Appellate Tribunal (ITAT) in Mumbai has ruled that, Disallowance Of Rental Expenses Merely As Per the Leave and License Agreement Cannot Be Sustained.
The appeal has been filed by the assessee before the ITAT challenging the order passed by the learned Commissioner of Income Tax (Appeals). The assessee has challenged the disallowance of rental expenses and disallowance of interest expenditure. The authority held that even if the premise taken on lease by the assessee is used by the directors for the purpose of their residence, the rental expenditure can be allowed as a business expense since the said premise is also used by the directors for official work of the company.
Brief facts are, the assessee company is engaged in the business of investment in shares, securities and derivatives. During the assessment proceedings, the Assessing Officer noticing that the assessee had claimed deduction towards rental expenses called for the necessary details and asked the assessee to justify such a claim. After verifying the leave and license agreement, the Assessing Officer found that as per the terms of the agreement, the premise was to be used for the residential purpose of employees/directors and their family members. Thus, he observed, the rental expenses for the lease of the premises not being for the purpose of the business has to be disallowed. On a further query from the Assessing Officer, the assessee submitted that it had incurred interest expenditure against the loan taken from India Infoline Investments Services Ltd. and the said loan amount was utilized for trading in derivatives and non–convertible debenture (NCD). It was submitted, since the borrowed fund was utilized for trading in derivative and NCDs, the interest expenditure on such loan has to be set–off against the interest income earned on NCDs. The Assessing Officer, however, did not find merit in the submissions of the assessee. The learned Commissioner (Appeals) also sustained the disallowance while deciding assessee’s appeal.
The assessee submitted in the light of decisions in ACIT v/s Stuish Capital Service Pvt. Ltd., ITA no.5482/ Mum./2016, and ITA no.5083/Mum./2018 &Ors., in the business of investing in shares, derivatives etc., it needs to meet with the investors regularly and frequently which is most necessary for its business activities. Further, he submitted, the subject premise is actually used for this purpose; hence, the expenditure incurred has to be allowed as a business expense. And he submitted, even if the premise taken on lease by him is used by the directors for the purpose of their residence, the rental expenditure can be allowed as a business expense since the said premise is also used by the directors for official work of the company.
The bench comprising of Judicial Member Saktijit Dey and Accountant Member Manoj Kumar Aggarwal held that though, in the leave and license agreement, it is mentioned that the premise has been taken on lease for the use of residence of directors/employees, however, it cannot be said that in course of such user, the directors are not doing any official work, such as, meeting the investors, etc. Therefore, merely because as per the terms of the leave and license agreement the premise is to be used for residence purpose of the directors, assessee’s claim cannot be rejected. It is found that the borrowed fund or part of it has been utilized in acquiring the NCDs, then the interest on such borrowed fund has to be set–off against the interest income earned on NCDs to the extent of utilization of borrowed funds in NCDs. The aforesaid claim of the assessee, therefore, needs factual verification. So the issue is restored back to the Assessing Officer for fresh adjudication after verification of facts on record and due opportunity of being heard to the assessee.
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