ITAT directs AO to allow Expenditure incurred at Head Office except director Salary against Interest Income [Read Order]

The Income Tax Appellate Tribunal (ITAT), Chennai Bench directed AO to allow expenditure incurred at Head Office except for director salary against interest income.

The assessee, M/s. The Travancore Textiles P.Ltd. is engaged in the business of growing and selling coffee and filed its return of income for assessment year admitting total income. The case has been taken up for scrutiny and during the course of assessment proceedings, the Assessing Officer noticed that assessee has maintained separate books of account for agricultural activity and non-agricultural activity.

The books of account of agricultural activity were separately audited by an independent auditor. In the Head Office main source of income of the assessee for the impugned assessment year is interest on deposits and against this assessee has claimed various expenses including audit fee, salary, and wages, director’s remuneration, electricity expenses, etc.

The Assessing Officer was of the opinion that expenses claimed at Head Office are related to the main business activity of agricultural operations as well as non-agricultural operations and hence, needs to be proportionately apportioned to agricultural income and non-agricultural income. Accordingly, by taking the ratio of agricultural income and non-agricultural income, total expenses have been apportioned to agricultural income and consequently, recomputed income returned from non-agricultural activity.

The assessee carried the matter in appeal before the first appellate authority, but could not succeed. The CIT(A) for the detailed reasons recorded in appellate order sustained addition made by Assessing Officer towards apportionment of expenses towards agricultural income and non-agricultural income on the ground that Head Office expenses like staff salary, director’s salary, and other expenses definitely have bearing on the profitability of the agricultural division.

The department on the other hand, strongly supporting the order of CIT(A) submitted that when the main business activity of the assessee is only growing and selling coffee, then there is no reason to segregate Head Office expenses and plantation expenses and whatever expenses incurred by assessee including expenses at Head Office are related to the main business activity of agricultural operations and hence, Assessing Officer was right in allocating expenses to agricultural income and non-agricultural income.

The coram of V.Durga Rao and G.Manjunatha noted that the Assessing Officer in the immediately preceding year has accepted interest income offered by the assessee under the head income from the business has suddenly changed the head of income to ‘income from other sources’ without there being any change in facts and circumstances for the impugned assessment year.

Therefore, the ITAT directed the Assessing Officer to consider interest income under the head ‘income from business’ as claimed by the assessee and further directed the Assessing Officer to allow expenditure incurred at Head Office except for director salary against interest income.

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