Deduction for expenditure incurred towards machinery hired cannot be rejected on the ground that that the machinery was lying idle
The high court of Bombay at Goa has recently held that the deduction claimed by a company for expenditure incurred towards machinery hired cannot be rejected by the tax authorities on the ground that that the machinery was lying idle.
In this case, the assessing officer (AO) did not allow the claim of expenditure of Rs 25.9 lakh made by Salitho Ores Ltd in its income tax returns for the assessment year 1989-90. According to the AO, the expenditure was made to pay rent for three dozers which were not used at all by the company for its mining business during the previous year.
The AO held that no prudent businessman would take on lease four dozers when only one could be put to actual use.
Subsequently, the company approached the commissioner of income tax (CIT) (Appeals) challenging the AO’s order. The CIT ordered that the business decision taken by the assessee of hiring dozers, though erroneous, cannot be questioned and the claim of expenditure should be allowed. The CIT order in respect of the expenditure was confirmed by the income tax appellate tribunal (ITAT). The income tax then department challenged the ITAT decision before the high court.
Upholding the company’s claim, the high court observed: “How many dozers should be engaged was a question which could be best to be considered by the assessee. As long as the expenditure is incurred bona fide in pursuit of a business and not by way of diversion of funds, the expenditure has to be allowed as a deduction.”
While noting that sometimes the judgment of the businessman regarding the existence of business opportunity turns sour, the court stated that “the expenditure incurred for pursuit of the business and/or exploitation of a business opportunity cannot be denied by the tax authorities on the ground that the business decision was imprudent”.
