Introduction: The Income Tax Appellate Tribunal (ITAT) in Delhi recently delivered a significant ruling concerning the disallowance of business expenses under Section 37 of the Income Tax Act. In the case of Giri Buildwell Pvt. Ltd. vs. DCIT, the ITAT challenged the arbitrary disallowance made by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) (CIT(A)).
Background of the Case
Giri Buildwell Pvt. Ltd. had filed its income tax return with a declared income of Rs. 41,95,030. However, the Assessing Officer (AO) completed the assessment with a total income of Rs. 58,09,620. This assessment involved two significant additions:
1. Alleged addition on account of disallowing business expenses: Rs. 14,10,163
2. Alleged addition on account of disallowance under Section 14A: Rs. 2,04,430
Disallowance of Business Expenses
The AO disallowed business expenses claimed by the assessee on the grounds that the company’s primary activities were related to income from house property and capital gains, with no substantial business activity. The disallowed expenses included salaries, director remuneration, staff welfare, conveyance, and various other expenditures. The AO contended that these expenses had no connection to the income from house property and were, therefore, inadmissible.
The assessee argued that its main business activity was the sale/purchase and construction of properties. While adverse market conditions led to a lack of property transactions during the relevant assessment year, the company still incurred expenses necessary for maintaining its business infrastructure. These expenses were deemed crucial for potential future business opportunities. The assessee maintained that these expenses should be allowed as business deductions.
CIT(A) and ITAT’s Decision
The CIT(A) upheld the AO’s order, leading the assessee to appeal to the ITAT. The ITAT reviewed the case and noted that the AO had not properly examined the expenses to determine if they were incurred for the purpose of business and had a business expediency explanation. The tribunal emphasized that a corporate entity, even if not actively conducting business due to market conditions, must still incur certain expenses to maintain its existence and operational readiness. The ITAT cited several precedents to support this view.
The ITAT’s decision in the Giri Buildwell Pvt. Ltd. vs. DCIT case underscores the importance of properly examining business expenses in income tax assessments. Disallowing expenses arbitrarily, without considering business expediency, can result in unjust outcomes. In this case, the ITAT found that the standard deduction from rental income did not cover expenses essential for maintaining the business entity. Therefore, it ruled in favor of the assessee, emphasizing the need for a thorough examination of expenses for proper tax assessments.
This ruling provides clarity on the treatment of business expenses and reaffirms the principle that businesses must be allowed to deduct expenses incurred for maintaining their operational readiness, even if they are not actively conducting transactions due to market conditions.
FULL TEXT OF THE ORDER OF ITAT DELHI
1. The appeal has been preferred by the Assessee against the order dated 09.03.2018 of CIT(A)-35, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in appeal no. 418/16-17 arising out of an appeal before it against the order dated 28.10.2016 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the DCIT, Circle-10(1), New Delhi (hereinafter referred as the Ld. AO).
2. The brief facts of the case are that Assessment in this case was completed on a total income of Rs. 58,09,620/- as against returned income of Rs. 41,95,030/-. While doing so the assessing officer has made the following addition. :
|1.||Alleged addition on account of disallowing business expenses.||14,10,163/-|
|0.||Alleged addition on account of disallowance under section 14A||2,04,430/-|
2.1 The Ld. AO observes that the entire activity of the assessee company revolves around earning of income from income from house property along with income under the head income from capital gain, there is no business activity, therefore, business expenses claimed by the assessee were disallowed and added back to the income of the assessee.
2.2 The detail of business expenses disallowed are as under:
Salaries and other benefits
|Staff Welfare & Other allowance||56,699/-|
|Membership Fee & Subscription||60,039/-|
|Vehicle Running & Maintenance||61,725/-|
|Legal & professional expenses||29,680/-|
2.3 Ld. Counsel has submitted that the main activity of the company is sale/purchase and construction of the property and not the rental income. Apart from that the company is maintaining the Inventory of Rs. 59,580,020/- but due to adverse market condition no sale/ purchase of property could be made during the year under considerations. However, the company is to maintain the office to carry on its main business activity and to incurred the expenses wholly and inclusively for business purposes. Ld. Counsel has submitted that for maintenance & marketing for selling the existing inventory the company is to maintain all the basic expenses like Salary to staff & director, staff welfare, conveyance, telephone, electricity, insurance, membership fee, vehicle running expenses, security charges and other statutory expenses, otherwise the company could not sell the inventory. Therefore these expenses are mandatory in nature to meet out any business opportunity to sell the inventory and should be allowed as business expenses. It is submitted that the assessee was not carrying out business activity due to adverse market conditions, but the assessee being an artificial juridical person, has to incur expenditure for maintaining its existence and for carrying out whatever little activities that the assessee is involved in. Unlike a natural person, a company can only operate through other natural persons—whether employees or others.
3. Assessee has come in appeal before the Tribunal raising following grounds :
“1. On the facts and in the circumstance of the case and in law the CIT(A) was incorrect and unjustified in sustaining the addition of Rs 14,10,163 incorrectly and unjustifiably made by the assessing officer.
2. On the facts and in the circumstance of the case and in law the CIT(A) was incorrect and unjustified in holding that there was no business activity in the year under consideration even when the main purpose for which the company has been floated is carrying on the business.
3. On the facts and in the circumstance of the case and in law the CIT(A) was incorrect and unjustified in holding that the expenses of Rs 14,10,163 are part of expenses of Rs 34,10,822 claimed as deduction u/s 24 of the Act.
4. On the facts and in the circumstance of the case and in law the CIT(A) was incorrect and unjustified in holding that expenses of Rs. 14,10,163 are related to earning income from house property.
5. On the facts and in the circumstance of the case and in law the CIT(A) was incorrect and unjustified in rejecting the contention of the assessee that the expenditure of Rs 14,10,163 are for the purposes of maintaining the co operate structure of the company.
6. On the facts and in the circumstance of the case and in law the CIT(A) erred in not appreciating the fact that the expenses allowable u/s 24 can not include the expenses of Rs 14,10,163 which had been incurred for maintaining and running the business of the company and cannot be part of the expenses allowable u/s24.
7. On the facts and in the circumstances of the case and in law the CIT(A) was incorrect and unjustified in not allowing the expenses incurred and claimed rightly under the head of business income.”
3.1 Ld. CIT(A) has sustained the order of ld. AO.
3.2 On the other hand, Ld. DR supported the findings of Ld. Tax Authorities below.
4. Appreciating the matter on record, it can be observed from the order of Tax Authorities below that the 10% deduction from the income under the head, “income from house property” u/s 24 of the Act has been considered by them to take care of all expenses. On the contrary, the assessee has made a claim that apart from the income made by way of renting of properties, there were other inventories and the assessee was making certain expenses for preservation of that inventory.
5. After taking into consideration the details of business expenses disallowed. The Bench is of considered opinion that as for the purpose of Section 37 of the Act the Tax Authorities were under obligation to examine the expenses to consider if the same were for the purpose of business and had business expediency as explanation. It is now a settled proposition of law that merely because the business stands abandoned or closed or dormant due to market conditions, a corporate assessee still needs to incur certain expenditure to keep itself floated. Reliance in this regard can be placed on the judgment ;
1. ITO vs. Mokul Finance (P) Ltd. (2007) 110 TTJ 0445 (Del)
2. CIT vs. Ganga Properties Ltd., (1993) 199 ITR 0094 (Cal)
3. Nakodar Bus Service (P) Ltd. vs. CIT, (1989) 179 ITR 0506 (P&H)
4. CIT vs. Rampur Timber & Turnery Co. Ltd. , (1981) 129 ITR 0058 (All)
5. L.VE. Vairavan Chettiar vs. CIT, (1969) 72 ITR 0114 (Mad)
6. Thus Bench is of considered opinion that the 30% standard deduction from the income under the head, “income from house properties” does not take care of all such expenses, which have an explanation of business expediency attached to them beyond the repair and maintenance and such like expenses, against the rental properties. Ld. Tax Authorities have fallen in error in out rightly declining expenses claim in the P & L account by the assesee which had no direct concern with the rented properties but were for keeping the business entity functional as a running concern. Non-examination of the same for purpose of Section 37 of the Act makes disallowance absolutely arbitrarily. Thus, the ground raised are sustained and the appeal of assessee is allowed.
Order pronounced in the open court on 21st August, 2023.