Issues before tribunal:
- Whether expenses incurred for maintaining corporate entity & expenditure for day to day functioning of the company are allowable expenses u/s 37 even when no business activity was carried out by the assessee?
- Whether claim of set off of brought forward losses depreciation brought forward from earlier years should have been allowed?
- Assessee had been engaged in the business of investing, leasing & financing since 1992 and in the course of business receipt and payment of interest was an ordinary activity conducted in the normal course of business. During the year under consideration assessee made an application to RBI to register itself as NBFC which was rejected by RBI.
- AO noticed that assessee had debited Rs. 98.60 lacs under the head interest to the income & expenditure account and out of which interest amounting to Rs. 22.51 lacs was reduced and remaining amount was added to computation of income.
- AO added amount of Rs. 22.51 lacs and treated as income from other sources in absence of any business activity and disallowed all expenditures incurred for running office and day to day functions.
- In appeal CIT (A) held that due to rejection by RBI there was no possibility of having any business in future and business of assessee was closed down permanently hence no business expenditure could be allowed.
Contention of the revenue:
- Revenue urged that company was not authorised for carrying of business of finance due to rejection of registration as NBFC by RBI and in absence of any business activity interest income of expenditure incurred could not be allowed.
- Assessee was not in business of earning interest on loans hence interest income could not be treated as business income and assessee failed to show any nexus between expenditure and interest income. In this purview no expenditure can be allowed for interest income.
- No business loss of depreciation can be set off against income from other sources.
Contention of the Assessee:
- Assessee was carrying out business activities and already disallowed interest amounting to Rs. 76.09 lacs.
- Assessee had incurred expenses for carrying business and maintaining corporate entity and it has shown income to the extent of income earned.
- RBI denied registration of assessee company as NBFC due to insufficient funds and such denial by RBI would not turn business of assessee into an illegal business.
- AO treated interest income as business income in earlier years.
Held by the court: While allowing appeal filed by assessee tribunal held as follows:
- Denial by RBI to register assessee as NBFC could not be a ground for deciding the issue of business and making business illegal and does not hold any reason for non-treatment of systematic organized activities carried out by assessee for earning profit as business activities. If assessee had violated any provision under RBI act it would be penalized by appropriate authority.
- AO assessed interest income as business income in earlier years and had allowed all the expenditure related with the business activity.
- The rule of consistency demands that for deviating from the stand taken in the earlier years AO should bring on record the distinguishing feature of that particular year.
- The AO or the FAA has not mentioned even a single line as to how the facts of the case under appeal were different from the facts of the earlier or subsequent years.
- The Hon’ble Allahabad High Court has held that expenditure incurred for retaining the status of the company, namely miscellaneous expenses, salary, legal expenses, travel expenses, expenses would be expenditure wholly and exclusively for the purpose of making and earning income
- There is no doubt that the assessee is a corporate entity. Even if it is not carrying on any business activity it has to incur some expenditure to keep up its corporate entity. Therefore expenditure incurred by it has to be allowed.
- Issue of setting off of brought forward losses is covered by decision of Hon’ble Delhi HC in the matter of Lavish Apartment Pvt. Ltd. Vs. ACIT in ITA no. 254/2006 held that “Income against which brought forward loss is claimed to be set off should represent business income judged by application of commercial principles and not on application of provisions of Act.”
Assessee is a corporate entity and it has been continuously incurring day to day and other expenses to maintain corporate entity since 1992. A mere denial of registration as NBFC by RBI in any subsequent year could not decide closure of running business of the assessee. If there is no business activity is carried out by assessee in any year incurrence of routine expenses cannot be denied on that account.
(Compiled by our Team Member Advocate Jagjeet Singh)