Monarch Commodities Pvt. Ltd. Vs. DCIT (ITAT Bangalore)
Under section 57(iii) of the Act, only those expenditure are to be allowed which are related to earning of income from other sources. Since the expenditure claimed by the assessee was not incurred to earn income from other sources, the same cannot be allowed.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
These appeals are preferred by the assesses against the respective order of the CIT(Appeals) on common grounds, except the quantum and for the sake of reference, the grounds raised in ITA No. 1302/Bang/2016 are extracted here under:-
“1. The Learned Commissioner of Income Tax (Appeals) in the facts and circumstances of the case of the appellant and in law erred in-
(a) Confirming the impugned assessment order passed by the Ld. Assessing Officer u/s. 153C r.w.s. 143(3) of Act which was illegal and bad-in-law.
(b) Not holding, following his own appellate order for AY 2006-07 to 2011¬12, that the requirements of section 153C were not fulfilled and the assessment order passed u/s. 153C was required to be cancelled.
(c) Holding and stating that the appellant along with other companies carried out accommodation transactions in textiles and chana dal and the said bogus business losses were found to be set-off against income from properties and interest income.
(d) Holding that the appellant had failed to bring any evidence on record that he had ever asked for copy of sworn statements of Mr. Jitendra Salecha and H.M Amin, the Director of the appellant.
(e) Holding that the appellant had indulged in bogus transactions and consequently the artificial losses cannot be allowed to be set off against the income from other sources and income from house property.
(f) Holding and stating that business loss claimed by the appellant amounting to Rs. 6,24,042/- was liable to be disallowed and to be added to the income of the appellant.
(g) Not allowing set off of business loss of Rs. 6,24,042/-against income from house property and income from other sources.
(h) Not allowing the expenses incurred by the appellant for maintaining its corporate structure viz. audit fees, staff cost, electricity, telecommunication expenses, motor car expenses, directors remuneration etc. and certain judicial pronouncements as submitted to him.
(i) Alternatively not holding certain expenses incurred by the appellant were allowable as deduction u/s. 57(iii) of the Act and determining the total income of the appellant accordingly.
2. The above grounds of appeal are distinct and separate and without prejudice to each other.
. The Appellant craves leave to add, alter, amend or withdraw all or any of the grounds of appeal herein and to submit such statements, documents and papers as may be considered necessary at any time before or at the time of hearing the appeal.”
2. During the course of hearing, the ld. counsel for the assessee opted not to press ground Nos. 1(a) to (e). Accordingly these grounds are dismissed being not pressed.
3. With regard to ground Nos. 1 (f) to (i), the facts borne out from the record are that during the course of search conducted on 19.07.2011 in the case of Shri Priyakant Amin, Shri Pratap Wadhwa, M/s. STI Products India Ltd. and others, it was noticed that the companies, M/s. Amin Manilal & Co. Pvt. Ltd., M/s. Manilal Commodities Pvt. Ltd., M/s. Monarch Commodities Pvt. Ltd. And M/s. Sunisha Impex Pvt. Ltd. have claimed bogus business losses. It was also found that the above companies carried out accommodation transactions in respect of bogus trading in textiles and Chana dal. The bogus business losses were found to be set off against the income from properties and interest income. It was also noticed that Shri Hasmukhray Ami is one of the directors of the companies M/s. Amin Manilal & Co. Pvt. Ltd., M/s. Manilal Commodities Pvt. Ltd., M/s. Monarch Commodities Pvt. Ltd. and M/s. Sunisha Impex Pvt. Ltd. The above companies own immovable properties and substantial part of the income is derived from these immovable properties. The AO has disallowed the claim of business loss after making necessary verification with regard to genuineness of the business losses suffered by them.
4. The assessee preferred an appeal before the CIT(Appeals) with the submission that to maintain corporate structure, the assessee is required to incur certain expenses which should be allowed against other income of the assessee. The CIT(Appeals) re-examined the issue in the light of the assessee’s contentions, but was not convinced with it and dismissed the appeal of the assessee.
5. Now the assesses are before us and reiterated its contentions.
6. The ld. DR placed reliance upon the order of the CIT(Appeals).
7. Having carefully examined the orders of authorities below in the light of rival submissions, I find that during the course of search conducted upon Shri Priyakant Amin, Shri Pradeep Wadhwa and M/s. STI Products Ltd., it has surfaced that the assessee companies were not doing any business and they were claiming bogus business losses. It was also noticed that business loss was claimed to be set off against income from house property and interest income.
8. During the course of hearing, the ld. Counsel for the assessee advanced an argument that to keep the corporate structure, assessee is required to incur certain expenses. On this argument, a specific query was raised as to when the assessee has started its business. In response thereto, it was stated that assessee is contemplating to restart it, meaning thereby, the assessee has never undertaken any business of trading in textile and Chana dal. In the earlier years, the assessee claimed bogus business loss and claimed set off of same against income from house property. There is no intention whatsoever to revive its business. Therefore, the expenditure relating to keep corporate entity alive cannot be allowed as there was no intention of assessee to run a business. The CIT(Appeals) has examined the issue in detail and for the sake of reference, his observations are extracted here under:-
“The above companies also claimed trading activities and claimed business losses in trading of textiles and chana dal. During the search proceedings, it was observed that the above companies do not have any showrooms/go downs for keeping the stock of the textiles or chana dal and all the trading transactions are with the companies of Sri Jitendra Salecha. Sri Hasmukhray Amin stated that trading is done with the advice of Sri Jitendra Salecha. He also stated that he has no direct transaction with any party other than Shri Jitendra Salecha or his associate concerns. The above companies purchase goods only through Shri Jitendra Salecha and sale the goods through Shri Jitendra Salecha only. He also stated that he is not aware of the buying or selling parties for business goods for concerns operating from this premises. He failed to explain why trading was carried out for loss. As noted in the above, paragraphs Sri Jitendra Salecha carried out accommodation transactions with the concerns of Sri Priyakant Amin. Hence, explanation was called for vide Summons U/s 131(1A) of the I.T.Act vide No. DDIT(Inv.)/PNJ/Amin/11-12, Dated.27.07.2011 to M/s Amin Manilal & Co Pvt Ltd, M/s Manilal Commodities Pvt Ltd, M/s Monarch Commodities Pvt Ltd and M/s Sunisha Impex Pvt Ltd as to why the claim of business loss should not be disallowed. The above companies failed to furnish any reply or explanation in respect of the above show cause notice.
It is pertinent to note that the appellant is saying that he was not given the copy of the sworn statement of Mr. Jitendra Salecha, Hasmukhray Amin nor was he given any opportunity to cross examine Mr. Jitendra Salecha. However, the appellant has failed to bring any evidence on record that he has ever asked for a copy of the sworn statement of the above mentioned persons or any opportunity to cross examine them. Therefore, assessment order cannot be faulted on these counts.
Once it is held that the appellant has indulged in bogus transactions. These artificial losses can not be allowed to be set off against the income from other sources or income from house property. The grounds raised by the appellant are, therefore, dismissed.
During the appellate proceedings, the appellant has raised two more grounds, which are as under:
Without prejudice to each of the aforesaid contentions, in any case, it is submitted that the expenses incurred by the appellant for maintaining its corporate structure, such as audit fees, directors remuneration, etc., should be allowed as deduction in computing the total income of the appellant. He relied on Hindustan Chemical Works Ltd vs CIT (124 ITR 561) and Preimus Investment. & Finance Ltd vs DCIT 122 DTR 106.
Without prejudice to each of the earlier contentions, in any case, it is submitted that if for any reason, the said expenses incurred for maintaining corporate structure are not allowed as deduction while computing the profits of the business, the same should be allowed in earning income from other sources such as interest, dividend, etc., u/s. 57(iii) of the Act. He cited the decision of Chinai and Co Pvt. Ltd. vs CIT (206 ITR 616) in support of his contention.
The plea of the assessee that the expenses incurred by the appellant for maintaining its corporate structure, audit fees, directors remuneration should have been allowed. The case laws cited by the appellant are distinguishable on facts. The assessee has claimed these expenses as regular business expenditure but as it has been held that the appellant has not carried out any business activity, therefore, any expenses claimed to have been incurred cannot be allowed. Further, it has claimed that some deduction should have been allowed for earning of income from other sourced such as interest dividend etc, however, the appellant has failed to bring anything on record to suggest that it has incurred any expense corresponding to the income offered. Therefore, the expenses incurred toward earning these incomes cannot be allowed.”
9. Under section 57(iii) of the Act, only those expenditure are to be allowed which are related to earning of income from other sources. Since the expenditure claimed by the assessee was not incurred to earn income from other sources, the same cannot be allowed. I therefore find no infirmity in the order of the CIT(Appeals) and confirm the same.
10. In the result, the appeals of the assessee are dismissed.
Pronounced in the open court on this 15th day of December, 2017.