Section 115BBE not applicable to expenses adequately explained during assessment

Icenet. Net Ltd Vs ITO (ITAT Ahmedabad)

ITAT allowed internet expenses and labour charges as business expenses and further held that Section 115BBE not applicable to expenses adequately explained during assessment

Introduction: In the case of Icenet. Net Ltd. vs. ITO, the issue revolved around the disallowance of certain expenses made by the Assessing Officer, which was later confirmed by the CIT(A). The disallowed expenses were related to internet expenses and labour charges, and the assessee appealed before the Income Tax Appellate Tribunal (ITAT) Ahmedabad.

Analysis: The ITAT Ahmedabad examined the grounds of appeal raised by the assessee. The first ground concerned the disallowance of Rs. 10,00,000/- incurred as internet expenses. The Assessing Officer claimed that the liability was a contingent liability and should have been brought into the books of accounts at the time of creation. However, the ITAT allowed the appeal, considering the nature of the performance guarantee given by the Indian Overseas Bank to the Department of Telecommunication. The ITAT held that the guarantee was in the nature of compensatory expenditure and was incurred for the purpose of the assessee’s business, making it allowable under Section 37(1) of the Income Tax Act.

The second ground was related to the disallowance of Rs. 2,00,000/- incurred as labour charges. The Assessing Officer argued that since the business was discontinued, the expenses could not be claimed as business expenditure. However, the ITAT disagreed and allowed the claim, as certain business activities were ongoing during the period, and the expenditure was related to the administration and accounting of the business.

The third ground dealt with the application of Section 115BBE of the Income Tax Act to the disallowed amounts. The ITAT ruled that the provisions of Section 115BBE were not applicable to the assessee’s case, as the expenses were adequately explained during the assessment proceedings.

Conclusion: The ITAT Ahmedabad allowed the appeal of Icenet. Net Ltd., confirming the allowability of internet expenses and labour charges as business expenses. The disallowance made by the Assessing Officer under Section 69C r.w.s. 115BBE was set aside, providing relief to the assessee.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The appeal filed by the assessee is against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”), National Faceless Appeal Centre (in short “NFAC”), Delhi on 17.02.2023 for A.Y. 2017-18.

2. The grounds of appeal raised by the assessee are as under:

“1. The Learned C.I.T. (Appeals) erred in law and on facts in confirming the disallowance of Rs.10,00,000/- made by the learned Assessing Officer on account of internet expenses debited in the books of the Appellant being the amounts debited by the bank on invocation of performance guarantee by the Department of Telecommunication. The C.I.T.(Appeals) erred in confirming the said disallowance on the ground that the said liability was a contingent liability not brought in the books of the Appellant at the time of creation of such contingent liability and has been rightly taxed by the learned Assessing Officer u/s.69C of the Act. Your Appellant submits that the disallowance is not warranted in the facts and circumstances of the case and the same should be directed to be deleted.

2. The Learned C.I.T. (Appeals) erred in law and on facts in confirming the disallowance of expenditure of Rs.2,00,000/- incurred towards the salary paid by the appellant during the year under consideration on the ground that business of the Appellant is closed in the year 2008. It is submitted that there was lull in the business of the Appellant and it was never sought to be closed. In any event, such expenditures are necessary for maintaining the corporate status of the Appellant, and hence also, are allowable as business expenditure. It is submitted that it be so held now and the disallowance made by the learned Assessing Officer as confirmed by C.I.T.(Appeals) be deleted.

3. The Learned Assessing Officer erred in law and on facts in taxing the disallowances made at the rate prescribed u/s.115BBE of the Act. It is submitted that the provisions of section 115BBE are not at all applicable to the appellant, and hence, the demand raised by the Assessing Officer as confirmed by the learned C.I.T.(Appeals) by charging the addition made at the tax rate u/s.115BBE be deleted.

4. Your Appellant reserves the right to add, alter, amend and/or withdraw any of the above Grounds of Appeal.”

3. The assessee filed his original return of income for the A.Y. 2017-18 on 06.11.2017 declaring a loss of (-)Rs. 2,74,661/-. The Assessing Officer observed that expenses of Rs. 10,00,000/- was debited in Profit & Loss Account as internet expenses on the other side in the bank account there is a debit entry of Rs. 10,00,000/- with narration “creation of invocation event transaction”. Apart from the above, an amount of Rs. 2,00,000/- was also debited in Profit & Loss Account as labour charges which is also unexplained expenditure as the company has already stopped operating since 2018 as per the narration of Assessing officer. Accordingly, the Assessing Officer completed the assessment under Section 143(3) on 29.11.2019 assessing total income at Rs. 9,25,340/- by disallowing the said expenditure as unexplained expenditure under Section 69C r.w.s. 115BBE of the Income Tax Act amounting to Rs. 12,00,000/-.

4. Being aggrieved by the assessment order the assessee filed appeal before the CIT(A). The CIT(A) dismiss the appeal of the assessee.

5. As regards Ground No. 1, the Ld. A.R. submitted that the assessee has claimed revenue expenditure of Rs. 10,00,000/- during the year under consideration as the assessee has given performance guarantee issued by the Indian Overseas Bank to Department of Telecommunication (DOT) and it has been invoked by DOT by sending letter to Indian Bank dated 24.06.2016. The guarantee was given by the bank for business performance. Therefore, in the light of the decision of Hon’ble Gujarat High Court in case of Neo Constructo Construction Ltd. 218 taxman 24, the Ld. A.R. submitted that the performance guarantee is in the nature of compensatory in nature and was incurred for purpose of the business of the assessee and hence allowable under Section 37(1) of the Act.

6. The Ld. D.R. submitted that the business was discontinued and therefore, the assessee cannot claim the same as business purpose. The Ld. D.R. relied upon the assessment order and the order of the CIT(A).

7. Heard both the parties and perused all the relevant material available on record. It is pertinent to note that the bank guarantee was originally for the business purpose with the Department of Telecom which is a mandatory for certain projects. Thus, the observations made by the Assessing Officer that it is not in respect of business appears to be incurred as the performance guarantee was prior to the period on which the assessee was not fully operationalise his business. Therefore, the benefit of Section 37(1) is allowable to the assessee in light of the decision of Hon’ble Gujarat High Court in case of Neo Constructo Construction Ltd. (Supra). Ground No. 1 is allowed.

8. As regards Ground No. 2, the Ld. A.R. submitted that the labour expenses money to Rs. 2,00,000/- claimed by the assessee was paid to one staff which was doing administrative / accounting as well as miscellaneous office work and therefore, the same is related to the assessee’s business itself. The Ld. A.R. submitted that the company was not closed too and the administrative as well as accounting of the assessee’s business was operational during the period, therefore, the expenditure is revenue expenditure and the same should have been allowed.

9. The Ld. D.R. relied upon the assessment order and the order of the CIT(A). It is pertinent to note that there was no closure declared by the assessee of its entire business but certain business activities were going on from 2008 till 2016 and therefore, one staff expenses related to salary component was genuine by the assessee as revenue expenditure. Hence, the Ground No. 2 is allowed.

10. As regards Ground No. 3, the Ld. A.R. submitted that the CIT(A) erred in disallowing the addition at the rate prescribed in the Section 115BBE of the Act. The Ld. A.R. submitted that the provisions of Section 115BBe are not at all applicable to the assessee’s case.

11. The Ld. D.R. relied upon the assessment order and the order of the CIT(A).

12. Heard both the parties and perused all the relevant material available on record. From the perusal of the additions it is pertinent to note that the expenditure claimed by the assessee in respect of performance guarantee as well as labour expenses were both explained by the assessee during the assessment proceedings and therefore, applying Section 115BBE in assessee’s case is not justifiable. Hence, Ground No. 3 is allowed.

13. As regards additional ground the same are in alternate to Ground No. 1 & 2 in case are dismissed. But since both grounds are allowed hereinabove the same becomes academic, hence not adjudicated.

14. In result, the appeal of the assessee is allowed.

This Order pronounced in Open Court on 07/07/2023