2005 (12) TMI 449 - AT - Income Tax

Lease rent income - Income from other sources - disallowance - whether such expenses are incurred wholly and exclusively for the purpose of earning the income - HELD THAT - The perquisites payable to the Managing Director and vehicle expenses for the motorcar used by Managing Director are allowable as expenses incurred wholly and exclusively for earning the income. If the Company is to earn the income, it has to incur such expenses. It has to maintain its office. Accordingly, security charges are also to be paid. For maintaining the office, the power, fuel and water charges are to be incurred. The office is to be repaired and kept in useful condition. Thus, the repairs and renewal expenses are also required to be incurred. Similarly, for corres-pondence, stationery and printing expenses are also to be incurred. When the staff is to be employed, they are to be provided with welfare activities. To maintain the office in its proper decorum, flowers and plants are to be put therein or nearby. The assessee has also to entertain its guests or the officials from the lessee. Hence, such entertainment expenses are also inevitable and is to be considered as incurred wholly and exclusively for earning the income. The assessee has also to visit places and hence, vehicle has to be maintained. Similarly, the assessee has also to communicate with several agencies as well as the lessee. For this purpose, telephone, telex expenses are also to be incurred. Other general expenses like advertisement, interest on purchase of car, rent for executive s residence are also spent out of necessity to indirectly facilitate or earning of the income. Insurance is also necessarily to be paid to effectively safeguard the assets. When the expenses are incurred which are either under compulsion or obligatory on the ground of commercial expediency, it is not for Assessing Officer to decide as to what can be the reasonability or necessity for the same. What is to be seen is whether such expenses are incurred wholly and exclusively for the purpose of earning the income. Hon ble Supreme Court in the case of CIT v. Rajendra Prasad Moodi 1978 (10) TMI 133 - SUPREME COURT held that it is not necessary that income should be derived in the year under consideration. Even though income is not received, yet if the expenses are incurred for earning the income, the same are allowable u/s 57(iii) of the Act. We accordingly hold that the expenses claimed by the assessee for these years are to be allowed u/s 57(iii) of the Act. None of the expenses can be classified as not incurred wholly and exclusively for the purpose of earning the income. It is seen that though the income is assessed under the head Income from other sources , the assessee was required to maintain its status as Limited Company and to incur certain necessary expenditure. Expenses for preserving and maintaining the source of income and the expenses were obligatory in nature. The same were on the ground of commercial expediency in order to indirectly facilitate the earning of income. Thus, there is some connection, direct or indirect, between the expenditure incurred and income earned and hence, the expenditure are to be allowed. The expenses incurred are legitimate and bona fide, which is not doubted by the Assessing Officer. The assessee had no option except to incur the expenditure and hence, the same are allowed. We accordingly direct the Assessing Officer to allow the expenses claimed as they are incurred wholly and exclusively for the purpose of earning such income. In the result, the appeals of assessee are partly allowed and the appeals of revenue are dismissed.

Issues Involved:
1. Re-assessment under section 147.
2. Treatment of lease rent from Taj Group of Hotels.
3. Disallowance of various expenses by the assessee.
4. Revenue's challenge on the deletion of disallowance of certain expenses.

Issue-wise Detailed Analysis:

1. Re-assessment under section 147:
- The assessee contended that the condition precedent for reopening of assessment was absent, making the assessment bad in law.
- However, this ground was not pressed during the hearing and was dismissed for want of prosecution.

2. Treatment of lease rent from Taj Group of Hotels:
- The assessee leased its hotel to Indian Hotels Company Ltd. (Taj Group) under an agreement for 33 years, renewable for another 33 years, with a minimum guaranteed license fee or a percentage of net sales.
- The Assessing Officer treated the lease rental as "income from other sources" instead of "business income."
- The Tribunal upheld this treatment, referencing its previous decision in the assessee's case for assessment year 1989-90, confirming that the lease rental income is assessable as "income from other sources."

3. Disallowance of various expenses by the assessee:
- The Assessing Officer allowed only specific expenses like salaries, PF, ESI, and other inevitable expenses, disallowing others.
- The CIT(A) partly confirmed these disallowances, allowing some expenses and disallowing others, including managing director's perks, entertainment expenses, and various general expenses.
- The Tribunal examined the nature of these expenses under section 57, which allows deductions for expenditure laid out wholly and exclusively for the purpose of making or earning income.
- The Tribunal referenced several legal precedents, including CIT v. Rampur Timber & Turnery Co. Ltd., CIT v. New Savan Sugar & Gur Refining Co. Ltd., and CIT v. Ganga Properties Ltd., which support the allowance of expenses necessary for maintaining the company's status and fulfilling statutory obligations.
- The Tribunal concluded that the expenses claimed by the assessee, such as managing director's remuneration, vehicle expenses, security charges, and other general expenses, were necessary for maintaining the company's status and indirectly facilitating the earning of income.
- It was held that these expenses were incurred wholly and exclusively for the purpose of earning the income and thus should be allowed under section 57(iii).

4. Revenue's challenge on the deletion of disallowance of certain expenses:
- The revenue challenged the deletion of disallowance of expenses like travelling expenses of directors, vehicle maintenance, and advertisement expenses.
- The Tribunal, after considering the arguments and legal precedents, upheld the CIT(A)'s decision to allow these expenses.
- It was noted that the expenses were necessary for maintaining the company's operations and fulfilling statutory requirements, thereby indirectly facilitating the earning of income.

Conclusion:
- The appeals of the assessee were partly allowed, and the appeals of the revenue were dismissed.
- The Tribunal directed the Assessing Officer to allow the expenses claimed by the assessee as they were incurred wholly and exclusively for the purpose of earning such income.

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