2011 (10) TMI 653 - AT - Income Tax

Disallowance u/s 14A - Held that - Rule 8D is not retrospective in its operation, in the light of decision of Hon ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT . Even under section 14A of the Act reasonable expenditure, which was necessary for the purpose of earning tax free income has to be considered for disallowance. In the instant case, as rightly pointed out by the learned Counsel, the expenditure incurred by the assessee was only to run the day-to-day activity and expenditure such as listing fees, filing fees, audit fees, appeal fees, etc., cannot be considered to be having any nexus with the earning of tax free income. Under the circumstances, by respectfully following the decision of the ITAT, F Bench (supra), we hold that adhoc disallowance of ₹ 37,512/- made by the Assessing Officer is not in accordance with law. Deduction towards business expenditure - commencement of business - Held that - It is well settled that in order to claim deduction towards business expenditure it is not necessary that an assessee has to earn business income in the same year so long as it can be shown that the company intends to continue its activities. The expenditure reflected in the assessment year clearly indicate that these are the basic expenditure in order to continue its status as a company and in the absence of proving that the assessee, by its conduct, had taken a decision not to carry on its business forever the minimum expenditure claimed by the assessee cannot be disallowed. We therefore, direct the Assessing Officer accordingly. Prior period expenses - Held that - We fail to understand the logic behind the plea of learned DR. Heading of section 43B states that certain deductions can be allowed upon actual payment. It is not in dispute that professional tax can be claimed as deduction, irrespective of the method of accounting followed by an assessee, in the year of actual payment. Admittedly, assessee paid the professional tax in the previous year relevant to the assessment year 2005-2006. Under the circumstances, we are of the firm view that the assessee is entitled to deduction of ₹ 19,850/-. Assessing Officer is directed accordingly.

Summary

Issues:
1. Disallowance of expenditure for earning exempt income under section 14A of the Act
2. Disallowance of business expenditure due to lack of business income
3. Allowability of professional fees as deduction for a prior period

Analysis:
1. The first issue revolves around the disallowance of expenditure for earning exempt income under section 14A of the Act. The assessee incurred fixed expenditure necessary for day-to-day activities, not directly linked to earning dividend income or capital gains. The Assessing Officer disallowed a portion of this expenditure, considering it connected to earning tax-free income. However, the Tribunal held that the expenditure was essential to maintain the company's identity and not specifically related to tax-free income. Citing the decision in a similar case, the Tribunal ruled against the adhoc disallowance made by the Assessing Officer.

2. The second issue concerns the disallowance of business expenditure due to the absence of business income in the relevant year. The Assessing Officer disallowed a specific sum as business expenditure since no business activity was conducted. The Tribunal emphasized that to claim business expenditure, it is not mandatory to earn business income in the same year, as long as the intention to continue business activities is evident. The Tribunal found the expenditure necessary to maintain the company's status and directed the Assessing Officer to allow the deduction.

3. The third issue involves the deductibility of professional fees for a prior period. The Assessing Officer and CIT(A) disallowed the deduction, stating that prior period expenses cannot be claimed in the current year under the mercantile system of accounting followed by the assessee. However, the Tribunal disagreed, stating that professional tax can be claimed as a deduction in the year of payment, as per section 43B of the Act. Since the professional tax was paid in the relevant previous year, the Tribunal allowed the deduction of the professional fees.

In conclusion, the Tribunal allowed the appeal filed by the assessee-company, rejecting the disallowances made by the Assessing Officer and CIT(A) and directing the Assessing Officer to allow the deductions as per the Tribunal's findings.