2007 (3) TMI 144 - HC - Income Tax

Business expenditure - The assessee firm claimed deduction of expenditure incurred prior to formation of firm - Held that claimed of assessee is genuine and allowed

Summary

Issues:
1. Disallowance of expenditure not pertaining to the relevant accounting period for the assessment year 1975-76.

Analysis:
The case involved a question of law referred to the High Court by the Income Tax Appellate Tribunal regarding the disallowance of Rs. 3,41,747 made by the assessing officer on account of expenditure not related to the accounting period relevant to the assessment year 1975-76. The facts revealed that the assessing officer disallowed certain expenses incurred by the assessee before April 1, 1974, as they were not considered to pertain to the assessment year in question. The assessee contended that the expenses were related to work undertaken before April 1, 1974, but the receipts were received after that date. The Commissioner of Income-Tax (Appeals) rejected the contention, but the Tribunal accepted it, allowing the expenditure as a deduction for the year in question.

The Tribunal justified its decision by stating that the firm was not in existence before April 1, 1974, and there was no question of filing a return for the earlier period. The Tribunal also emphasized that expenses could only be claimed once receipts were received, and since the receipts were received after April 1, 1974, the expenses had to be carried forward and allowed in the relevant accounting period for the assessment year under appeal. The Tribunal held that the Income-tax Officer and the CIT(A) were not justified in disallowing the claims, reversing their orders on this account.

Upon hearing the arguments from the revenue's counsel and reviewing the record, the High Court found that the expenses in question were spent by the assessee during a previous year where there were no business receipts, necessitating the expenses to be carried forward to the next year. The High Court noted that the expenses were related to the business conducted by the assessee, and therefore, upheld the Tribunal's decision in allowing these expenses as deductions for the relevant year.

In conclusion, the High Court answered the question referred against the revenue and in favor of the assessee, disposing of the reference accordingly.