2015 (2) TMI 13 - AT - Income Tax

Disallowance of expenses and depreciation - assessee company has not only carrying out its business activities past 7-8 years but also not carried out any business activities in future 2-3 years - Ld. CIT(A) after examining all the expenses has restricted the disallowance to the tune of ₹ 8,68,705/- and given the relief of ₹ 18,35,634/- out of the total disallowance of ₹ 27,04,339/- - Held that - Keeping in view the details of salaries paid to the employees of the assessee company, we find that Ld. CIT(A) has allowed the entire salary expenses to the assessee in the impugned order which is not permissible under the facts and circumstances of the present case, because the assessee company is not carrying out its business activities since past 7-8 years and also not carry out for subsequent 2-3 years amount to ₹ 6,42,432/- has wrongly been allowed by the Ld. CIT(A). After examining the same, we are of the view that under the facts and circumstances of the case and to keep the corporate status alive, minimum expenses on account of salary should be allowed to the assessee. Therefore, we allow the salary of one Account Assistant amounting to ₹ 87000/-; Computer Operator ₹ 73,367/-; Driver ₹ 49,400/-; Peon ₹ 38,400/- and salary of one CA ₹ 24,000/- only and salary for others claimed by the assessee and the other expenses are disallowed. AO is directed to recompute the income of the assessee, as per the directions given as aforesaid. - Decided in partly in favour of assessee. Services charges - assessed under the head income from other sources OR profit and gains from business and profession - Held that - receipts by way of service charges does not form a continuous and systematic course of activity for the appellant. Some stray referrals in the case of its own directors and their relatives (for example director's son Sh. R. Malhotra and couple of business associates) resulted in booking of tickets through Span Excursions Pvt Ltd. Against that purchase, a few thousand by way of service charges has been received during the year. The income, therefore, was more of a casual nature. Keeping in view of the facts noted by the Ld. CIT(A) we are in agreement with his findings that there was no business income earned during the year and the amounts received in the form of credit notes were primarily casual in nature. Thus, they were rightly assessed under the head income from other sources - Decided against assessee. Expenditure on account of electricity and water charges, watch and ward charges, traveling expenses and Director s remuneration, correctly diallowed by CIT(A) - Decided against assessee. Entitlment for deduction of expenses u/s. 30 to 37 - Held that - AO has wrongly held that the assessee can claim expenses to the extent of business receipts only. Whereas the assessee is entitled to claim expenses covered under section 37 of the I.T. Act, therefore, direction is issue to the AO to reexamine the expenses and allow the same in view of the provisions of section 37 of the I.T. Act. - Decided in favour of assessee for statistical purposes.

Issues Involved:
1. Disallowance of expenses and depreciation.
2. Classification of service charges and interest income.
3. Disallowance of personal expenditure of directors.
4. Ad-hoc disallowance of director's remuneration.
5. Principle of consistency in tax assessments.

Detailed Analysis of Judgment:

1. Disallowance of Expenses and Depreciation:
The Revenue appealed against the relief of Rs. 18,35,634/- out of the total disallowance of Rs. 27,04,339/- made by the AO on account of expenses and depreciation. The AO had disallowed these expenses, arguing that the assessee had not carried out any business activities for the past 7-8 years and was not expected to do so in the near future. The CIT(A), however, allowed a portion of these expenses, considering them necessary for maintaining the corporate status and retaining staff. The Tribunal upheld the CIT(A)'s decision but modified it by allowing only essential expenses to keep the corporate status alive, such as salaries for minimal staff, and disallowed the rest.

2. Classification of Service Charges and Interest Income:
The assessee contested the classification of service charges of Rs. 19,610/- and interest income of Rs. 1,52,970/- under 'Income from Other Sources' instead of 'Profits and Gains from Business and Profession'. The CIT(A) upheld the AO's classification, noting that the service charges were received for referrals and were casual in nature, not part of a continuous business activity. The Tribunal agreed with this classification, citing that the principle of consistency does not apply when there is a material change in the factual position.

3. Disallowance of Personal Expenditure of Directors:
The CIT(A) disallowed certain expenditures, such as electricity and water charges, watch and ward expenses, and traveling expenses, holding them to be personal expenses of the directors. The Tribunal upheld these disallowances, agreeing with the CIT(A) that these expenses were not incurred for business purposes.

4. Ad-hoc Disallowance of Director's Remuneration:
The CIT(A) made an ad-hoc disallowance of 50% of the total director's remuneration of Rs. 4,80,000/-, attributing part of it to the earning of rental income. The Tribunal upheld this decision, agreeing that the remuneration was not entirely for business purposes.

5. Principle of Consistency in Tax Assessments:
The assessee argued that the principle of consistency should be applied, as similar expenses were allowed in previous years. The Tribunal, however, noted that the principle of consistency does not apply when there is a material change in the factual position, as was the case here. The Tribunal cited various judgments, including those of the Supreme Court, to support this view.

Separate Judgments for Different Assessment Years:
For the assessment year 2008-09, the Tribunal noted that the facts were identical to those of the assessment year 2005-06. However, it pointed out that the business had revived in the year under consideration, necessitating a fresh examination by the AO. The Tribunal directed the AO to reexamine the expenses and allow them under section 37 of the I.T. Act, considering the revived business activities.

Conclusion:
The Tribunal partly allowed the Revenue's appeal for the assessment year 2005-06 and dismissed the assessee's appeal for the same year. For the assessment year 2008-09, both the assessee's and Revenue's appeals were allowed for statistical purposes, directing a fresh examination by the AO.

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