2015 (8) TMI 73 - AT - Income Tax

Expenditure debited without earning any business income - assessee had earned interest income which was assessable under the head Income from other sources - Held that - The Assessing Officer has erred in rejecting the business loss of the assessee admitted in the return of income. The Assessing Officer should have appreciated that there was business activity, though there was no revenue during the previous year under consideration. Hence, in our opinion the expenditure is relatable to the business activity and the same is allowable as a deduction. See CIT (Asst.) v. Lafarge India Holding P. Ltd. 2007 (8) TMI 485 - ITAT MUMBAI - Decided in favour of assessee.

Summary

Issues:
1. Validity of reopening assessment under section 147 of the Act.
2. Allowability of business expenditure under section 37 of the Act.
3. Interpretation of "for the purpose of business" in relation to business activities.

Issue 1: Validity of reopening assessment under section 147 of the Act:
The judgment involves appeals against the orders of the Commissioner of Income-tax (Appeals) relating to the assessment years 2004-05 and 2005-06. The Assessing Officer issued a notice under section 148 of the Act recording reasons for debiting expenditure without earning any business income. The Commissioner of Income-tax (Appeals) upheld the reopening under section 147 as valid, confirming the Assessing Officer's jurisdiction to frame reassessment.

Issue 2: Allowability of business expenditure under section 37 of the Act:
The main contention revolved around the allowance of expenditure under section 37, requiring expenditure to be paid wholly and exclusively for the purpose of the appellant's business and not be capital, personal, or of a specified character. The Assessing Officer disallowed the expenditure as no business receipts were disclosed, allowing only a portion under a different section. The Commissioner of Income-tax (Appeals) upheld this decision, citing relevant case law and principles.

Issue 3: Interpretation of "for the purpose of business" in relation to business activities:
The appellant argued that the business had commenced activities, incurring expenses for developing technology and awaiting orders. The appellant contended that the entire expenditure was for business purposes, even without immediate business receipts. Legal precedents were cited to support the claim that expenditure related to business activities should be allowed as deductions, irrespective of current revenue generation. The Tribunal, following relevant case law, allowed the appeal, emphasizing the wider scope of "for the purpose of business" compared to "for the purpose of earning income."

In conclusion, the Tribunal allowed the appeals, emphasizing the validity of reopening the assessment, the criteria for allowing business expenditure, and the interpretation of business activities for expenditure deductions. The judgment underscores the importance of establishing a nexus between expenses and business activities, even in the absence of immediate revenue generation, to determine the allowability of deductions under the Income Tax Act.