2010 (11) TMI 1072 - AT - Income Tax

Summary

Issues Involved:
1. Justification of disallowance of expenditure of Rs. 12,55,869 by CIT(A).
2. Taxability of income under the head 'income from other sources'.
3. Allowability of expenses when no business activities are conducted during the year.

Summary:

Issue 1: Justification of disallowance of expenditure of Rs. 12,55,869 by CIT(A)
The primary issue in this appeal is whether the CIT(A) was justified in upholding the disallowance of expenditure of Rs. 12,55,869 on the grounds that there were no business activities during the year under consideration. The assessee argued that it was an investment company and the expenses were necessary for maintaining its business infrastructure. However, the CIT(A) observed that the appellant did not provide any material evidence to suggest active investment activities throughout the year and noted that the investments had not changed. Consequently, the CIT(A) upheld the disallowance, stating that the expenditure could not be allowed as a deduction under the head 'income from other sources'.

Issue 2: Taxability of income under the head 'income from other sources'
During the assessment proceedings, the Assessing Officer (AO) noted that the assessee had shown income of Rs. 29,44,729 from dividends, interest, and other sources, which are taxable under the head 'income from other sources'. The AO disallowed the claimed expenditure of Rs. 12,55,869, which was in the nature of business expenses, as the assessee did not conduct any business activities during the year. The CIT(A) supported this view, emphasizing that the expenditure could not be allowed under 'income from other sources'.

Issue 3: Allowability of expenses when no business activities are conducted during the year
The Tribunal referred to a coordinate bench's decision in the case of ITO Vs Mokul Finance Pvt Ltd (110 TTJ 445), which dealt with a similar issue. It was observed that even if no business activities were conducted during the year, expenses necessary for maintaining the company's existence, such as salaries, conveyance, and property tax, should be allowed as deductions. The Tribunal also cited various High Court judgments, including CIT v. Ganga Properties Ltd. and CIT v. Rampur Timbery & Turnery Co. Ltd., which held that expenses incurred for the continued existence of a company are allowable deductions, even if the company earns income only from other sources. The Tribunal concluded that the mere absence of business operations in a particular year does not imply the cessation of business. Therefore, the disallowance made by the AO was not justified, and the CIT(A)'s decision was overturned.

Conclusion:
The Tribunal allowed the appeal, deleting the disallowance of Rs. 12,55,869, and held that the expenses incurred by the assessee, an artificial juridical person, to maintain its existence and infrastructure should be allowed as deductions, even if no business activities were conducted during the year. The appeal was pronounced in the open court on 24th November 2010.