2016 (7) TMI 1490 - AT - Income Tax

Disallowance of business expenses - whether essential feature that the expenses should not only be incidental or necessary, but it should be wholly and exclusively for the purpose of business, has not been satisfactory brought out by the assessee - temporary stoppage of busniss activities - Held that - What is relevant is that all necessary licenses etc. required to keep the hotel business alive are being maintained by the assessee. AO himself was convinced that the government dues being the minimum statutory expenses were allowable and as a result thereof he has allowed duties and taxes , insurance of assets , license fees and MVAT expenses . Considering the nature of expenses which have been allowed by the AO, we find no good reason why water expenses and electricity expenses can be disallowed. We also find no good reason why security charges paid to secure the assets of the assessee can be disallowed as maintenance of physical assets and securing the property from vandals, trespassers etc. is the bare minimum expenditure necessarily required to be incurred. Similarly, salary of one Accountant and one office boy can hardly be said to be an expenditure which was not incurred wholly and exclusively for the business of the assessee. A temporary lull at a point of time in the business of the assessee in the absence of any fact or evidence to the contrary cannot lead to the conclusion in the peculiar facts and circumstances of the case that the business has permanently closed especially in view of the fact that as per the assertions of the assessee before the Assessing Officer that its licenses etc are being maintained and kept intact ensuring that the hotel is ready for operation. A fact which has not been disputed as license fees have been allowed by the AO himself. - Decided in favour of assessee.

Summary

Issues Involved:
1. Correctness of the CIT(A)'s order.
2. Deletion of the addition of ?53,31,894/- made by the AO on account of disallowance of expenses.

Detailed Analysis:

Issue 1: Correctness of the CIT(A)'s Order
The revenue challenged the correctness of the CIT(A)'s order dated 19.12.2013 for the assessment year 2008-09. The CIT(A) had allowed certain expenses claimed by the assessee, which the AO had disallowed.

Issue 2: Deletion of the Addition of ?53,31,894/- Made by AO
The AO disallowed expenses amounting to ?53,31,894/- claimed by the assessee, arguing that these expenses should be "wholly and exclusively" for the purpose of business. The AO allowed only government dues, considering them as minimum statutory expenses necessary for keeping the company in existence.

The assessee declared a total loss of ?11,03,49,616/- in the original return filed on 30.09.2008, which was revised to ?1,09,60,211/- on 04.05.2009. During scrutiny, the AO noted that the revised return included new expenses of ?63,89,741/-, which were previously considered as Capital Work in Progress. The assessee explained that these expenses were necessary for maintaining the corporate structure and preserving assets, including licenses required for hotel operations. The AO, however, allowed only government dues and disallowed other expenses such as security charges, electricity, water charges, and salaries for an accountant and an office boy.

The CIT(A) found that expenses on security, electricity, water, and salaries were essential for maintaining the company's assets and corporate status. Relying on judicial precedents, the CIT(A) concluded that these expenses were necessary for preserving the business and allowed the claim, deleting the disallowance of ?53,31,894/-.

The ITAT upheld the CIT(A)'s decision, noting that the AO had not disputed the necessity of the expenses for maintaining the corporate structure. The ITAT found no reason to disallow expenses on security, electricity, water, and salaries, as they were essential for the business. The ITAT also found that the decision in CIT vs PIEM Hotel Pvt. Ltd. was not applicable to the present case.

In conclusion, the ITAT dismissed the revenue's appeal, upholding the CIT(A)'s order and allowing the expenses claimed by the assessee. The ITAT emphasized that a temporary lull in business does not imply permanent closure, especially when the company maintains necessary licenses for operations. The order was pronounced in the open court on 29th July 2016.