2019 (2) TMI 1818 - AT - Income Tax

Allowability of expenses - Whether assessee has not carried out any business activity during the impugned AY? - HELD THAT - So long as the assessee s business is in existence, actual business receipts in not a sine qua non to claim the business expenditure. The assessee was a corporate entity and its business could come to an end only upon its being wound up as per due process of law. The corporate entity has to incur expenditure so as to maintain its corporate personality and day-to-day existence. Other notable feature is the fact that the assessee has claimed depreciation which demonstrate that its fixed assets were in existence and were not sold-off during impugned AY. The perusal of other expenses as placed on record reveal that the same are in the nature of electricity, water charges, rent, duties taxes, travelling, telephone expenses, legal expenses other routine expenditure. So far as the treatment of misc. income and insurance premium refund is concerned, the complete details of the same was already filed by the assessee before AO and the same were found to be arising out of liquidation of old stock and refund of excess premium paid by the assessee and therefore, the same were clearly business income in nature. The revenue is unable to rebut the factual matrix as well as case laws being relied upon by first appellate authority. This being the case, no infirmity or perversity could be found in the impugned order.

Summary

Issues:
1. Classification of receipts as business income or income from other sources.
2. Disallowance of business expenditure due to lack of business activity.
3. Allowance of business expenditure despite no manufacturing activity.

Analysis:

Issue 1:
The appeal contested the classification of receipts totaling to ?1,25,607 as miscellaneous income and ?75,150 as insurance premium refund under the head "Business Receipts" instead of income from Other Sources. The appellant argued that there was no business activity during the relevant year, and no sales were reported in the returns for subsequent years. However, the Commissioner of Income Tax (Appeals) held that the miscellaneous income was from liquidation of old stock and the insurance premium refund was a refund of excess premium, thus constituting business receipts.

Issue 2:
The disallowance of expenses amounting to ?71,62,567 on account of employee benefits, depreciation, and other expenses was challenged. The Assessing Officer disallowed these expenses due to the lack of business activity during the year. The appellant contended that despite the absence of manufacturing activity, the intention to carry on the business was evident, and the expenses were necessary for maintaining the company's infrastructure. The Commissioner agreed with the appellant, citing precedents and held that the expenses were allowable, as the appellant had every intention to continue its business operations.

Issue 3:
The appellant's claim for business expenditure was further contested by the revenue, arguing that without business activity, the expenditure could not be allowed under Section 37(1). However, the Tribunal noted that as long as the business entity existed, the incurrence of business expenditure was justified to maintain its corporate identity. The Tribunal emphasized that the appellant's fixed assets were not disposed of, and routine expenses were necessary for day-to-day operations. The Tribunal upheld the Commissioner's decision, dismissing the revenue's appeal and rendering the cross-objections of the appellant inconsequential.

In conclusion, the Tribunal upheld the Commissioner's decision regarding the classification of receipts and allowance of business expenditure, emphasizing the intention to carry on the business and the necessity of maintaining corporate infrastructure despite the absence of significant business activity during the relevant year.