2018 (8) TMI 1965 - AT - Income Tax

Non granting deduction towards salary expenditure incurred - proof of conducting business activity - As during the relevant assessment year, the assessee was only engaged in the business of financial services though the main objects in the Memorandum of Association was Hotel Business - HELD THAT - Ancillary objects in the Memorandum of Association also permitted the assessee company to carry on the business of financial services. In the process the assessee company had deployed its fund towards earning interest income because during the relevant assessment year the assesse company did not commenced activities with respect to Hotel Business. Since the business of the assessee company during the relevant assessment year was only financial services, the income earned during the relevant assessment year ought to be assessed as business income and the entire expenditure incurred by the assessee for earning such income has to be allowed as deduction - Nothing on record is before us to suggest that the assessee company was indulging in any other business activity during the relevant assessment year - expenditure incurred by the assessee towards salary has also to be allowed as deduction while computing the business income of the assessee for the relevant assessment year - Decided in favour of assessee.

Summary

Issues:
- Disallowance of deduction towards salary expenditure incurred by the assessee

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax(Appeals) for the assessment year 2012-13, where the main issue was the denial of deduction for salary expenditure amounting to ?1,50,00,000. The assessee, a private limited company engaged in finance, hotel, and real estate business, had initially admitted income of ?1,09,25,509 for the year. The Assessing Officer disallowed expenditure of ?2,06,42,360 as the company had only earned interest income and had not started operations related to hotel and resort business. The Commissioner allowed some expenditure but disallowed the salary expenditure. The argument presented was that since the company was engaged only in finance business during the relevant year, all expenses should be allowed as deduction. The contention was that the interest income earned was in the nature of business income. However, the opposing view was that only expenditure related to earning interest could be allowed as deduction under the head "Income from other sources."

The Tribunal observed that during the relevant assessment year, the company was solely involved in financial services despite having hotel business objectives in its Memorandum of Association. As the company had not commenced hotel business activities, it had deployed funds to earn interest income. Since the business conducted was financial services, the income earned had to be treated as business income, and all expenses incurred for earning such income should be allowed as deduction. The Tribunal found no evidence to suggest any other business activity by the company during the relevant year. Consequently, the Tribunal directed the Assessing Officer to delete the addition of ?1,50,00,000 towards salary expenditure, thereby allowing the appeal of the assessee. The judgment was pronounced on 27th August 2018 in Chennai.