2015 (12) TMI 1840 - AT - Income Tax

Disallowance of expenses - assessee did not carry out any business during the year - HELD THAT - Unless there is some material on record to show that the assessee has completely abandoned the business. There is no finding by any of the authorities below that there was a cessation of business. It is not the case, as has been stated by the AO, that the assessee is claiming deduction of business expenses from rental income. The expenses incurred by the assessee are business expenses and just because there is no business income during the relevant period, such deductions cannot be declined. The depreciation is not in respect of the assets rented out either. The assessee is incurring is a business loss and thats all that matters. Whatever be the consequences of such losses on assessee s ultimate tax liability does not govern the question whether deduction for expenses could be allowed or not - disallowances sustained by the CIT(A) infact deserve to be deleted - Decided in favour of assessee. Unexplained credit - amount shown as deposit received from Pharmason Exports was added as unexplained credit by the Assessing Officer, for want of complete details and verifications - HELD THAT - We are not inclined to uphold this addition. We have noted that the amount is received from the banking channel, it is duly referred to in the rent agreement itselfa copy of which was placed before us as well, and the assessee has regular dealing with the concern which has placed this security deposit. On these facts, this amount cannot be treated as unexplained credit. It stands duly explained. We, therefore, direct the Assessing Officer to delete this addition as well.

Summary

Issues:
1. Disallowance of expenses for a business with no activity during the year
2. Disallowance of depreciation claim due to lack of business activity
3. Addition of unexplained credit amount

Issue 1 - Disallowance of Expenses:
The appeal questions the correctness of the CIT(A)'s order confirming the disallowance of expenses for a business with no activity during the year. The Assessing Officer disallowed expenses amounting to &8377; 8,00,962 as the business was inactive, leading to the claim of these expenses as business loss. The ITAT noted that the mere absence of business activities does not imply business discontinuation. Referring to legal precedents, the ITAT emphasized that business continuity depends on specific facts of each case. The ITAT found no evidence of complete business closure and concluded that the expenses were legitimate business expenses, even if no income was generated during the period. Therefore, the disallowances were overturned, and the assessee received relief.

Issue 2 - Disallowance of Depreciation Claim:
The Assessing Officer disallowed a depreciation claim of &8377; 1,16,738 due to the absence of business activity during the year. However, the ITAT emphasized that lack of activity does not automatically mean business closure. Citing legal precedents, the ITAT highlighted that business continuity is determined by factual circumstances. The ITAT found no indication of business cessation and ruled that the depreciation claim was valid as it was a business loss. The ITAT emphasized that the consequences of such losses on tax liability do not affect expense deductions. Consequently, the disallowance of the depreciation claim was overturned.

Issue 3 - Addition of Unexplained Credit:
The appeal contested the addition of &8377; 3,00,000 as unexplained credit received from a tenant as a security deposit. The Assessing Officer added this amount due to incomplete details and verifications. Despite providing evidence through a rent agreement and bank transactions, the CIT(A) upheld the addition. The ITAT, after reviewing the material, found the amount was received through proper banking channels and was supported by the rent agreement. As the transaction was adequately explained and the tenant had a prior relationship with the assessee, the ITAT directed the Assessing Officer to delete this addition. Consequently, the addition of the unexplained credit was disallowed.

In conclusion, the ITAT allowed all grounds of appeal, overturning the disallowances of expenses and depreciation claim while disallowing the addition of unexplained credit. The appeal was granted in favor of the assessee on all issues.