2016 (4) TMI 39 - AT - Income Tax

Disallowance of expenses - business expediency - Held that - In the case of CIT versus Rajendra Prasad Moody (1978 (10) TMI 133 - SUPREME Court ), while deciding the issue for deduction for expenses under the head income from other sources, the Hon ble court has held that what section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income and the section does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction and it does not say that the expenditure shall be deductible only if any income is made or earned. The same principle applies for allowability of deduction of expenditure under the head profit and gains of business. Thus in our considered view the expenses debited by the assessee in the profit and loss account and claimed under the head profit and gains of the business are allowable both on the principle up consistency as well as business expediency. Accordingly the findings of the Ld. Commissioner of Incometax( Appeals) on the issue in dispute are reversed. Disallowance of depreciation - building was let out and the rental income from the same was claimed under the head income from house property - Held that - As the building was let out and therefore the depreciation corresponding to that part cannot be allowed to the assessee. In subsection (2) of section 38 of the Act, it is clearly laid down that where any building is not exclusively used for the purpose of business or profession the deductions under clause (ii) of subsection (1) of section 32 shall be restricted to fair proportionate part thereof which the Assessing Officer may determine having regard to the use of such building for the purpose of business or profession. Thus in view of the clear provisions of the Act in this regard, we restore the issue to the file of the Assessing Officer and direct the Assessing officer to allow the depreciation in accordance with the provisions of section 38(2) of the Act.

Summary

Issues Involved:
1. Disallowance of expenditure of ?12,51,610/-
2. Disallowance of depreciation of ?94,330/-
3. Adjustment of past losses against taxable income
4. Validity of the assessment framed

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure of ?12,51,610/-
The assessee challenged the disallowance of ?12,51,610/- claimed as expenditure under the head "profit and gains of business." The Assessing Officer (AO) disallowed the expenditure on the grounds that the assessee did not show any business or professional receipts during the year. The assessee argued that it had been engaged in providing services on a commission basis to foreign parties in past years and needed to maintain infrastructure for professional services. The principle of consistency was invoked, referencing the case of Commissioner of Income-tax vs. Dalmia Promoters Developers Private Limited, where it was held that in the absence of material changes in facts, the view taken in earlier years should prevail. The Tribunal agreed with this principle, noting that the assessee had incurred similar expenses in previous and subsequent years, which were allowed. Therefore, the Tribunal allowed the expenditure of ?12,51,610/- on the grounds of consistency and business expediency.

2. Disallowance of Depreciation of ?94,330/-
The AO disallowed the depreciation of ?94,330/- on the building, arguing that the building was let out and rental income was claimed under "income from house property." The assessee contended that the depreciation was claimed on the portion of the building used for business purposes. The Tribunal noted that under Section 38(2) of the Income-tax Act, deductions should be proportionate to the part of the building used for business. The issue was restored to the AO to allow depreciation in accordance with Section 38(2), thus partially allowing the ground for statistical purposes.

3. Adjustment of Past Losses Against Taxable Income
The assessee argued for the adjustment of past business losses and depreciation against the taxable income computed. The Commissioner of Income-tax (Appeals) [CIT(A)] had already directed the AO to verify the records and allow the brought forward losses as per the provisions of the Act. The Tribunal found no further adjudication necessary and dismissed this ground as infructuous.

4. Validity of the Assessment Framed
The assessee claimed that the assessment framed was bad in law and facts and should be set aside. However, the Tribunal did not find any specific argument or evidence to support this claim within the provided text and thus did not address this issue in detail.

Conclusion:
The appeal was partly allowed. The Tribunal reversed the disallowance of ?12,51,610/- on the grounds of consistency and business expediency. The issue of depreciation was restored to the AO for re-evaluation under Section 38(2). The adjustment of past losses was already directed by the CIT(A) and did not require further adjudication. The assessment's validity issue was not substantively addressed.