2017 (5) TMI 210 - AT - Income Tax

Disallowance of business expenditure - Cessation of business by the assessee - Held that - As submitted by the assessee that assessee has shown substantial income in assessment year 2007-08 and 2008-09. Also there was a temporary lull in the business activity. However he has claimed that subsequently the business has picked up and in financial year 2015-16 and financial year 2016-17 assessee has shown substantial business income. We note that the balance sheet for the financial year 2015-16 was not before the authorities below. Furthermore the submission that there was a temporary lull and the business has subsequently picked up, was also not before the authorities below. However the proposition that when there is a temporary lull in the business, it cannot be said that there is a cessation of business by the assessee, is supported by the decision of Hon ble High Court decision as cited above. When there is no cessation of business, assessee is engaged in doing business and the business expenditure as appropriate deserves to be allowed. However since we note that the additional evidence and the new submissions were not before the authorities below, hence in the interest of justice we remit this issue the file of the A.O. The A.O shall examine the issue afresh in light of the additional submissions of the assessee. Appeal of the assessee allowed for statistical purposes.

Summary

Issues Involved:
1. Interpretation of business activities for tax assessment.
2. Treatment of income from investments as business income.
3. Allowability of expenses related to investment activities.
4. Disallowance of expenses by Assessing Officer.
5. Consideration of temporary lull in business for expenditure disallowance.

Issue 1: Interpretation of business activities for tax assessment:
The appellant contested that the business involves equity research and managing risks in the equity market, emphasizing that expenses incurred were for business activities. The Assessing Officer (AO) disagreed, considering the interest income from fixed deposits and debentures as "income from other sources." The AO disallowed expenses and held that the interest income was taxable under a different category. The Commissioner of Income-tax (Appeals) upheld the AO's decision, emphasizing that the appellant's main income was from investments rather than business activities.

Issue 2: Treatment of income from investments as business income:
The appellant argued that investments in shares and fixed deposits should be treated as stock in trade for business purposes. However, the Commissioner found that the appellant's income was mainly from investments, with no evidence of active trading in shares. The Commissioner emphasized that the appellant's activities did not qualify as business, as shown by the nature of income and balance sheet details.

Issue 3: Allowability of expenses related to investment activities:
The appellant claimed various expenses related to investment activities, including employee costs, travel expenses, and professional fees. The AO disallowed these expenses as they were considered not directly related to business activities. The Commissioner agreed with the AO's decision, stating that since the income from investments was exempted, the expenses related to such activities should be excluded under Section 14A.

Issue 4: Disallowance of expenses by Assessing Officer:
The AO disallowed specific expenses claimed by the appellant, such as traveling expenses, salaries, and other costs, due to the nature of the appellant's activities being primarily investment-based rather than business-oriented. The Commissioner upheld this disallowance, noting that the expenses were not directly linked to business income.

Issue 5: Consideration of temporary lull in business for expenditure disallowance:
The appellant argued that there was a temporary lull in business activity, leading to a decrease in income for a specific period. The appellant cited previous profitable years and subsequent business growth as evidence of temporary setbacks. The Tribunal acknowledged this argument and remitted the issue back to the AO for reevaluation, considering the temporary nature of the business decline and subsequent recovery.

Overall, the Tribunal allowed the appeal for statistical purposes, emphasizing the need to reassess the expenditure disallowance in light of the temporary lull in business activity, granting the appellant an opportunity to present additional evidence and arguments before the AO.