2019 (1) TMI 474 - HC - Income Tax

Disallowance of the entire business expenditure - whether the assessee company has to necessarily and directly operate the businesses as mentioned in the Memorandum of Association so as to qualify as carrying out business activity or whether making of investment in subsidiaries which in turn are operating in the business as referred in the Memorandum of Association of the appellant company? - Held that - Acquisition of controlling interest in the companies can be in furtherance of business purpose of the assessee. In the case in question, the assessee has made investments in the companies which are in the same and specified line of business, in terms of the objective. Schedule 3 of the balance sheet refers to the details of the said companies. This is not in dispute. During the course of hearing, the assessee has placed before us copy of the assessment orders passed under Section 143(3) for the assessment years 2009-2010 and 2010-2011 wherein the Assessing Officer has not disputed and challenged that the assessee was engaged in business, though there was no change in the nature of business activity undertaken by the assessee. There is no merit in the present appeal and the same is dismissed.

Summary

Issues:
1. Whether the respondent-assessee was engaged in any business activity during the assessment year 2008-2009.
2. Whether the disallowance of the entire business expenditure of ?52,573,792/- was justified.
3. Whether the investments made by the respondent-assessee in subsidiary companies were in line with its main objects as per the Memorandum of Association.

Issue 1:
The appellant Revenue contended that the respondent-assessee was not engaged in any business activity during the assessment year in question as no business had been set up or commenced, and there were no fixed assets, receipts, or expenses related to the main objects as per the Memorandum of Association. The respondent-assessee had declared a loss of ?7.06 crores for the Assessment Year 2008-2009. The Commissioner of Income Tax (Appeals) set aside the disallowance of the business expenditure, stating that the investments made were in line with the main objects specified in the Memorandum of Association. The Tribunal affirmed these findings, noting that the investments in subsidiary companies were in the same line of business as per the objectives.

Issue 2:
The assessment order referred to the main objects specified in the Memorandum of Association, which included setting up/providing/running of call centers, infrastructure facilities, telecom services, information technology, and other related services. The Commissioner of Income Tax (Appeals) accepted the respondent-assessee's argument that the investments made in subsidiary companies aligned with the main objects, and thus, the disallowance of the business expenditure was unjustified. The Tribunal upheld this decision, emphasizing that the investments were made in companies operating in the same line of business as specified in the Memorandum of Association.

Issue 3:
The respondent-assessee's investments in subsidiary companies were scrutinized to determine if they were in accordance with the main objects outlined in the Memorandum of Association. The Commissioner of Income Tax (Appeals) and the Tribunal found that the investments were made in companies engaged in businesses specified in the Memorandum of Association, such as call centers, telecom services, and related activities. The Tribunal concluded that the acquisition of controlling interest in these companies furthered the business purpose of the assessee, and thus, the business of the appellant had been set up as per the Memorandum of Association.

In conclusion, the High Court dismissed the appeal by the Revenue, affirming the decisions of the Commissioner of Income Tax (Appeals) and the Tribunal regarding the respondent-assessee's engagement in business activities and the validity of the investments made in subsidiary companies aligned with the main objects specified in the Memorandum of Association.