2019 (10) TMI 1027 - AT - Income Tax

Allowable business expenditure u/s 37(1) - closer of the business - assessee due to slow down in information technology sector globally the company decided to postpone the commencement of its software development activities, thus, leading to a conclusion that though business was set up the business activities have not been commenced - HELD THAT - Expenditure not incurred wholly for the purpose of the business can be disallowed. We also find that the relevant bills vouchers for the expenses have not been produced before the Assessing Officer in order to prove that the genuineness and allowability of the expenses. Thus, the expenditure incurred before commencement of business have been rightly segregated by the CIT (A) under the head salaries, recruitment relocation, common services, travelling conveyance, legal professional charges as pre-commencement expenditure which are hereby confirmed. Expenses of business promotion, sales commission, communication, travel conveyance, repair maintenance, legal professional fee, contribution to PF, the assessee could not submit any voucher before the assessing authorities. It is the primary duty of the assessee to produce the basic evidences in relation to the expenses claimed, so as to allow the expenses u/s 37 of the Income Tax Act. Since, no details could be produced as to the expenses claimed, no allowance can be given by the revenue. Hon ble Bombay High Court in the case of ALD Automotives Pvt. Ltd. 2018 (3) TMI 534 - BOMBAY HIGH COURT wherein it was held that where assessee failed to produce necessary evidence to prove that business was set up and it was ready to commence, expenditure incurred by assessee prior to setting up of business could not be allowed. Disallowance out of the salary, we find that the assessee could provide the PAN number of only three employees correctly out of the 28 employees on the list. The assessee could not furnish the details of salary payment even through the bank statement or by any documentary evidence regarding the rendering of the services by the employees to support the claim. Hence, based on the judgment of Hon ble Apex Court in the case of Swadeshi Cotton Mills 1966 (9) TMI 30 - SUPREME COURT in the absence of any other evidence produced by the assessee, we decline to interfere in the order of the ld. CIT (A). Rent claimed for the year ending 31.03.2001, the same is allowed as the expenses is related to setting up of the business notwithstanding the fact that the revenue earning business activities have not been commenced. Rental expenses claimed by the assessee for the subsequent period are not allowable as they do not pertain to the assessment year in question. Regarding the claim of business loss on account of rent, the ld. AR s contentions that the expenses was incurred during the year as the liability for payment of which in terms of lease deed has accrued and arisen during the year under consideration. Since, we have already allowed the rent paid for the current year, no future allowance for the rent can be allowed during the year even it is deemed to have accrued by the virtue of leased deed entered during the year. Penalty levied u/s 271(1)(c) - HELD THAT - The assessee owing to closure of the business could not furnish the details which certainly have not been proved by the revenue as bogus in nature. Further, no case has been made by the revenue to prove that the claim of the assessee is ex-facie bogus has held in the case of Escort Finance Ltd 2009 (8) TMI 677 - DELHI HIGH COURT relied upon by the Ld.CIT(A). Hence, keeping in view the peculiar facts and circumstances of the case that the disallowances have been made by the revenue merely on the reason that the assessee could not produce the relevant vouchers bills owing to closure of the business in India, we hereby delete the penalty levied u/s 271(1)(c) - Decided in favour of assessee.

Issues Involved:

1. Disallowance of expenses incurred before the commencement of business.
2. Disallowance of ad-hoc salary payments.
3. Disallowance of contributions to the Provident Fund Trust.
4. Disallowance of various business-related expenses.
5. Disallowance of rent expenses as business loss.
6. Disallowance of deposits and assets written off as business loss.
7. Disallowance of communication expenses.
8. Disallowance of legal and professional expenses.
9. Penalty under section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Expenses Incurred Before the Commencement of Business:

The assessee's claim that business operations commenced with the setup of infrastructure and hiring of employees was rejected. The tribunal upheld the Assessing Officer's (AO) decision, noting that the business activities had not commenced due to a global slowdown in the IT sector. The tribunal confirmed the disallowance of salaries, recruitment & relocation, rent, travelling & conveyance, legal & professional charges, and common services expenses as pre-commencement expenditures. The tribunal emphasized that the expenses must be incurred wholly for business purposes and supported by relevant bills and vouchers, which were not produced by the assessee.

2. Disallowance of Ad-Hoc Salary Payments:

The tribunal found that the assessee failed to provide sufficient evidence to substantiate the salary payments. Only three out of 28 employees had their PAN numbers correctly provided, and no documentary evidence was furnished to support the salary claims. Based on the judgment of the Supreme Court in Swadeshi Cotton Mills, the tribunal upheld the disallowance due to the absence of evidence.

3. Disallowance of Contributions to the Provident Fund Trust:

The tribunal noted that the assessee could not submit vouchers for the expenses claimed, including contributions to the Provident Fund Trust. It emphasized the primary duty of the assessee to produce basic evidence for the claimed expenses under section 37 of the Income Tax Act. The tribunal upheld the disallowance due to the lack of evidence.

4. Disallowance of Various Business-Related Expenses:

The tribunal upheld the disallowance of various expenses, including business promotion, sales commission, communication, travel & conveyance, repair & maintenance, legal & professional fees, and contributions to the Provident Fund. The assessee failed to provide relevant vouchers and bills to substantiate these expenses, leading to their disallowance.

5. Disallowance of Rent Expenses as Business Loss:

The tribunal allowed the rent expenses for the year ending 31.03.2001, as they related to the setting up of the business. However, it disallowed rent expenses for subsequent periods, as they did not pertain to the assessment year in question. The tribunal rejected the claim of business loss on account of rent for future periods, as the expenses were deemed to have accrued by virtue of the lease deed entered during the year.

6. Disallowance of Deposits and Assets Written Off as Business Loss:

The tribunal upheld the disallowance of deposits and assets written off as business loss. The assessee failed to provide sufficient evidence to substantiate these claims, leading to their disallowance.

7. Disallowance of Communication Expenses:

The tribunal upheld the disallowance of communication expenses, as the assessee could not produce vouchers to substantiate the claimed expenses.

8. Disallowance of Legal and Professional Expenses:

The tribunal upheld the disallowance of legal and professional expenses due to the assessee's failure to provide relevant vouchers and bills to substantiate these expenses.

9. Penalty Under Section 271(1)(c) of the Income Tax Act:

The tribunal found that the assessee had fully disclosed the facts in their return, but could not produce documents due to the closure of the business. The tribunal held that mere disallowance of expenses does not automatically lead to the levy of penalty. It emphasized that the revenue failed to prove that the assessee concealed income or furnished inaccurate particulars. The tribunal deleted the penalty, noting that the disallowances were made due to the non-availability of documents, not due to any malafide intention to evade tax.

Conclusion:

The appeal of the assessee in ITA No. 388/Del/2009 was partly allowed, and the appeal in ITA No. 980/Del/2013 was allowed, with the penalty under section 271(1)(c) being deleted. The tribunal emphasized the importance of providing sufficient evidence to substantiate claimed expenses and the distinction between setting up and commencement of business activities.

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