2021 (1) TMI 88 - AT - Income Tax

Disallowance of various expenditure debited into profit and loss account including depreciation on asset, interest on vehicle loan, miscellaneous expenses, repairs maintenance- others - non business expenses - HELD THAT - In order to allow deduction for expenditure the onus is on the assessee to prove that expenditure debited into profit and loss account is having nexus with income earned for the year. In this case, on perusal of disallowances made by Assessing Officer for various expenditure including salary, depreciation on car and air-conditioner , repairs and maintenanceothers and miscellaneous expenses, we find that none of the expenditure is having direct nexus with income earned for the year under consideration being interest income , rental income and dividend income. Unless, assessee proves nexus between expenditure debited into profit and loss account and income earned for the year, the question of allowance of expenditure does not arise. Moreover, assessee fails to file any evidence to prove that it was in the business activity but due to temporary lull in the business, business operations was not carried on for impugned assessment year . AO as well as learned CIT(A) have brought out clear facts that assessee has leased out factory premises to outside party and derived rental income as there is no manufacturing activity in the assessment year under consideration. Assessee has failed to file any evidence to prove that depreciation claimed on air-conditioner and motor car is having nexus with income earned for the year . Likewise, assessee has failed to file any evidence to prove that there is nexus between miscellaneous expenditure, interest on vehicle loan and repairs maintenance-others to income being rental income, interest income and dividend income earned for the year. As regards salary, learned CIT(A) considering the fact that assessee need to pay salary expenditure to employees, even though there is no business operations for the year has allowed 50% salary debited into profit and loss account . The assessee has failed to file any evidences to counter finding of fact recorded by the learned CIT(A) . We are, therefore, of the considered view that there is no error in the findings recorded by learned CIT(A) to confirm additions made by the Assessing Officer towards various expenditure debited into profit and loss account. Appeal filed by assessee is dismissed.

Summary

Issues:
1. Disallowance of various expenses claimed by the assessee.
2. Nexus between expenditure debited into profit and loss account and income earned.
3. Allowability of expenditure in the absence of business operations.

Analysis:
1. The assessee appealed against the order of the CIT(A) concerning the disallowance of expenses claimed, including salary, repairs, maintenance, miscellaneous expenses, interest on vehicle loan, and depreciation. The assessee argued that the expenses were necessary to maintain the machinery and corporate identity, even though there was a temporary lull in business operations due to a strike by workers.

2. The CIT(A) held that the onus was on the assessee to prove the nexus between the expenditure and income earned. Depreciation on assets, miscellaneous expenses, interest on vehicle loan, and repairs & maintenance were disallowed as the assessee failed to establish the connection with income. The CIT(A) directed a reduction in the disallowed salary amount from 75% to 50%, considering the need to pay staff even without business operations.

3. The Appellate Tribunal noted that while expenditure during a temporary lull in business could be allowed, the assessee failed to prove the nexus between the expenses and income earned. The Tribunal found that the disallowed expenses did not directly relate to the income sources of rental income, interest income, and dividend income. The Tribunal upheld the CIT(A)'s decision to confirm the disallowed expenses, as the assessee provided no evidence to counter the findings.

4. The Tribunal emphasized the importance of proving the connection between expenditure and income, especially in the absence of business operations. Despite the arguments presented by both parties, the Tribunal concluded that the disallowance of expenses was justified due to the lack of evidence establishing the necessary nexus. The appeal filed by the assessee was dismissed, and the decision of the CIT(A) was upheld.

Conclusion:
The Appellate Tribunal upheld the disallowance of various expenses claimed by the assessee, emphasizing the requirement to establish a nexus between expenditure and income earned, particularly in the absence of business operations. The Tribunal found that the assessee failed to provide sufficient evidence to support the allowance of the expenses, leading to the dismissal of the appeal.