2021 (3) TMI 351 - AT - Income Tax

Disallowing security expenses incurred on factory - non capitalization of security expenses to Factory building - HELD THAT - Assessee was in the business of manufacturing and trading of mosaic and stone tiles. On its factory premises (unit-2) which was part of its business asset and business activity, it had debited expenditure of security expenses and electricity expenses for sums aggregating to ₹ 10,00,264/-. This expenditure has been claimed in the Financial Year 2011-12. The AO and ld. CIT (A) have disallowed the said claim of expenses on the ground that the factory was sold on 07.05.2012 and assessee had received certain advances in the month of January and February, 2012. The sale deed was executed in the Financial Year 2012-13 and hence, it cannot be said that these expenditure were not incurred in F.Y. 2011 12. Even though assessee may not have full-fledged operations from the said factory, but if the factory was under the control of the assessee and certain stocks were lying, then electricity and security expenses cannot be held to be for non-business purpose, because during the year the factory premises was with the assessee. Accordingly, the security expenditure of ₹ 3,86,549/- and electricity expenses of ₹ 6,13,715/- which are duly supported by relevant bills and vouchers are allowed. Appeal of the assessee is allowed.

Summary

Issues:
Challenge to disallowance of security expenses incurred on factory and non-capitalization of security expenses to factory building.
Challenge to disallowance of electricity expenses incurred on factory and non-capitalization of electricity expenses to factory building.

Analysis:
The appeal was filed against the order passed by the Ld. Commissioner of Income Tax (Appeals) for the Assessment Year 2012-13 regarding the disallowance of security and electricity expenses incurred on the factory premises. The facts revealed that the assessee, engaged in manufacturing and trading of mosaic and stone tiles, had incurred expenses amounting to ?10,00,264 on security and electricity for the factory. The Assessing Officer disallowed these expenses, citing the sale of the factory premises in May 2012 and the receipt of advances in early 2012 as reasons to deny the business expenditure claim.

The Ld. CIT (A) upheld the addition, emphasizing that the assessee had decided to sell the factory and received advances in the preceding financial year, indicating the cessation of business activities at the factory. The contention was that the expenses were not legally justifiable as the assessee was no longer the owner of the factory. However, the assessee argued that the sale deed was executed in the subsequent financial year, and as stocks were present in the factory, security and electricity expenses were necessary until the property was sold.

Upon review, the Tribunal observed that the assessee was involved in the business activities related to the factory premises during the relevant financial year. Despite the impending sale, the factory remained under the control of the assessee with stocks on-site, justifying the security and electricity expenses as business-related. The Tribunal noted that the expenses were incurred in the Financial Year 2011-12, and since the sale deed was executed in the subsequent year, the disallowance was unwarranted. Consequently, the security and electricity expenses were allowed based on the presented bills and vouchers.

In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing that the security and electricity expenses incurred on the factory premises were legitimate business expenditures for the relevant financial year, even though the factory was sold in a subsequent year. The decision highlighted the necessity and relevance of the expenses in maintaining the business operations until the property was sold.