2021 (12) TMI 1249 - AT - Income Tax

Disallowance of Administrative Expenses - Closure of business activities - HELD THAT - We find that in the earlier years, on similar facts and circumstances wherein there was no revenue from operations and assessee had incurred similar nature of expenditure debited to the profit loss account, mostly under the heads, viz., salary and wages, employees benefit expenses and other expenses including statutory expenses and audit fees, were held to be allowable. One important fact noted by the Tribunal in the earlier years is that the fixed assets of the assessee company were subject matter of litigation u/s 18 of Land Acquisition Act and assessee was due to receive compensation of ₹ 460 crores which would be the income of the assessee in the year to receive. Assessee was maintaining this establishment and corporate set up for which it had incurred certain expenditure. Tribunal allowed the expenditure stating when the possibility of the revival of the business activities or operation of the assessee are not ruled out once for all, it cannot be said that the assessee company had closed down its operations permanently so as to disallow the business expenditure. The temporary lull in the business during the lean period of transaction cannot be mistaken to be the permanent close down of the business. The clear indication is that the assessee has to maintain its status as company till the end comes and it has to perform certain legal obligations by incurring certain expenditure and more particularly to pursue the litigation as a result of which it has to receive ₹ 460 crores approximately which shall form part of the income of the assessee in the year in which it will be received. In this year also, the aforesaid decision of the Tribunal will apply mutatis mutandis. Respectfully following the same, we direct AO to allow expenditure claimed in the profit loss account. Ground No.1 raised by the assessee is allowed. Depreciation of Fixed Assets - It is sufficient that on similar facts, asset s depreciation was allowed in the earlier years, therefore, this year no different treatment can be given simply because the business could not be carried out in this year. Accordingly, depreciation amount of ₹ 7,93,830/- is also allowed.

Summary

Issues:
1. Disallowance of Administrative Expenses
2. Disallowance of Depreciation on Fixed Assets

Analysis:
1. Disallowance of Administrative Expenses:
The appeal was filed against the order by the ld. CIT (Appeals) upholding the addition made by the Deputy Commissioner of Income Tax regarding the disallowance of administrative expenses totaling ?48,48,892 to the returned income. The AO disallowed the entire expenditure claimed by the assessee due to the absence of revenue from business activities during the relevant assessment year. The ld. CIT (A) allowed certain expenses like statutory dues, legal charges, audit fee, and salary of some employees, while confirming the disallowance of other expenses. The Tribunal noted that in previous years, similar expenditure was allowed based on the intention of the assessee to resume business activities in the future, despite the lack of current revenue. The Tribunal highlighted that the assessee was maintaining its establishment for potential future operations, as indicated by ongoing litigation and expected compensation. Consequently, the Tribunal directed the AO to allow the expenditure claimed, ruling in favor of the assessee.

2. Disallowance of Depreciation on Fixed Assets:
Regarding the disallowance of depreciation on fixed assets amounting to ?7,93,830, the ld. CIT (A) and AO confirmed the disallowance due to the absence of business activities during the year. However, the Tribunal emphasized that in previous years, depreciation on assets was allowed under similar circumstances. The Tribunal reasoned that since the business could not be carried out in the current year, it did not warrant a different treatment for depreciation. Therefore, the Tribunal allowed the depreciation amount claimed by the assessee. As a result, the appeal filed by the assessee was allowed, and the Tribunal directed the AO to allow both the administrative expenses and depreciation on fixed assets as claimed by the assessee.