2022 (1) TMI 482 - AT - Income Tax

Disallowance of the expenses claimed on account of employees benefit expenses - AO making the disallowance on the ground that assessee has claimed the expenses basically to reduce its profitability because to earn income from the bank deposits and rental income, one need not require to incur huge legal and professional fees and entertainment expenses and such other expenses - HELD THAT - Hon ble Calcutta High Court following the decision in the case of CIT vs., Rampur Timber Turnery Co. Ltd. 1981 (2) TMI 75 - ALLAHABAD HIGH COURT held that such expenses are allowable for the purpose of keeping the business of the assessee-company alive and for retaining the status of the assessee-company. A limited company, even if it does not carry on business, even if it derives income from other sources, has to maintain its establishment for complying with statutory obligation so long it is in operation and its name is not struck off the register or unless the company is dissolved which means cessation of all corporate activities of the company for all practical purposes. So long as it is in operation, it has to maintain the status as a company and it has to discharge certain legal obligations and for that purpose it is necessary to appoint clerical staff and secretary or accountant and incur incidental expenses. In this background, the conclusion of the Tribunal that the expenses incurred were wholly and exclusively for the activities to earn income is pre-eminently a reasonable conclusion. We have considered a similar case in New Savan Sugar Gur Refining Co. Ltd. 1969 (2) TMI 7 - SUPREME COURT Genuineness of the expenditure is not in dispute and the Company in subsequent assessment years has shown income from operations, we set aside the order of the Ld. CIT(A) and direct the A.O. to delete the addition. - Decided in favour of assessee.

Issues Involved:
1. Disallowance of ?34,44,207/- out of expenses claimed by the assessee.
2. Nexus of the expenses claimed with the income earned.
3. Consistency in treatment of similar expenses in preceding and subsequent assessment years.

Issue-Wise Detailed Analysis:

1. Disallowance of ?34,44,207/- out of expenses claimed by the assessee:

The assessee company filed its return of income declaring ?5,40,49,840/-, with a nominal operational income of ?1,25,000/- and other income of ?6,11,38,102/-. The Assessing Officer (A.O.) noted that the expenses claimed under various heads amounted to ?77,94,580/-. The A.O. disallowed 50% of the expenses claimed on account of employee benefit expenses of ?25,80,244/- and other expenses of ?43,08,171/-, totaling ?34,44,207/-, on the grounds that the assessee failed to establish the nexus of the expenditure incurred with the income earned. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the A.O.'s decision, stating that the expenses claimed did not appear to have any nexus with the income earned and seemed to be aimed at reducing profitability.

2. Nexus of the expenses claimed with the income earned:

The CIT(A) observed that even if the assessee's contention of trying to revive their business was accepted, the expenses claimed did not appear to have any nexus with the income earned. The CIT(A) noted that the assessee's main income was from other sources, such as interest and rental income, and that the expenses claimed were not justified as being necessary for earning such income. The CIT(A) further noted that the assessee had not provided adequate justification for the expenses claimed, such as business promotion expenses, travelling expenses, general expenses, and salary paid to staff.

3. Consistency in treatment of similar expenses in preceding and subsequent assessment years:

The assessee argued that the genuineness of the expenses was not in dispute and that similar expenses had been allowed in preceding and subsequent assessment years without any disallowance. The assessee provided a chart showing the consistency of the expenses claimed on account of employee benefit expenses and other expenses and the treatment accorded by the Revenue in various assessment years. The assessee cited several judicial precedents, including the decision of the Hon’ble Calcutta High Court in the case of CIT vs. Ganga Properties Ltd., which held that a company, even if it does not carry on business, has to maintain its establishment for complying with statutory obligations and that such expenses should be allowed as deductions.

Tribunal's Decision:

The Tribunal found merit in the assessee's arguments and noted that the genuineness of the expenses was not in dispute. The Tribunal observed that the expenses incurred by a company, even when it does not carry on any business activity, should be allowed as deductions since the company has to maintain its establishment for complying with statutory obligations. The Tribunal referred to the decision of the Hon’ble Calcutta High Court in the case of CIT vs. Ganga Properties Ltd., which supported the assessee's contention that such expenses are necessary for maintaining the company's status and complying with legal obligations.

The Tribunal concluded that the disallowance made by the A.O. and upheld by the CIT(A) was not justified. The Tribunal set aside the order of the CIT(A) and directed the A.O. to delete the addition of ?34,44,207/-. The appeal filed by the assessee was allowed.

Conclusion:

The Tribunal allowed the appeal of the assessee, setting aside the disallowance of ?34,44,207/- made by the A.O. and upheld by the CIT(A). The Tribunal held that the expenses incurred by the assessee were genuine and necessary for maintaining the company's establishment and complying with statutory obligations, even if the company did not carry on any business activity. The Tribunal directed the A.O. to delete the addition, thereby allowing the grounds raised by the assessee.

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