2022 (5) TMI 438 - AT - Income Tax

Disallowance of business expenses u/s. 37 - No business carried out by assessee - assessee s submission that there was a temporary lull during the period and assessee had to incur basic expenditures to retain and carry the business infrastructure - HELD THAT - It is amply clear from the facts on record that there was a temporary lull during this period. In the earlier years assessee has done business and in subsequent years also business receipts are there. In these circumstances when there is a temporary lull assessee cannot be denied the basic expenditure which were required to carry on and retain the business infrastructure. By no stretch of imagination it can be held that if there is no business receipt during the year assessee should wind up the infrastructure and start all over again when the business receipts start following. CIT(A) reliance upon his own earlier order do not change of facts and circumstances that there is temporary lull. It has not been disputed by revenue authorities that receipts from the business have started in 2017-18. Hence assessee;s plea of temporary lull is justified. - Decided in favour of assessee.

Summary

Issues:
Disallowance of business expenses under section 37 of the Income Tax Act.

Analysis:

Issue 1: Disallowance of Business Expenses
The appeal was against the order confirming the disallowance of business expenses by the Deputy Commissioner of Income Tax. The assessee, engaged in film production, had claimed business expenses of Rs. 3,58,603 during the relevant year. The Assessing Officer (AO) disallowed the entire amount as no business activity was carried out during that period. The AO completed the assessment determining the total income at Rs. 15,99,600. The AO observed that no business receipts were shown, and the claimed expenses included various heads like bank charges, car expenses, depreciation, legal charges, repairs, etc. The assessee justified the expenses by stating a temporary lull in business activity and referred to income from satellite rights in subsequent years. However, the AO was not convinced and disallowed the expenses.

Issue 2: CIT(A) Decision
The Commissioner of Income Tax (Appeals) dismissed the appeal by referring to an earlier order for a different assessment year where a similar issue was adjudicated. The CIT(A) noted that no business receipts were received during the relevant year and subsequent years, indicating a cessation of business activity. The CIT(A) held that since no business was carried out during the relevant year, the claimed business expenses were not allowable. The CIT(A) relied on the fact that the assessee had not produced any movies or undertaken any business activity since 1996, except for nominal revenues from satellite rights in later years.

Issue 3: ITAT Decision
The Income Tax Appellate Tribunal (ITAT) heard both parties and observed that there was a temporary lull in business during the period in question. The ITAT noted that the assessee had conducted business in earlier and subsequent years, and receipts from business had started in later years. The ITAT held that during a temporary lull, basic expenditures required to maintain business infrastructure should not be denied. The ITAT disagreed with the CIT(A)'s decision and found in favor of the assessee, setting aside the orders of the lower authorities and allowing the appeal.

In conclusion, the ITAT ruled in favor of the assessee, emphasizing the justification for basic expenditures during a temporary lull in business activity. The decision highlighted the importance of maintaining business infrastructure during such periods, even when no business receipts are generated.