2023 (4) TMI 376 - AT - Income Tax

Disallowance of expenses and depreciation - no business was conducted by the Assessee and there is no business income - DR submitted that Ld. CIT(A) has observed no TDS have been deducted on such payment of professional fees and therefore same should be disallowed u/s 40(a)(ia) - HELD THAT - There is nothing on record that assessee had closed down the business completely and has wounded up during this year. There is a distinction between temporary suspension of the business or lull in the business and complete closer of the business. No reasons as to why when there is no closer of business during the year accept for there was no business income why the general and administrative expenses can be disallowed. Temporary suspension of business does not mean it is dissolved on the business is completely shut down its Akin to Lull business which as stated by the assessee was various genuine reasons. Accordingly, in principle such expenses cannot be disallowed. Legal expenses payments have been made by the assessee for the filling of various suit for recovery of money from the debtors like Fancy Impacts, Marble Gems, Asugems Sugey Gems which is still pending, and the suits were filed in 2012. Thus, this legal expenses cannot be disallowed as they have been incurred during carrying of the business. No TDS have been deducted on such payment of professional fees and therefore same should be disallowed u/s 40(a)(ia) - Before us, the Ld. Counsel cannot clarify that, whether any TDS have been deducted, therefore this matter is restored back to the file of the Assessing Officer to see whether any TDS has been deducted on the payment of professional legal fee to the legal firm and whether provisions of 40(a)(ia) are applicable. Thus, issue of claim of expenses as treated as partly allowed for statistical purposes. Disallowance of depreciation - once assets of forming part of the block of assets, and same where used for the purpose of business in the earlier years, then, depreciation cannot be disallowed. Accordingly, appeal of the assessee is partly allowed for statistical purposes.

Summary

Issues involved:
The appeal against the order dated 25.03.2019 for the quantum of assessment passed u/s 143(3), for the AY 2011-12 involving the disallowance of expenses and depreciation.

Disallowed Expenses:
The assessee, a partnership firm in the business of "Manufacture and Export of Diamonds," filed a return of income showing a total loss. The Assessing Officer disallowed expenses and depreciation as there was no business activity during the year. The assessee argued that the expenses were administrative and allowable, citing a temporary suspension of business due to global economic conditions. The Assessing Officer and CIT (A) disallowed the expenses, citing lack of direct nexus with income. The Tribunal noted that the business was not permanently closed and distinguished between temporary suspension and complete closure of business.

Depreciation Disallowance:
Depreciation was claimed on assets used for business, with no new assets purchased during the year. The Tribunal found that the expenses were general and administrative, incurred in the normal course of business. The CIT (A) observed that the assessee did not engage in commercial activity after the year in question. The Tribunal held that since the business was not permanently closed and expenses were not claimed in subsequent years, the expenses were allowable. Legal fees for civil suits were found to be related to business activities and thus not disallowable.

Legal Fees and TDS Disallowance:
The legal fees incurred for civil suits were found to be related to business activities and not disallowable. However, the issue of TDS deduction on professional fees was raised. The matter was referred back to the Assessing Officer to determine if TDS was deducted, and the disallowance was treated as partly allowed for statistical purposes.

Conclusion:
The Tribunal partially allowed the appeal for statistical purposes, stating that if assets forming part of the block were used for business in earlier years, depreciation cannot be disallowed. The issue of TDS deduction on professional fees was referred back to the Assessing Officer for further examination.