2007 (7) TMI 351 - AT - Income Tax

Allowable business expenses - Business income assessed at nil - Abandoned business - HELD THAT - As Dr. Gupta rightly contends the assessee being an artificial juridical person it needs to incur certain expenditure to keep itself afloat and have its continued existence. Unlike a natural person a company can only operate through other natural persons-whether employees or others. It is not the case of the AO that the expenditure of the assessee company are excessive or unreasonable vis-a-vis its legitimate business requirements. The Hon ble High Courts have consistently held that in the case of the corporate assessees such expenses have to be allowed as deduction irrespective of whether or not the assessee is engaged in active business and even if assessee has only passive incomes. The CIT(A) was therefore justified in his conclusions. That is however not the only reason why the disallowance made by the AO was unsustainable in law. We agree with Dr. Gupta s second line of argument as well. We find that the whole cause of action of disallowance of expenses is in the background of AO s observation that the assessee did not carry out any business transactions which at best was AO s finding about an activity of business not being functional in the relevant previous year. In our opinion not carrying on business activity in a particular period cannot be equate with closure of business as it takes an unsustainably narrow view of the scope of cessation of a business. In the light of this legal position it would follow that unless there is some material on record to show that the assessee has completely abandoned the share dealing business merely because there are no business transactions in the relevant previous year cannot be reason enough to come to the conclusion the business has come to an end. It could not thus be said; as was the case before in the case of L.VE. Vairavan Chettiar vs. CIT 1965 (4) TMI 6 - MADRAS HIGH COURT that the assessee had completely abandoned or closed the business forever . Unless the business is abandoned or closed and even if business is at a dormant stage waiting for proper market conditions to develop the expenditure incurred in the course of such a business is to be allowed as deduction. For this reason also the disallowance made by the AO was pot justified and the CIT(A) rightly deleted the same. Ground No. 1 is thus dismissed.

Summary

Issues:
1. Disallowance of expenses claimed during a year with no business activity.
2. Deletion of disallowance of deemed dividend under s. 2(22)(e).

Issue 1: Disallowance of expenses claimed during a year with no business activity

The appeal concerns the deletion of an addition of Rs. 6,36,210 on account of expenses claimed during a year when no business was conducted by the assessee. The AO contended that as there were no business activities, the expenses could not be allowed. However, the CIT(A) held that the expenses were necessary for running the organization and were not excessive. The CIT(A) justified the allowance of expenses, emphasizing the importance of the expenses for maintaining the company's existence. The tribunal upheld the CIT(A)'s decision, stating that as an artificial juridical person, the company needed to incur expenses to continue its existence, even if not actively engaged in business. The tribunal also highlighted the distinction between suspension of business activity and closure of business, emphasizing that lack of business activity in a particular period does not equate to business closure. Citing relevant judicial precedents, the tribunal concluded that the disallowance made by the AO was not justified, and the CIT(A) rightly deleted the disallowance.

Issue 2: Deletion of disallowance of deemed dividend under s. 2(22)(e)

The second ground of appeal involved the deletion of the disallowance of Rs. 1,04,740 on account of deemed dividend under s. 2(22)(e). The representatives agreed that this issue was covered in favor of the assessee by a previous Tribunal order and a subsequent judgment by the Hon'ble Delhi High Court. The tribunal, following the precedent set in the assessee's own case, confirmed the action of the CIT(A) and declined to interfere in the matter. Consequently, the tribunal dismissed the second ground of appeal.

In conclusion, the tribunal dismissed the appeal filed by the AO for the assessment years 2002-03 and 2003-04. The decision was based on the justification provided by the CIT(A) for allowing necessary expenses for maintaining the company's existence and the precedent established in the assessee's own case regarding the disallowance of deemed dividend under s. 2(22)(e). The tribunal's detailed analysis and reliance on legal precedents ensured a fair and thorough consideration of the issues raised in the appeal.