2016 (8) TMI 210 - HC - Income Tax

Allowbility of expenditure - whether the old business had come to an end and the new business had not started? ? - Held that - As looking to the facts on record and in view the fact that amendment in the Memorandum of Article was made, we are of the opinion that the company has utilized its property, which was available in the books of account, as also the company has tried to come out from the gross expenditure and another activity is carried out. However, the nature of business may be different but that would not make the appellant disentitle and therefore the Tribunal has committed an error in holding that old business come to an end and new business has not started Allowability of carry forward of loss - Held that - Not allowing to carry forward of loss suffered after November 7, 1990 as the business of real estate had been commenced thereafter, in this regard it is required to be noted that activity of the construction has been started after taking title from the Bank and payment was made after approval and new activity was started from the date when they have cleared all the dues and this fact is clearly established from the letter issued by the Bank dated April 16, 1987. Thus, the tribunal has committed an error and we accordingly answer this question in favour of assessee and against the revenue. Disallowance of interest paid to the Directors - Held that - We are of the opinion that the loan amount was taken by the company from the Director and that was for the beginning of new activity and if such payment could not have been made, the Bank will not issue title for new activity and the company might have suffered a great loss. Thus, taking into account the fact that since the new activity is for the benefit of the company and loan amount is taken from the Director, the interest of which is required to be paid to the Director, the question is accordingly answered in favour of assessee by allowing payment of interest as expenses under the Act.

Summary

Issues Involved:
Challenging ITAT order on assessment year 1994-95 and 1995-96 regarding set off of loss carry forward, interest and administrative expenses, short term capital gain.

Analysis:
1. The appellant challenged the ITAT order regarding the set off of loss carry forward from old business to new business. The AO disallowed the set off claiming the new business had not started. The CIT(A) set aside the assessment for re-computation. The ITAT confirmed CIT(A)'s decision, leading to the present appeal. The court analyzed the facts and held that the company continued its business activities, allowing the carry forward of loss. The Tribunal erred in not permitting the carry forward. The issue was decided in favor of the assessee.

2. The question of not allowing the carry forward of loss after November 7, 1990, due to the commencement of real estate business was also raised. The court noted that the construction activity started after clearing dues and obtaining approval. The Tribunal erred in its decision, and the court ruled in favor of the assessee.

3. Regarding the interest paid to the Directors, the court considered it necessary for the new activity's commencement, as without it, the Bank would not issue title. The court allowed the payment of interest as an expense under the Act, ruling in favor of the assessee.

4. The issue of interest paid to the Director and other expenses not being deductible against other income was addressed. The court had already ruled in favor of allowing the interest payment as an expense, thus deciding this issue in favor of the assessee as well.

5. The court concluded that the appeal succeeded, disposing of the matter in favor of the assessee. The judgment highlighted the importance of continuity in business activities and the relevance of expenses incurred for the benefit of the company in determining tax liabilities.