2021 (2) TMI 423 - AT - Income Tax

Disallowance of employee benefit expenses - Allowable business expenditure - no business has not been set up - difference between the setting up of business and commencing the business - HELD THAT - Only because there was no business receipt, it cannot be said that assessee s business has not been set up. Since the assessee s business is already set up and ready to commence its business activities during the previous year relevant to the assessment year under consideration, in our opinion, the assessee is entitled to the loss computed as claimed by the assessee. Accordingly, we hold that the claim of assessee towards business expenditure incurred by the assessee has to be allowed since the assessee has already set up its business and ready to commence. Allowability of set off of business loss against the interest income - contention of the assessee is that interest income has to be assessed business income only - HELD THAT - We do not find merit in the argument of the ld. AR. The interest income earned by the assessee is from the fixed deposits which is sourced from the share capital. This interest income is to be assessed as income from other sources. However, as per section 71(1) of the Act, assessee is entitled to set off business loss with income from other sources. Being so, we direct the AO to allow the set off of business loss against income from other sources in terms of section 71 (1) of the Act.

Issues Involved:

1. Disallowance of employee benefit expenses, other expenses, and depreciation.
2. Allowability of corporate expenses.
3. Matching principle and set-off of business loss against other income.
4. Set-off of business loss against interest income.
5. Levying interest under sections 234A, 234B, and 234C of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Employee Benefit Expenses, Other Expenses, and Depreciation:

The assessee company contested the disallowance of ?84,77,015 for employee benefit expenses, ?34,62,051 for other expenses, and ?3,69,362 for depreciation by the Assessing Officer (AO). The AO disallowed these expenses on the grounds that they were to be reimbursed by ESCOMs as per the Memorandum of Understanding (MoU). The AO allowed only ?10,00,000 towards corporate expenses. The CIT(A) upheld the AO's decision, stating that all expenditures should be borne by ESCOMs as per the MoU. However, the Tribunal found that the assessee's business was set up and ready to commence, and the expenses were necessary for maintaining the corporate structure, thus allowing the claim for these expenses.

2. Allowability of Corporate Expenses:

The assessee argued that corporate expenses, such as fees payable to the Registrar of Companies, directors' fees, remuneration to the Managing Director, and statutory auditors' fees, were mandatory and should be allowed as deductions. The CIT(A) disallowed the expenses, stating that they should be allocated to ESCOMs. The Tribunal, however, recognized that these expenses were necessary for keeping the corporate structure operational and allowed them.

3. Matching Principle and Set-off of Business Loss Against Other Income:

The AO and CIT(A) applied the matching principle, which states that only expenses relatable to a head of income should be claimed in the Profit and Loss Account. The AO disallowed the business loss of ?46,76,754, stating that there was no matching concept between the expenditure and the relatable income. The Tribunal disagreed, stating that the assessee's business was set up and ready to commence, and therefore, the expenses should be allowed.

4. Set-off of Business Loss Against Interest Income:

The assessee contended that the interest income should be assessed as business income, allowing the set-off of business loss against it. The Tribunal held that the interest income from fixed deposits, sourced from share capital, should be assessed as income from other sources. However, under section 71(1) of the Income Tax Act, the assessee is entitled to set off business loss against income from other sources. The Tribunal directed the AO to allow this set-off.

5. Levying Interest Under Sections 234A, 234B, and 234C of the Income Tax Act, 1961:

The assessee contested the levy of interest under sections 234A, 234B, and 234C. The Tribunal did not specifically address this issue in the judgment, focusing instead on the primary contentions regarding the disallowance of expenses and the set-off of business loss.

Conclusion:

The Tribunal allowed the appeal partly, recognizing the assessee's business was set up and ready to commence, thus permitting the deduction of corporate expenses and the set-off of business loss against income from other sources. The Tribunal directed the AO to allow the set-off as per section 71(1) of the Income Tax Act.

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