2021 (3) TMI 831 - AT - Income Tax

Disallowance of huge business expenditure - onus to prove - no business operation for the year under consideration - there is no nexus between expenditure debited into profit loss account and business operation of the assessee thus disallowed entire expenditure - HELD THAT - In order to allow deduction for any expenditure, the assessee should prove the nexus between expenditure incurred and debited into profit loss account and business operations of the assessee. Further, assessee also needs to prove that expenditure has been wholly and exclusively incurred for the purpose of business. In this case, on perusal of details filed by the assessee, we find that although assessee has debited huge expenditure under various heads of expenditure, but failed to file any evidences to prove that there is a nexus between expenditure debited into profit loss account and business operations of the assessee. Therefore, it is a well settled principle of law that whether or not any revenue from operations normally overhead expenditure incurred for maintaining corporate status of the assessee needs to be allowed. To ascertain the fact with regard to nature of expenditure and necessity of incurring such expenditure with reference to business operations of the assessee, the evidences needs to be examined by the AO. Therefore, to verify the claim of the assessee that there is a nexus between expenditure debited into profit loss account and business operations, the issue has been set aside to the file of the AO with a direction to the AO to reconsider the explanation furnished by the assessee along with necessary evidences. In case, the AO finds that the expenditure debited into profit loss account are necessary to incur for maintaining corporate status of the assessee, then the expenditure incurred by the assessee needs to be allowed irrespective of the fact that there is no revenue from operations. Appeal filed by the assessee is allowed for statistical purposes.

Summary

Issues:
1. Disallowance of expenses on the grounds of no commercial activity during the relevant year.
2. Nexus between expenditure and business operations for allowing deductions under section 37(1) of the Act.

Issue 1: Disallowance of Expenses
The assessee, engaged in real estate development, filed a return for the assessment year 2015-16 with no income from operations but claimed expenses. The Assessing Officer (AO) disallowed the entire expenditure as there was no revenue from operations. The Commissioner of Income Tax (Appeals) upheld the disallowance, emphasizing the necessity of proving the nexus between expenditure and business. The assessee argued that genuine expenses for business continuity should not be disallowed due to temporary business lull. The ITAT Chennai noted the absence of a finding that the expenses were not genuine. It highlighted the burden on the assessee to establish the nexus between expenditure and business operations. The tribunal set aside the matter to the AO for reevaluation with necessary evidence to determine if the expenditure was essential for maintaining the corporate status, regardless of the lack of revenue from operations.

Issue 2: Nexus between Expenditure and Business Operations
The ITAT Chennai stressed the importance of proving the nexus between expenditure and business operations to claim deductions under section 37(1) of the Act. While acknowledging the temporary business lull causing no revenue from operations, the tribunal emphasized that genuine expenses incurred for business continuity should not be disallowed solely based on this reason. The tribunal noted the assessee's history of revenue from operations in previous years and directed the AO to reassess the expenditure's necessity for maintaining the corporate status. It reiterated that overhead expenditure for corporate status maintenance should be allowed, pending the AO's verification of the nexus between the expenditure and business operations.

In conclusion, the ITAT Chennai allowed the appeal for statistical purposes, directing a reevaluation by the AO to determine the necessity of the expenditure for maintaining the corporate status, irrespective of the lack of revenue from operations in the relevant year.