2024 (7) TMI 904 - HC - Income Tax

Business expenditure incurred for fulfilling contractual obligations of parent company - c an be considered as business loss of appellant company or not? - appellant company is a subsidiary company of LIC Energy, Denmark - HELD THAT - Perusal of the record would show that the holding company had received five orders to supply LEAK detection and location system to India apart from several enquiries on other modeling software. The appellant company incurred expenditure for overseeing and execution of contracts entered by the holding company. It is also clear that the appellant company did not undertake any business on its own and thus, the expenses incurred by the appellant company are not occasioned in the process or for its own business. Therefore, the expenditure incurred by the appellant company cannot be considered as expenditure in connection with its business or incidental to its business. For allowing loss, the expenditure must be connected with or related to the business carried on by the assessee and profits and gains therein. However, in the present case, the losses incurred are for the purpose of giving support services to the holding company and the assessee did not derive any profit and gain from such expenditure, therefore, the loss incurred by the appellant company is not related to its own business. It is relevant to note that the holding company and the subsidiary company are separate entities and the expenditure pertaining to one entity cannot be claimed or allowed in the hands of the other. As per Section 37 of the Act, 1961, the prerequisites for allowing deduction are that the expenditure should have been incurred in respect of a business carried on by the assessee and should be spent wholly and exclusively for its own business. In the present case, admittedly, the expenditure sought to be deducted was incurred for overseeing the project of the holding company - in order to be deductible as a business loss, the expenditure must be in the nature of trading loss, not as capital loss springing directly out of trading activity and it must be incidental to the business of the assessee. It is not sufficient that it falls on the assessee in some other capacity or is merely connected with its business and also the amount incurred by the assessee which is not in the ordinary course of business cannot be allowed as a deduction. Thus the amount incurred by the appellant company cannot be considered as revenue expenditure of the appellant company and thus, not eligible for reduction under Section 37 - Decided against assessee.

Issues Involved:
1. Whether the business expenditure incurred by the appellant for fulfilling contractual obligations of the parent company can be considered as business loss of the appellant company.
2. Whether the expenditure incurred by the appellant can be allowed as a deduction under Section 37 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Business Expenditure and Business Loss:
The appellant-company, incorporated on 19.12.1997, filed its return for the assessment year 1999-2000 declaring a loss of Rs. 55,68,141/-. The case was selected for scrutiny, and the Assessing Officer (AO) disallowed the claimed expenditure, stating it was not incurred for the appellant's business but for providing support services to the parent company. The CIT(A) allowed the expenses as revenue expenditure, stating the appellant was ready to render services and consultations. However, the Tribunal reversed this decision, stating that the holding company and subsidiary are separate entities, and the expenditure of one cannot be claimed by the other. The Tribunal further noted that the expenses were not for the appellant's business but for fulfilling the parent company's contractual obligations.

2. Deduction under Section 37 of the Income Tax Act, 1961:
The appellant argued that the expenditure incurred was for participating in the parent company's project, aligning with its business objectives. The appellant cited several cases to support its claim, including:
- Sri Venkata Satyanarayana Rice Mill Contractors Co. vs. Commissioner of Income Tax: Contributions to public welfare funds connected to business are allowable deductions.
- Commissioner of Income Tax vs. Samsung India Electronics Ltd.: Expenditure benefiting both the assessee and a third party can still be deductible.
- Commissioner of Income Tax, West Bengal vs. Royal Calcutta Turf Club: Expenses preventing business extinction are allowable deductions.

The respondent countered with cases where similar deductions were disallowed, emphasizing that the expenditure must be for the assessee's own business. The Tribunal, agreeing with the respondent, held that the expenses were for the parent company's benefit, not the appellant's business, and thus not deductible under Section 37.

Consideration and Judgment:
The court considered whether the expenses incurred by the appellant for the parent company's projects could be treated as business expenses. It noted that the appellant did not undertake any business on its own and the expenses were not connected to its business activities. The court cited Section 37, which requires expenses to be incurred for the assessee's business to be deductible. The court concluded that the expenses were not for the appellant's business but for supporting the parent company, and thus not allowable as deductions.

Conclusion:
The court dismissed the appeal, upholding the Tribunal's decision that the expenses incurred by the appellant for the parent company's projects cannot be considered as business expenses of the appellant and are not deductible under Section 37 of the Income Tax Act, 1961. The appeal was dismissed with no order as to costs, and any pending miscellaneous applications were closed.

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