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TMI Blog2018 (2) TMI 665X X X X Extracts X X X X X X X X Extracts X X X X ..... re fragrance and flavours. Though the assessee has financial service as an ancillary object to its main object, such activity is not the main business activity of the assessee. Therefore, there is no justification for treating interest income under the head ‘Income from business’. AO was right in treating interest income under the head ‘Income from other sources’. Disallowance of expenditure claimed against interest income - Held that:- We do not find any merit in the findings of the AO for the reason that whether the assessee has income under the head ‘business’or not, expenditure incurred to maintain the corporate status of the assessee needs to be allowed. In this case, on perusal of the details of expenditure we find that the assessee has incurred office rent, auditor’s remuneration and other small miscellaneous expenses which are mainly incurred to keep the corporate status of the assessee. Therefore, we are of the considered view that the AO was erred in disallowing expenditure incurred by the assessee. We direct the AO to allow expenditure claimed by the assessee u/s 37(1) of the Income-tax Act, 1961. Allowability of bad debts written off - Held that:- Hon’ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be disallowed. In response to show cause notice, the assessee submitted that during the year under consideration its main business activity is money lending to another corporate and earn interest. Therefore, interest earned from loans has been rightly treated as business receipts. The assessee further submitted that though it has treated interest income in the previous financial year under the head Income from other sources , because of change in facts and circumstances, it changed its business activity from manufacturing of fragrance and flavours to financial service and it has discontinued its manufacturing operations from AY 2008-09 onwards. Therefore, its claim of interest income under the head Income from business is in accordance with law. It was further submitted that it has claimed expenses against business receipts which are mainly in the nature of general administrative and other expenses incurred to keep corporate entity status of the assessee. Therefore, whether or not business is carried out, it required to incur these expenses to keep the corporate status, therefore, it has rightly claimed expenses against business receipts. The AO after considering relevant subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses against interest income. The CIT(A), after considering relevant submissions of the assessee observed that the assessee company has offered interest income as other income in its financial statements for the year under consideration. This implies that the same is not from its business operations. The assessee also failed to prove any kind of business activity conducted during the year so as to treat its interest receipts under the head Income from business . The CIT(A) further observed that the assessee has treated interest income under the head Income from other sources in the earlier years and without there being any material changes in the facts treating the same under the head Income from business was not justified. As regards expenses claimed by the assessee, the assessee has not incurred expenditure wholly and exclusively for the business of the assessee which is evident from the impugned assessment order. Though the assessee has claimed certain expenses against interest income, failed to prove nexus between expenditure incurred and interest income. Therefore, the AO was right in disallowing expenditure incurred by the assessee and also treating interest income un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of business of the assessee. 6. We have heard both the parties and perused the material available on record. The AO treated interest income under the head Income from other sources on the ground that the assessee s main activity was manufacture of fragrance and flavours but not financial services. The AO further observed that the assessee has treated interest income under the head Income from other sources in the earlier years and without any material change in facts, interest income has been treated under the head Income from business . Similarly, the AO has disallowed expenditure incurred by the assessee on the ground that the assessee has not incurred expenditure wholly and exclusively for the business purpose which is evident from the fact that it has discontinued its business activity. It is the contention of the assessee that though it was engaged in the business of manufacturing of fragrance and flavours, it has discontinued its manufacturing activity and continued to carry out financial services business which is evident from the fact that its activity was supported by the objects in memorandum of association and it was further supported by the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh the assessee has relied upon various judgments, on perusal of the decisions cited by the assessee we find that all are rendered in different facts and are not applicable to the facts of assessee s case. 8. Coming to the disallowance of expenditure claimed against interest income, the assessee has claimed various expenditure including office rent, auditor s remuneration, travelling and conveyance and other miscellaneous expenditure which are in the nature of general administrative and other expenses necessarily to keep the corporate status of the assessee whether or not the business activity is carried out during the year under consideration. The AO has disallowed expenditure only on the ground that the assessee has not carried out any business activity and expenditure are not incurred wholly and exclusively for the purpose of business of the assessee. We do not find any merit in the findings of the AO for the reason that whether the assessee has income under the head business or not, expenditure incurred to maintain the corporate status of the assessee needs to be allowed. In this case, on perusal of the details of expenditure we find that the assessee has incurred office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has incurred expenditure to keep corporate status which cannot be allowed u/s 57(iii) of the Income-tax Act, 1961. We find that the case before the Hon ble Bombay High Court is on whether, the assessee could claim general administrative and other expenses which are having no nexus with interest income, u/s 57(iii) of the Act or not. But in this case, the assessee has claimed expenditure u/s 37(1), therefore, the case law relied upon by the Ld.DR is not applicable to the facts of the assessee s case. 11. In this view of the matter and considering the ratios of the case laws discussed above, we are of the considered view that the AO was erred in disallowing expenditure incurred by the assessee. Therefore, we direct the AO to allow expenditure claimed by the assessee u/s 37(1) of the Income-tax Act, 1961. 12. In the result, the appeal filed by the assessee in ITA No.7102/2011 is partly allowed. ITA No. 6085/Mum/2013 13. In this appeal, the facts and issues involved are identical to the facts and issues discussed in ITA No.7012/Mum/2011. The findings given by us in ITA No. 7012/Mum/2011 shall mutatis mutandis apply to this appeal also. Therefore, for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordance with the provisions of section 36(1)(vii) of the Income-tax Act, 1961. The assessee further claims that once bad debt is written off in the books of account, there is no need to prove whether debt has become really bad or not in the light of decision of Hon ble Supreme Court in the case of TRF Ltd vs CIT(supra). We find merits in the arguments of the assessee for the reason that the Hon ble Supreme Court in the case of TRF Ltd vs CIT(supra) has held that once bad debt is written off in the books of account, then the assessee is not required to prove whether debt has really become bad or not; but the facts are not clear. The assessee has taken this plea by way of additional ground before the Tribunal for the first time. The AO did not have an occasion to examine the claim of the assessee in the light of provisions of section 36(1)(vii) and the decision of Hon ble Supreme Court in the case of TRF Ltd vs CIT(supra). Therefore, we are of the considered view that the issue needs to be examined by the AO in the light of the decision of Hon ble Supreme Court in the case of TRF Ltd vs CIT(supra). Hence, we set aside the issue to the file of the AO and direct him to decide the is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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