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TMI Blog2024 (7) TMI 904X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same as business loss and called for explanation from the appellant. That in response, the appellant submitted all the documents as called for by the Assessing Officer in support of its claim. On due verification of the same, the Assessing Officer had disallowed the claim of appellant on the ground that the same has not been incurred for the purpose of business. In fact, the appellant has provided support services to the parent company of the appellant and claimed the said expenditure as business loss. 6. The Assessing Officer further observed that appellant has debited an amount of Rs. 42,000/- towards fee paid to the Registrar of Companies for increase of authorized share capital from 1.00 crore to 2.4 crores under the head 'rates & taxes'. However, the Assessing Officer disallowed the said expenditure taking into consideration the decision rendered by the Hon'ble Supreme Court in Punjab State Industrial Development Corporation [225 ITR 792] and also Brooke Bond (India) Ltd., [225 ITR 798] and consequently, a demand of Rs. 7,763/- against the appellant vide assessment order dated 26.03.2002 under Section 143(3) of the Act, 1961 was issued. 7. Aggrieved by the assessment order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmined for the assessment year under consideration is meager, the business loss to be carried forward denied by the Assessing Officer amounts to Rs. 55,68,141/-, which has substantial impact in the subsequent assessment years in which such brought forward business loss were set off. 11. The learned counsel for appellant further submitted that this Tribunal ought to have considered that the expenditure amounting to Rs. 50,64,152/- incurred by the appellant pertains to business expenditure for participating in the project allotted to its parent company, which is in line with the appellant's business objective as per its memorandum of association. That the Tribunal ought to have considered that the Assessing Officer failed to verify that with the effort made by the appellant for its parent company in the assessment year 1999-2000 had resulted in earning an income of Rs. 1,39,33,163/- and Rs. 2,07,86,750/- for the subsequent assessment years and finally prayed to allow the appeal. 12. Learned counsel for appellant relied upon the following decisions in support of appellant contentions: i) Sri Venkata Satyanarayana Rice Mill Contractors Co. Vs. Commissioner of Income Tax, A.P.II [(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d party. …." 15. In Royal Calcutta Turf Club (supra), the issue before the Bench was whether the expenditure incurred for running the school for jockeys is deductible. The business of the respondent was to run race meetings on a commercial scale for which it is necessary to have races of as high an order as possible. For the popularity of the races run by the respondent and to make its business profitable, it was necessary that there were jockeys of requisite skill and experience in sufficient numbers who would be available to the owners and trainers because without such efficient jockeys, the running of race meetings would not be commercially profitable. It was for this purpose that the respondent started the school for training Indian jockeys. If there were not sufficient number of efficient Indian jockeys to ride horses its interest would have suffered, and it might have had to abandon its business if it did not take steps to make jockeys of the necessary calibre available. Therefore any expenditure which was incurred for preventing the extinction of the respondent's business would, in our opinion, be expenditure wholly and exclusively laid out for the purpose of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Delhi held that as per the terms of agreement, all facilities, amenities and business activities were to be maintained by the hotel and insofar as the foreign travel expenditure, there was no evidence or material on record showing that said expense was connected with or for purpose of business income and, therefore, rejected the claim. 19. In Crescent Organics (P.) Ltd., (supra), the assessee claimed for deduction under Section 36(1)(iii) of the Act, 1961 in respect of interest paid on borrowals utilized for investments in a foreign company. The Hon'ble Bombay High Court held that investments were not in course of assessee's business, therefore, rejected the claim for reduction. The assessee also claimed business expenditure with regard to foreign travel expenses under Section 37(1) of the Act, 1961. The High Court held that assessee failed to prove that entire foreign travel expenses of directors and auditors were incurred for its business affairs, therefore, rejected the claim of the assessee. 20. In P.Amarnath Reddy (supra), the assessee claimed business expenditure of foreign travel expenses of his wife in the capacity of marketing executive of concern and that the same wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods for sale would amount to commencement, though no sale might have been occurred. In the case of manufacture, the fact that the production unit is set up so as to enable manufacture without actually manufacturing, operations or sale would amount to commencement of business." 25. In considered opinion of this Court the facts of above case and facts of present case are different and hence, does not come to aid of appellant. 26. However, on appeal by the Department, the Tribunal had taken a different view that assessee company had deputed its engineers at its own cost for fulfilling the contractual obligation of the holding company and as such, expenditure cannot be considered as one incurred wholly and exclusively for the purpose of the assessee's business and further the holding company and the subsidiary company are separate entities and the expenditure pertaining to one cannot be claimed or allowed in the hands of the other. 27. The Bench relying upon the decision in CIT vs. Chandulal Keshavlal & Co. [1951 SCC 440] held that "in order to justify a deduction the disbursement must be for reasons of commercial expediency; it may be voluntary but incurred for the assessee' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be, for the time being in force, governing the conduct of such person; or (iii) to compound an offence under any law for the time being in force, in India or outside India]. (2) [***] (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party." 29. As per the decision of Hon'ble Apex Court in Saravana Spinning Mills Pvt. Ltd., (supra), the prerequisites for allowing reduction under Section 37 of the Act, 1961 are as under: "(a) if the expenditure does not fall within sections 30 to 36; (b) that it should have been incurred in the accounting year; (c) that it should be in respect of a business carried on by the assessee; (d) that it should not be in the nature of capital expenditure and (e) that it should be spent wholly and exclusively for business. 30. An analysis of the authorities, precedents relied upon by both the counsels would make it clear that business can be said to have been commenced, the very moment the party is ready to receive the clients. 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