M/S. PRATHIBHA ENGINEERING INDUSTRIES PVT. LTD.,,CHENNAI vs. ITO, CORPORATE WARD - 5 (2),, CHENNAI

This appeal filed by the assessee is directed against the order of the learned CIT(A)-3, Chennai dated 30.09.2019 and pertain to assessment year 2016-17.

The assessee has raised the following grounds of appeal:

Brief facts of the case are that assessee is in the business of manufacture and sale of welded mesh for industrial and domestic use. The assessee has filed its return of income for assessment year 2016-17 on 31.03.2017 declaring total income of `7,82,177/- During the year under consideration the assessee did not carry on main business of manufacture and sale of welded mesh for the industrial and domestic use. The assessee’s main income consists of income from house property being rental income derived from leased factory premises, interest income from deposits and dividend income. The assessee has claimed various expenses against income from other sources like salary, repairs & maintenance, interest on vehicle loan, depreciation and miscellaneous expenses. During the course of assessment proceedings, when the Assessing Officer has called upon the assessee to explain nexus between the expenditure debited into profit & loss account and business operations, assessee submitted that although, it has not carried out any business activity for the impugned assessment year due to strike by workers, but it has continued to incur certain expenditure to keep plant & machinery in active condition and also corporate identity of the assessee and hence it cannot be said that expenditure incurred is not having nexus with the business activity of the assessee. The Assessing Officer was not convinced with the explanation furnished by the assessee and according to him, expenditure debited to profit & loss account under various heads including miscellaneous expenses, depreciation on air-conditioner and motor car, repairs and maintenance, others, interest on vehicle loan and salary is not related to business activity of the assessee and in the absence of any income from business operation, expenditure debited into profit and loss account cannot be allowed as deduction and accordingly, disallowed all expenses and added back to total income. However, in respect of salary he has allowed 75% of salary paid on the ground that even if no business income, assessee need to pay salary expenditure for staff to maintain records.

Being aggrieved by the assessment order, assessee preferred an appeal before learned CIT(A). Before learned CIT(A), assessee has filed detailed written submissions on the issue along with certain judicial precedents which has been reproduced at page no.2 to 16 of learned CIT(A) order. The sum and substance of argument of assessee before learned CIT(A) are that expenditure incurred under various heads including salary, depreciation, interest on loan, miscellaneous expenditure and repairs & maintenance - others are normal revenue expenditure which are required to be incurred for maintaining corporate status of the assessee and also to keep plant & machinery in good condition, even though there is no business operations for the impugned assessment year, therefore, merely for the reason that there is no income from main business operations necessary expenditure incurred for the purpose of business cannot be disallowed.

The learned CIT(A) after considering the relevant submissions of the assessee and also by taking note of various facts brought out by Assessing Officer held that insofar as depreciation is concerned onus is on the assessee to prove that motor car and air-conditioner has been actually used for the purpose of earning income. Since the assessee has not discharged its onus to prove that there is nexus between the depreciation and income earned for the year, the same cannot be allowed as deduction . Similarly, as regards miscellaneous expenses learned CIT(A) observed that assessee has failed to prove nexus between expenditure and income earned in terms of the provisions contained under section 37(1) of the Act and hence, disallowances made on this count is in order. As regards depreciation on motor car and air-conditioner and interest on vehicle loan, assessee has failed to establish nexus between expenditure and income earned for the year. Therefore, there is no error in the findings recorded by Assessing Officer to disallow expenditure debited into profit and loss account . Likewise, as regards disallowance of salary, learned CIT(A) observed that disallowance made by the Assessing Officer @ 75% of salary paid for the year appears to be on higher side and accordingly by considering the facts has directed Assessing Officer to disallow 50% of salary debited into profit and loss account. Aggrieved by the learned CIT(A) ‘s order, assessee is in appeal before us.

The learned AR for the assessee submitted that learned CIT(A) has erred in confirming various expenditure debited into profit and loss account including depreciation on asset, interest on vehicle loan, miscellaneous expenses, repairs & maintenance- others without appreciating the fact that all expenditure have been incurred wholly and exclusively for the purpose of business. The learned AR for the assessee submitted that learned CIT(A) has erred in disallowing 50% of salary expenses without appreciating the fact that assessee need to pay salary to employees to maintain and look after affairs of the company, even though there is no main business operations for the year. The AR further submitted that there is no doubt, for the impugned assessment year, assessee has not carried out any business activity because of strike from employees. However, assessee has actually engaged in the business of manufacturing for past several years . Although, assessee has leased out part of its factory premises to outsiders, but it has to maintain plant and machinery and for this purpose it has incurred repairs & maintenance expenses. Likewise, assessee has to incur certain expenditure to maintain corporate status of the assessee, even though there is no main business activity in the year under consideration. The Assessing Officer as well as learned CIT(A) without appreciating the above facts has simply disallowed expenditure debited into profit and loss account on the ground that there is no nexus between expenditure debited into profit and loss account and income earned for the year.

The learned DR, on the other hand, strongly supporting the order of learned CIT(A), submitted that in order to claim deduction for any expenditure there should be nexus between expenditure debited into profit and loss account and income earned for the year.

We have heard both parties, perused materials available on record and gone through the orders of the authorities below along with plethora of case laws cited by learned counsel for assessee.

In the result, appeal filed by assessee is dismissed.