M/S. NANDA MINT & PINE CHEMICALS LTD.,NEW DELHI vs. DCIT, NEW DELHI

Section 40A(3) reads as under : “Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, 45 or use of electronic clearing system through a bank account, exceeds ten thousand rupees, no deduction shall be allowed in respect of such expenditure.”

Before us, during the arguments, the ld. AR argued that this amount was incurred as legal fee paid to the Advocate as well as reimbursement of stationery and clerkage incurred by the Advocate. Hence, it consists of different items and the reimbursement of items cannot fall into the provisions of section 40A(3).

We find that even the assessment order mentions the fact that the amounts have been reimbursed. Since the amount consists of Advocate fee and filing expenses, it cannot be treated as an aggregate amount spent in a day. Hence, in the peculiar facts of the case, the addition made by the Assessing Officer is to be deleted.

Sales Tax Payment: We find from the record that this payment is on account of Additional Sales Tax paid on account of VAT liability. Since the amount is on account of Sales Tax liability which is allowable u/s. 37 and not any penalty paid as held by the Assessing Officer, we hereby delete the addition made by the Assessing Officer on account of Sales Tax demand.

Administrative Expenses: The amount of Administrative Expenses has been disallowed by the Assessing Officer on the premise that there was no business activity in the year in question.

During the arguments before us, it was submitted that the expenses are carried out necessarily for maintaining the business structure of the company for office maintenance and for other administrative contingencies. The legal expenses, loss on sale of assets, plant repair and maintenance expenses, bank commission, salary and wages to the existing employees have to be paid even though the company is not in ponderable field owing to unrest and the change of policy in the geographical area of Jammu. We hold that the expenses cannot be disallowed based on the premise that no sales have been undertaken by the assessee. The expenses incurred by the assessee for maintenance of business have to be allowed as per the provisions of section 37 of the IT Act. Hence, the disallowance made by the Assessing Officer is hereby deleted.

Regarding ground No. 3, wherein the ld. CIT (A) enhanced the amount of disallowance on the premise that the business of manufacturing or otherwise was not carried during the year in question. The entire expenses cannot be disallowed in view of the fact that the provisions do not entitle the Revenue to allow expenses only in case of earning of income. The business expenses are to be allowed u/s. 37 irrespective of the fact whether sales have been undertaken or revenues have been earned or not. What needs to be examined is whether the expenses incurred are genuine or bogus. In the absence of any evidence to prove that the expenses have not been bogus, no disallowance is called for. Since the assessee has to maintain the plant and machinery in running condition even though no sale has taken place, the expenses have to be allowed as per the provisions of the Act. Hence, we, hereby delete the enhancement made by the ld. CIT(A).

The Assessing Officer disallowed the expenses on the premise that no business is in existence.

Before us, it was argued that the assessee company has neither dissolved nor the business undertaking was sold out. The business continued to exist as a juristic entity. The business production was nil and hence, no sales were effected which does not mean that the business is not in existence. The business was in existence with future prospects of running of business and earning of income. We hold that expenses cannot be disallowed just because no operation or sales have been effected. The plant and machinery have to be maintained and the personal employed have to be paid, office and factory have to be kept in a running condition. Reliance is placed on the judgment of Hon’ble Bombay High Court in the case of Karsondas Ranchoddass, 83 ITR 1, wherein it has been explained that “even if the business dealings have not been carried out by the assessee during the year still the loss incurred during the year was required to be allowed if the business establishment by itself existed”. We also note that in the assessment year 2013-14, in the similar circumstances, the Revenue has allowed the expenses incurred on the ground that it is not the number of transactions that determines existence of a business but whether the entity has wound up in its entirety that counts. Keeping in view entire gamut of circumstances, we hereby hold that the additions made by the Assessing Officer are not legally sustainable.

Since all the expenses are adjudicated to be allowable, the electricity expenses would also be covered under the same and any refund received would only result into decrease of the loss returned by the assessee.

The assessee has included speculation loss of Rs.7,67,620/- in the other expenses claimed by the assessee. The ld. CIT(A) directed the Assessing Officer to determine the same in accordance with law, hence, we decline to interfere with the issue.