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Facts
The revenue filed an appeal against the CIT(A)'s order which deleted a major disallowance of Rs. 2,70,64,096/- made by the AO under section 37 for business expenses for A.Y. 2014-15. The AO had questioned the business expenses due to a significant disparity between total income and operational revenue, while the assessee claimed the expenses were genuinely incurred for business, despite a lull in the business year. The assessee also received substantial dividend income taxable under section 115BBD.
Held
The ITAT dismissed the revenue's appeal, affirming the CIT(A)'s decision to delete the major portion of the disallowance of business expenses. The tribunal found that the AO's disallowance was based on mere suspicion and conjectures without identifying specific non-business expenses, and that the expenses were incurred for business purposes. However, the ITAT confirmed the CIT(A)'s upholding of a minor disallowance of Rs. 84,922/- related to house property maintenance charges, as it was not a business expense.
Key Issues
Whether the CIT(A) erred in deleting the disallowance of business expenses under section 37 made by the AO and whether the apportionment of business expenses by the AO was justified.
Sections Cited
143(3), 37, 143(2), 142(1), 115BBD, 115O
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Income Tax Appellate Tribunal, DELHI BENCH ‘F’, NEW DELHI
Before: SH. PRADIP KUMAR KEDIA & SH. SUDHIR KUMAR
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘F’, NEW DELHI BEFORE SH. PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER AND SH. SUDHIR KUMAR, JUDICIAL MEMBER ITA No.7841/Del/2018 Assessment Year: 2014-15 DCIT Vs. Wharton Engineers and Circle 27 (2) Developers Pvt. Ltd. New Delhi (Earlier willful Finance Investment Co.Pvt.) New Delhi PAN No.AAACW0629C (APPELLANT) (RESPONDENT)
Appellant by Sh. Arvind Trivedi, Sr. DR. Respondent by Sh. Sanjiv Chaudhary, CA Sh. V.K. Garg, CA Sh. Parveen Kumar, CA Date of hearing: 19/09/2024 Date of Pronouncement: 27 /11/2024 ORDER PER SUDHIR KUMAR, JM: This appeal by the revenueis directed against the order of the Commissioner of Income Tax (Appeals)/NFAC, Delhi [hereinafter referred to as “CIT(A)”] vide order dated 24.09.2018 pertaining to A.Y. 2014-15 pertaining to arises out of the
assessment order dated13.12.2016 under section 143(3)of the Income Tax Act 1961 [hereinafter referred as ‘the Act’].
The revenue has raised following grounds of appeal :-
"Whether ton the facts and circumstances of the case the CIT(A) has erred in deleting the addition of Rs. 2,70,64,096/- made by the AO by making disallowance u/s 37 of the Income Tax Act, 1961, without appreciating the detailed reasons given by the AO in the Assessment Order."
"Whether on the facts and circumstances of the case the CIT(A) has erred in deleting the addition of Rs. 2,70,64,096/- without appreciating that the AO has rightly apportioned the business expenses out of total expenses looking to the fact that out of total income of Rs. 29,11,23,926/- the business income was only Rs. 1,89,73,926/- inclusive of Rs. 1,60,77,509/- as interest on unsecured loan leaving thereby Rs. 28,96,417/- only as operational revenue from windmill."
The appellant craves, leave or reserving the right to amend, modify, add, forego or alter any ground(s) of appeal raised above at the time of hearing of this appeal.
The brief facts of the case are that the assesseeengaged in the business of Shipping Commission, Financing and Wind Energy since last many years and has been paying substantial tax. The assessee companyhas filed its return of income declaring of Rs.27,19,95,000/- for the assessment year 2014-15 on 28-11-2014. The case was selected for scrutiny in CASS. A notice u/s 143(2) of the Act was issued on 01-09-2015. Questionnaire dated 05-07-2016 u/s 142(1) of the Act was sent to the assessee company calling for details. The Authorized representatives of the assessee company have attended the proceedings. The AO has assessed the gross income Rs 28,90,35392/- as under;- Income from house property Rs105000/- Income from business Rs 16930392/- Business income /loss as per assessee Rs (-) 0218 626/- Expenses disallowed Rs 27149018/- Income from other sources u/s 115BBD Rs 272000000/-
Aggrieved the order of the AO the assessee company has filed the appeal before the Ld CIT(A) who vide his order dated 24-09-2018 has allowed the appeal against which the Revenue is in appeal before us.
The Ld.DR das submitted that the assessee company has received a dividend of Rs 272000000/-this income was taxable @15%u/s 115BBD of the Act without any deduction because the assessee has reflected the income from other sources. He has strongly supported the order of the AO.
The Ld AR of the assessee has submitted that AO has not doubted the expenses. He has submitted that disallowance has made only suspicion and conjectures basis by the AO. He has also submitted that the addition made by AO was rightly deleted by the Ld CIT(A). Reliance has placed on the following Judgments;
CIT V. R.D Ramnath Company (HUF) [2010] 1 taxmann.com 166 (Delhi). 2. Commissioner of Income –tax Vs. Anita Jain, 3. CIT v. National Agricultural Co-op. Marketing Federation of India Ltd. – 11 taxmann.com 258 (Delhi- HC)
We have heard the parties and perused the material available on record.
The Ld. CIT(A) has relied the various judgments and deleted the addition made by AO by observing in the order as under:- “5.5 In the background of business history of the Appellant noted above, I am in agreement with the submissions of the AR that merely because there is less business income due to lull and dormancy in a particular year, disallowance based on the quantum of business income is not warranted particularly where the expenses claimed are more or less same as claimed and allowed in prior years. No specific disallowable expenses has been pointed by the AO and arbitrary, ad-hoc, disallowance has been made. It is not the proportion of income which determines the admissibility of expenses. The estimated disallowance as made by the AO is based on mere suspicion and conjectures and without mentioning how and which expense is not business expense or which expense relate to sources of income other than business income. As per AO some expenses must have been incurred in relation to income and activities other than business and business activities. It is not the case of the AO that the expenses incurred are not genuine. Rather in the impugned order, the AO herself has mentioned that Incurring of total expenses is not doubted. The case law relied on by the AR duly support the case of the Appellant. Hon'ble Delhi High Court in the case of CIT v. R.D. Ramnath Company (HUF),
[2010] 1taxmann.com 166 (Delhi) on somewhat similar facts has held that estimated disallowance of 60% of salary & office expenses being based on surmises and conjectures cannot be sustained. Further in the case of CIT v. National Agricultural Co-op. Marketing Federation of India Ltd., [2011] 11 taxmann.com258(Del) disallowance of indirect expenses made on proportionate basis of total sales was not sustained.
5.6 Hon'ble Supreme Court in the case of S. A. Builders Ltd.v.CIT(Appeals), 288 ITR 001 (SC) and Sassoon J. David & Co. P. Ltd. vs. CIT,118 ITR 261 (SC)has held that all that section 37 requires is that the expenses should be incurred wholly and exclusively for the purpose o the business and the expression 'wholly and exclusively used in section 37 does not mea 'necessarily'. The expression "for the purpose of business" is wider in scope than the expression for the purpose of earning profits". For the purpose of business" includes expenditure voluntarily Incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors
and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits.
5.7 Total expenses claimed by Appellant, Rs. 2,91,92,492/- include establishment expenses, Rs.2.24,35,365/- which in turn include remuneration paid to the directors, Rs. 1,80,00,000/-. The same remuneration has been paid in prior years for which no disallowance was made in past. Other administrative
Expenses as seen from P&L account are essential expenses for statutory purposes or for compliance with law of for maintaining the business of the company and its positioning. Moreover, directors to whom Director's remuneration has been paid are regular income tax assessee and have paid tax at maximum tax rate. There being no tax loss because of the higher rate of tax applicable to the directors, there is no tax arbitrage. This shows the bornafide of the appellant.
5,8 I am also in agreement with the AR that in the case of lull & dormancy where even there is no income and there is no indication of closure of business, expenses are allowable to retain the company and its assets with the
hope of revival of business. In this case of the Appellant though there was decrease in business income in this year because of non-receipt of commission income, it is fact that there is much more business in subsequent years. Accordingly, I don't see any justification in disallowing almost entire business expenditure claimed by the Appellant.
5.9 The AO to support her case has made certain averments in the impugned order which are based on mere assumptions and are not specific. No specific expense has been identified which is not a business expense except Rs. 84,922/- in relation to let out property at NOIDA. It relates to maintenance charges paid to Kings Reserve RWA. The AR based on the decision of Hon'ble Delhi High Court in the case of Commissioner of Income-tax v. R. J. Wood P. Ltd., stated that the payment being for maintenance of society and not for the rented property, were Wharton Engineers and Developers Private Limited, AY 2014-15, deductible from the rent while computing the annual letting value thereby reducing the income from House property. If business loss is reduced to this extent, House property income will also be reduced to that extent and accordingly, will have no bearing on total loss claimed.
The contentions of the AR are not acceptable. Even if the maintenance charges are to be reduced from the rent, the same cannot be allowed as business expense. As such maintenance charges of Rs. 84,922/- paid in relation to let out house property cannot be allowed against business income and the disallowance to this extent is upheld.
The AO mentions that the assessee neither paid tax under section115BBD on the premise that it is paying tax under MAT provision nor it paid tax under section1150 on the premise that it has received dividend from foreign subsidiary on which tax is payable under section 115BBD. The said observations of the AO are misconceived and do not support her case. As per the provisions of the Act, tax u/s 1150 is not payable as the foreign dividend is not exempt. Tax payable on foreign dividend under normal provisions under section 1158BD being less than tax payable under MAT, tax has been paid under MAT which is more than the tax rate u/s 115BBD
The ratio of allowable business expenses at 7% has been estimated by the AO with reference to income other than business income which is mainly dividend income. That means entire expenses disallowed at Rs.2,71,49,018/- have been allocated to foreign dividend income. In the impugned order, no such expense has been pointed out by
the AO as being needed or incurred to receive dividend income. No effort is required from the investor to earn dividend income after investment has been made. There is no fresh investment during the year. Moreover, the dividend income being received from foreign company, the same is taxable and not exempt.
5.10 The AO has relied upon the decision of the Hon'ble Supreme Court in the case of McDowell and Co. Ltd. 154 ITR 148 (SC) which is totally misplaced and is not applicable on the facts of the Appellant. In McDowell case any device leading to tax avoidance was disapproved and it was held that colorable devices cannot be part of tax planning. Hon'ble Supreme Court in that case also clarified that the tax planning may be legitimate provided it is within the framework of the law. Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan, while considering the taxability of capital gain on transfer of shares held in Indian Company by tax resident of Mauritius company and after considering the decision of Hon'ble Supreme Court in the case of Mc de company and after considering characterize the act of incorporation under the Mauritian law as a sham or a device actuated by improper motives. An act which is otherwise valid in law cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some
economic detriment or prejudice to the national interests. Hon'ble Madras High Court in the case of M. V. Valioppan v. ITO [1988] 170 ITR 238 (Mad) has held that McDowell decision does not rule out Ignoring of genuine /real transactions being ignored merely on the ground that it results in reducing the tax burden. Where there is a commercial or a business purpose in a transaction which only means that a transaction has the result of reducing the tax burden as a result of or a real deprivation of income as in the case of a family partition, that transaction would be permissible attempt for reducing the tax burden
In this case of the Appellant, I don't find that the Appellant has entered into any sham or colourable transaction. In fact there is no tax avoidance. Mode of business, business transactions and the nature of expenses in this year are similar as accepted in prior years. Incurring loss under the head business income because of non-receipt of income from a particular source of income during the year cannot be held a device to avoid tax. Moreover, in this year, the Appellant has not adjusted the business loss of Rs. 1,02,18,626/- against taxable income from other sources of Rs. 27,20,00,000/-except a small amount of house property income of Rs. 1,05,000/-. It is also noticed that the tax has been paid and assessed under MAT and there is no tax effect even after disallowance of expenses. As
such according to me there is no avoidance of any tax nor there such transaction during the year.
In view of above, disallowance of Rs.2,71,49,018/- made u/s 37of the Act except Rs. 84,922/- as per para 7.6 herein above is deleted.”
Section 37 of the Act provides that any expenditure not being in the nature of capital expenditure or personal expenses of the assessee laid out or expanded wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”. The assessee wholly and exclusively claims that the entire expenses have been incurred for the business purposes. The assessee company has paid tax at MAT rate and there is no tax evasion. The Ld CIT(A) has examined this issue in correct prospective and rightly deleted the additions towards disallowances of business, expenditure under section 37 of the Act made by the AO.
The reasonings and findings of the Ld CIT(A), while granting relief is on proper appreciation of law expounded by the judicial dicta. We do not find any reasons to interfere with the findings of the Ld CIT(A). The appeal of the revenue is liable to be dismissed.
In the result the appeal of the revenue is dismissed.
Order pronounced in the open court on 27.11.2024.
Sd/- Sd/- (PRADIP KUMAR KEDIA) (SUDHIR KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER *NEHA, Sr. PS* Date:-.11.2024 Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(Appeals) ` 5.DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI