SHREE MADHU TEXTILES,MUMBAI vs. ITO 14(2)(3), MUMBAI

The appeal involves a single issue, i.e., the maintainability in law of the disallowance of expenditure, claimed in the sum of Rs.7,53,609/-, effected at Rs.3,57,936/- in assessment of the assessee’s business income, returned at Rs.5,56,411/- for the year, in the facts and circumstances of the case.

(A.Y. 2010-11) Shree Madhu Textiles vs. ITO 3. The brief facts of the case are that the only business the assessee was found to have undertaken during the relevant year was commission on marketing of building material, earning a gross income of Rs.1,37,954/-, i.e., apart from interest income of Rs.83,638/- from two parties. The impugned expenditure was accordingly found excessive, and barring some expenditure allowed in full, was allowed only at 50%, resulting in the impugned disallowance. In appeal, the ld. CIT(A) observed that the assessee had not been able to show that the expenditure had been claimed for earning commission income. The solitary transaction of sale of shares (of Rs.27,830/-), held as investment from the past and reflected as such, could not be considered as ‘business’. Even otherwise, such a meager activity would not justify incurring expenditure in the sum claimed. The claim of exploring new business opportunities was also an illusion as the same is not supported by any material on record. The fabric business was not alive during the relevant year. The assessee, in his view, was undergoing a transition during the relevant year. Though, therefore, there was no business during the year, except of- course the marketing activity for commission, the Assessing Officer (A.O.) had yet allowed expenditure at Rs.3,95,673/- (i.e., without a finding of the same as being toward the said activity) out of the total claim for Rs.7.54 lacs (refer para 4.3 of the impugned order). The disallowance being confirmed thus, the assessee is in second appeal.

We have heard the parties, and perused the material on record. The assessee’s claim of incurring expenditure in exploring new business opportunities in the field of marketing Pre Fab, Engineering Bldg. material, used in making Factories and Warehouses; marketing Sensors and Drywall, used in Hotels, Offices and Hospitals, and of having incurred bulk of the expenditure claimed thereon, explains both its case as well as the incurring of the expenditure in the sum claimed. The same may, therefore, well be true, i.e., despite non-furnishing of any (A.Y. 2010-11) Shree Madhu Textiles vs. ITO evidence in its respect, which aspect though cannot but be kept in regard. However, the expenditure incurred toward setting up, i.e., prior to the setup of, a business, is not allowable. In the present case, the expenditure does not even qualify to be so in-as- much as the assessee is yet to identify the business to be set up, and is in the process of evaluating/appraising the prospects/feasibility of different businesses. The expenditure on exploring new business opportunities by the assessee, even if it were evidenced, is thus not admissible. The realization of an investment also cannot be regarded as business, even as we find no indication of the same, i.e., share trading, as being the assessee’s business, giving credence to the Revenue’s perception of the assessee having sold the said shares to lend a semblance of a ‘business’. The expenditure which is deductible, it may be appreciated, is that undertaken in the course of carrying on a business, and it could nowhere be shown that the expenditure stands incurred in relation to any business. We, therefore, find no reason to disturb the concurrent findings of the Revenue authorities, with we in fact concurring with the ld. CIT(A) in that the AO has been more than reasonable in allowing a good part (over 50%) of the expenditure claimed, allowing thus a benefit of doubt to the assessee. We may in this regard also state that the word ‘wholly’ in the expression ‘wholly and exclusively’ occurring in section 37(1), it is trite law, relates to the quantum of the expenditure, while the word ‘exclusively’ confines itself to the purpose of the expenditure – its object and motive, so that it is both reasonable and permissible for the Revenue authorities to make an assessment of the proportion of the expenditure that in its considered view could be said to have been incurred for the relevant business, disallowing the balance where the said condition is not satisfied in full. It is in all cases a matter of fact, based on evidences for and against, with the onus being on the assessee in-as-much as it is it who claims the same and is even otherwise - in the normal course of events, expected to have the same (evidences). The allowance of interest expenditure, i.e., in part, despite absence of business, appears to be in view of