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Income Tax Appellate Tribunal, DELHI BENCH: ‘B’ NEW DELHI
Before: SMT DIVA SINGH & SH.PRASHANT MAHARISHI
PER DIVA SINGH, JUDICIAL MEMBER
The present appeal has been filed by the Revenue assailing the correctness of the order dated 03.04.2012 of CIT(A)-XIII, New Delhi pertaining to 2008-09 AY on the following grounds:-
“Whether on the facts and in the circumstances of the case, the Ld.CIT(A) is correct in allowing the relief of Rs.37,47,695/- being business expenditure as against disallowance made by the AO treating the same as non business expenditure? 2. The assessee craves leave, to add, alter or amend any ground of appeal
raised above at the time of the hearing.”
2. The relevant facts of the case are that the assessee declared an income of Rs.94,68,640/-. The said return was picked up for scrutiny wherein the Assessing Officer concluded the assessment at an income of Rs.1,43,10,236/-. The assessee challenged the additions before the CIT(A) who convinced with the explanation offered deleted the additions. Aggrieved by which the Revenue is in appeal before the ITAT.
2.1. Ld.Sr.DR placed reliance upon the assessment order.
2.2. Ld.AR on the other hand carrying us through the assessment order and the impugned order submitted that the assessee has disclosed rental income, income from I.T.A .No.-3573/Del/2012 parking charges and interest income etc. The AO arbitrarily doubted the claim of expenses having been incurred amounting to Rs.97,26,159/- which included interest expenditure of Rs.47,83,108/-. He ignored the fact that books of accounts have been submitted and they are duly audited and despite that proceeded to consider the business receipts of the assessee as only Rs.2,02,914/- and disallowed 50% thereof amounting to Rs.1,01,457/-. Thus out of the expenses i.e. Rs.97,26,159/- he subtracted Rs.47,83,108/- as interest expenditure and with the resultant figures added Rs.1,01,457/- which consisted of 50% of business receipts considered by him. Addressing these conclusions of the AO, it was submitted that the AO has not disputed the fact that the assessee is engaged in the business and has earned an income of Rs.2,02,914/- he has also not disputed the fact of incurring expenditure. The disallowance of 50% of the expenditure without assigning any reason is an arbitrary conclusion which cannot stand in the eyes of law. The business it was submitted is a continuing business where regular staff has been maintained who have been paid salary and wages. The expenses claimed on record pertained to office maintenance, printing and stationery, professional and legal charges conveyance, vehicle maintenance etc. which were all duly recorded.
Considering these submissions, the CIT(A) on facts has proceeded to delete the addition. The reasoning of the CIT(A), it was submitted has not been assailed either by any argument or by any evidence. Accordingly it was his submission that the appeal may be dismissed.
We have heard the rival submissions and perused the material available on record. We find that no rational reason has been brought on record by the Assessing Officer or Ld.Sr.DR to warrant an interference in the impugned order. It is trite law that it is not the magnitude of the expenditure claimed which will determine whether to allow or disallow. What is to be considered in terms of the provisions of the Act is the genuineness of the expenditure and whether it is exclusively for the business carried out and whether the claim is supported by genuine bills and vouchers. If the claim is Page 2 of 7
I.T.A .No.-3573/Del/2012 supported by documentary evidence wherein there is no Statutory violation the occasion to make an adhoc disallowance does not arise. We find ourselves in agreement with the following conclusion of the CIT(A) on facts supported by Sree Meenakshi Mills Ltd. vs. Commissioner of Income-tax [1967] 063 ITR 0207; Sanjeevi and Co. vs. Commissioner of income-tax [1966] 062 ITR 0156; and Commissioner of Income-tax v. City Ahmedabad Spinning and Weaving. Mfg. Co. [1994] 207 ITR 0427 does not warrant any interference:-
6.3. “I have considered the submissions of the appellant, observations of the assessing officer and various case laws and details filed by the appellant in this regard. On going through the assessment order I notice that the Assessing Officer's main contention is that the assessee company has claimed business loss of Rs.95,23,245/- out of which the bank interest has been allowed as deduction from income from other sources and the remaining expenditure has been incurred for earning the income from house property for which a standard deduction of 30% of the rental income has been allowed separately under Section 24(a) of the Act. This has been done on the ground that the business income shown by the appellant is only Rs.2,02,914/- as against which the expenditure claimed is Rs.97,26,159/- which is very high. Considering this aspect, the Assessing Officer has allowed 50% of the income as expenditure and disallowed the balance amount of expenditure. The implication of the above finding is that the Assessing Officer has accepted the fact that appellant is engaged in the business and receipt from the business Rs.2,02,914/-. The ASSESSING OFFICER has restricted the expenditure against such business income to the1 extent of Rs.1,01,457/-, that means the expenditure cannot exceed more than 50% of the receipts. This raises a question whether the expenditure has to be allowed in the ratio of the income? In this regard the AR of the appellant has submitted before me that the receipts of the business cannot be a basis to disallow the expenses incurred for business purposes unless there is a finding that this expenditure has not been incurred for the purpose of the business. As per the provision of Section 37(1) of the Act any expenditure incurred wholly and exclusively for the purpose of business is to be allowed except when such expenditure is not of personal nature or of a capital nature. The contention raised by the AR of the appellant is found to be reasonable and as per the provisions of the law. The Assessing Officer has accepted the fact and has considered only 50% of the receipt as business expenditure without going through the details of the expenditure incurred by the appellant. The Assessing Officer though has mentioned that the expenditure incurred are such which were incurred for earning the income from house property without specifying which such expenditure is for earning the income from the house property. Accordingly I have perused the profit and loss account of the company and noticed that the expenditure incurred by the company is on account of salaries and maintaining the office for conducting its business. As such the expenses incurred for running the business cannot be disallowed, to this extent the contention raised by the AR of the appellant is found to be justified, particularly in view of the fact that the Assessing Officer has not doubted the genuineness of the expenditure and there is no dispute with regard to the expenditure having been incurred. However, at the same time it is noticed by me that there are certain expenditure debited by the appellant in the profit and loss account of the appellant which are relatable to the income Page 3 of 7
I.T.A .No.-3573/Del/2012 from house property and cannot be allowed while computing business income:- S.No Particulars (Rs.) 1. Property Tax Rs. 49,780 2. Repair and maintenance Rs. 6,44,119 3. Brokerage and commission Rs. 4,00,000 Total Rs. 10,93,899
Since these expenses are not related to the business of the appellant and the same are related to the income declared under the head house property by the appellant for which the appellant has already claimed deduction u/s 24(a) of the IT Act and no separate expenditure can be allowed over and above the deduction allowable u/s 24(a) of the IT Act. In view of these facts, I uphold the disallowance of Rs.10,93,899/- and direct the Assessing Officer to allow the balance amount of the expenditure incurred for business purposes. In the result the appellant gets a relief of Rs.37,47,695/-. The other expenses claimed in the form of interest of Rs.47,83,108/- has already been allowed by the assessing officer against the interest income declared by the appellant in the assessment order itself. Therefore, the net relief allowable to the appellant is Rs. 37,47,695/-. In support of my above decision reliance is palced on following judicial pronouncements:-
Sree Meenakshi Mills Ltd. vs. Commissioner of Income-tax [1967] 063 ITR 0207- BUSINESS EXPENDITURE- TEST-MOTIVE WHETHER SHOULD BE DIRECTLY TO EARN INCOME-EXPENDITURE FOR PROSECUTING CIVIL PROCEEDING--SPINNING AND WEAVING- ORDER PROHIBITING DELIVERY OF YARN TO OUTSIDERS FOR WEAVING-CIVIL SUIT FOR ORDER TO DESIST FROM SEIZING YARN SUPPLIED TO WEAVERS AND TO RESTORE YARN ALREADY SEIZED-EXPENDITURE INCURRED AND COSTS- WHETHER ALLOWABLE DEDUCTION-DECISION AGAINST ASSESSEE IN CIVIL PROCEEDINGS-EFFECT-INDIAN INCOME- TAX ACT, 1922, S.10 (2)(XV). The appellant company, which carried on the business of cotton spinning and weaving, finding its own handlooms in its factory premises inadequate, distributed yarn produced by it to weavers outside the factory. Under clause 18B of the Cotton Cloth and Yarn (Control) Order, 1945, the Textile Commissioner was authorised to direct any manufacturer or dealer or any class of manufacturers or dealers, inter alia, not to sell or deliver any yarn or cloth of specified description except to such person or persons and subject to such conditions as he might specify. On February 7, 1946, the Textile Commissioner issued an order directing the company not to sell or deliver yarn manufactured by it except to such person or persons as he might specify. The company contended that the prohibition in general terms was ultra vires his authority, and continued to deliver yarn to weavers until February 20, 1946. This yarn was seized. On February 20. 1946, the Provincial Textile Commissioner issued an order to the effect that the company should confine its delivery to (a) licensed yarn dealers, (b) certain consumers who purchased yarn directly from it and (c) its own handloom factory. A note appended to the order provided that any other delivery of yarn which was not covered by a special order or permission would be a contravention of his order under clause 18B of the Control Order, 1945. The Appellate Tribunal recorded that it was not disputed that the company did not deliver any yarn to weavers Page 4 of 7
I.T.A .No.-3573/Del/2012 outside its premises after the order dated February 20, 1946. On March 4, 1946, the company filed a petition in the Madras High Court under section 45 of the Specific Relief Act for an order directing the Provincial Textile Commissioner to desist from seizing the yarn supplied to weavers at or around Madurai and Rajapalayam in the usual course of business for the purpose of converting it into cloth and to restore to it the yarn already seized. The petition was dismissed by a single judge of the High Court and his order was confirmed in appeal by the High Court. The company's appeal therefrom was also dismissed by the Privy Council. The Privy Council held that the expression "deliver" in clause 18B(1)(b) of the Control Order was used in its ordinary broad sense of handing over possession as distinct from passing of property and included delivery of possession to a bailee and accordingly delivery of a part of its yarn to weavers outside the mill premises for conversion into cloth for the company was in contravention of the order dated February 20, 1946. The Privy Council also held that the petition was incompetent as the acts in respect of which relief was asked for took place outside the limits of the ordinary original civil jurisdiction of the High Court. In prosecuting these proceedings the company spent Rs. 20,035 and it had also to pay Rs.5,912 as costs to the Government of its unsuccessful appeal before the Privy Council. In computing its income, the company claimed deduction of these amounts as expend if lire wholly and exclusively laid out for the purpose of its business: Held, that the object of the petition was to secure a declaration that the order dated February 20, 1946, in so far as it sought to put restrictions upon the right of the company to carry on its business in the manner in which it was accustomed to do was unauthorised, and to prevent enforcement of that order. Thereby, the company was seeking to obtain an order from the court enabling the business to he carried on without interference. The amounts expended by the company in that behalf were expenditure laid out wholly and exclusively for the purpose of its business and were deductible under section I0(2)(xv).' Held also, that the question of admissibility under section 10(2)(xv) had to be decided not on what was found or observed by the High Court in appeal from the order in the proceedings under section 45 of the Specific Relief Act or by the Privy Council but upon the findings of fact recorded by the Tribunal. Expenditure incurred to resist in a civil proceeding the enforcement of a measure, legislative or executive, which imposes restrictions on the carrying on of a business, or to obtain a declaration that the measure is invalid, would, if other conditions are satisfied, be admissible as a deduction under section 10(2)(xv). The deducibility of expenditure incurred in prosecuting a civil proceeding depends upon the nature and purpose of the legal proceeding in relation to the assessee's business and cannot be affected by the final outcome of that proceeding. However wrong- headed, ill-advised, unduly optimistic or over-confident in his conviction the assessee might appear in the light of the ultimate decision, expenditure in starting and prosecuting a civil proceeding cannot be denied as a permissible deduction in computing the taxable income merely because the proceeding had failed, if otherwise the expenditure was laid out for the purpose of the business wholly and exclusively, that is, reasonably and honestly incurred to promote the interest of the business. Persistence of the assessee in launching the proceeding and carrying it from court to court and incurring expenditure for that purpose is not a ground for disallowing the claim.
I.T.A .No.-3573/Del/2012 In order that an expenditure may be admissible as a deduction under section 10(2)(xv). it is not necessary that the primary motive in incurring it must be directly to earn income thereby. Decision of the Madras High Court in Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax [1963] 49 I.T.R. 156 reversed. Sanjeevi and Co. vs. Commissioner of income-tax [1966] 062 ITR 0156- BUSINESS EXPENDITURE-COMMISSION PAID TO AGENTS- DISALLOWANCE IN PART-WHETHER VALID-WHETHER VALID- INDIAN INCOME-TAX ACT, 1922, S. 10(2)(XV). The jurisdiction of the Revenue under section 10(2)(xv) is confined to deciding the reality of the expenditure, namely, whether the amount claimed for deduction was factually expended or not, and whether it was wholly and exclusively for the purpose of the business. Once that conclusion is reached in favour of the assessee, deduction of the entire amount should follow as a matter of course. Where commission of 40 per cent, was paid to agents and this was considered excessive by the Appellate Assistant Commissioner and disallowed in part: Held, that disallowance of part of the expenditure on the ground that the rate of commission was excessive was not justified. A proper disposal of the appeal would have been for the Tribunal to find whether the agreement of agency with each of the four persons was a fact, whether payment of commission to each of them as claimed by the assessee was true, and whether payment of commission to the four persons was an expenditure incurred by the assessee wholly and exclusively for the purpose of the business. If these points are found in favour of the assessee, no further question can arise as to reasonableness or otherwise of the quantum of the commission paid, for it is entirely for the assessee to decide it. Commissioner of Income-tax v. City Ahmedabad Spinning and Weaving. Mfg. Co. [1994] 207 ITR 0427- BUSINESS EXPENDITURE-FINDING THAT EXPENDITURE RELATED TO BUSINESS-EXPENDITURE CANNOT BE DISALLOWED MERELY BECAUSE ASSESSEE'S INCOME WOULD BE VERY MUCH REDUCED THEREBY-INCOME TAX ACT, 1961. S. 37, Once it is found thaT expenditure was bona fide incurred and that the same related to business activity, (hen it would become deductible as the same is permitted by the provisions of law. Merely because the assessee's income after incurring such expenses was found to be little or negligible, it cannot be said that the said expenditure became an impermissible deduction. " The facts of the above cited judicial pronouncements are identical with the facts of the appellant's case, therefore, the ratio of the above judgments is squarely applicable in the case of the appellant. Hence, the expenditure claimed by the appellant on account of business is allowable and the appellant gets a relief of Rs.37,47,695/-.”
Finding no infirmity with the aforesaid view on facts and law wherein the CIT(A) records that he has himself perused the record and sustained the additions to the extent warranted on facts, the departmental ground is dismissed.
I.T.A .No.-3573/Del/2012 5. In the result, the appeal of the Revenue is dismissed. The order is pronounced in the open court on 17th of November, 2016.