GM APPAREL P.LTD,MUMBAI vs. ITO 8(1)(4), MUMBAI

The grounds of appeal raised by the Assessee Company in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) read as under:-

The brief facts of the case are that assessee company is claimed to have been engaged in the business of trading and export of readymade garments. However, for the year under consideration there was no business activity except receipt of interest income. From the accounts of the assessee company, it was observed by the AO that the assessee company was in receipt of interest income of Rs. 2,58,861/- in respect of fixed deposit maintained with M/s Kotak Mahindra Bank Ltd. The assessee company had treated the same as interest income and computed the profit from the business at Rs. 1,02,995/- after claiming expenditure of Rs. 1,55,866/- in the return of income filed with the Revenue. The A.O. asked the assessee company to explain as to why the interest income be not brought to tax under the residuary head of ‘Income from other sources’ and the expenditure claimed against the interest income is not allowable under the provisions of the Act . The assessee company submitted that it has claimed certain legal expenses, audit expenses, bank charges and miscellaneous expenses at Rs. 17,866/- and apart from the above it has claimed Director’s Remuneration of Rs. 1,38,000/-. The assessee company further submitted that though there was no business activity during the year but the business funds were utilized for commercial purposes and hence the expenses cannot be disallowed.

Aggrieved by the assessment order dated 25-08-2014 passed by the A.O. u/s. 143(3) of the Act , the assessee company filed its first appeal before the ld. CIT(A).

Before the ld. CIT(A), the assessee company submitted that there was a slow down or lull in the business but the assessee company had not stopped the carrying on of its business. The expenditure claimed was bare minimum and to keep the company afloat, these expenses were very much required. In support, the assessee company placed reliance on the decision of the Hon’ble Gujarat High Court in the case of CIT v. Prayashvin B. Patel, 240 ITR 931as ITA 1176/Mum/2016 4 well as the decision of Mumbai Tribunal in the case of Aatur Holding P. Ltd., 112 Taxman 75 (Mag.) and Delhi Tribunal in the case of ACIT v. JNG Builders P. Ltd. to contend that there are certain expenses such as audit fees, salaries, professional fee , insurance , printing and stationary, bank charges, house keeping charges , repairs and maintenance etc which are necessary to maintain the corporate entity and are allowable expenses and it is also not necessary that every year the assessee company must have earned income from business or profession .

Aggrieved by the appellate orders dated 11.01.2016 passed by the ld. CIT(A), the assessee company is in second appeal before the Tribunal.

Before the Tribunal, the ld. Counsel for the assessee company submitted that the salary of Rs. 1,38,000/- was paid to the Directors. It was submitted that there was no business of trading and export of garments carried on by the assessee company. The A.O. has disallowed the entire expenses of Rs.1,38,000/- incurred towards Director Remuneration. The ld. CIT(A) although allowed the statutory expenses amounting to Rs. 17,866/-, the disallowance of the entire Directors Remuneration of Rs.1,38,000/- paid by the assessee company were disallowed. It is submitted that the assessee company has earned interest income of Rs. 2,58,861/- from FDRs maintained with Kotak Mahindra Bank which is a business income although the A.O. has treated the same as income from other sources, which is confirmed by the ld. CIT(A). It is submitted that the assessee company is private limited company and it is essential to maintain the company and to keep the Directors and hence Directors Remuneration paid to the Directors is allowable . There are no employees in the company and efforts were made to carry on the business of the company. It is submitted that in the past, interest income was assessed to tax as business income and only in this impugned assessment year the interest income has been charged under the head ‘income from other sources’.

The ld. D.R. submitted that the assessee company has earned interest income on the FDRs maintained with the Bank and the A.O. has rightly brought to tax the same under the head income from other sources. The ld DR submitted that the assessee company has not carried on any business activity during the relevant previous year and hence Directors Remuneration was rightly disallowed by AO and the disallowance sustained by learned CIT(A). The ld. DR relied on the orders of the authorities below.

We have considered the submissions of both the parties and also perused the material available on record including the case laws relied upon. We have observed that the assessee is a private limited company which has claimed to be in the business of trading and export of readymade garments. No business activity has been carried on by the assessee company during the relevant previous year. We have observed that the assessee company has only placed the surplus funds in FDRs with the Kotak Mahindra Bank on which interest income has been earned during the relevant previous year. There is no business activity carried on by the assessee company during relevant previous year and it is merely interest income which has been earned out of FDR. The assessee company declared interest income as income under the head ‘Income from Business or Profession’ in the return of income filed with the Revenue. As per section 56 of the Act interest income from FDRs is chargeable to tax under the head ‘income from other sources’. The Hon’ble Gujarat High Court in the case of CIT v. Prayashvin B. Patel, 240 ITR 931 as well as the decision of Mumbai Tribunal in the case of Aatur Holding P. Ltd., 112 Taxman 75 (Mag.) and Delhi Tribunal in the case of ACIT v. JNG Builders P. Ltd. have held that there are certain expenses such as audit fees, salaries, professional fee , insurance , printing and stationary, bank charges, house keeping charges , repairs and maintenance etc which are necessary to maintain the corporate entity and are allowable expenses and it is not necessary that every year the assessee must have earned income from business or profession and the assessee may be required to spend the amount for carrying on its activities . The assessee company incurred expenses of Rs. 17,866/- towards legal expenses, audit fees, bank charges and miscellaneous expenses which had been allowed by the ld. CIT(A). However as per the facts emerging from the records, there were no efforts or contributions made by the Directors to carry on the business of the company as in-fact no business was carried on by the assessee company during the ITA 1176/Mum/2016 7 entire previous year, hence in our considered view , the remuneration of Rs. 1,38,000/- paid to Directors was rightly disallowed by the A.O. and confirmed by the ld. CIT(A). Thus, we confirm the order of the learned CIT(A) in which we have not find any infirmity. We order accordingly.

In the result, the appeal filed by the assessee in ITA N0. 1176/Mum/2016 for the assessment year 2012-13 is dismissed.