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Income Tax Appellate Tribunal, DELHI BENCH ‘C’ : NEW DELHI
Before: SH. N.K.BILLAIYA & SH.ANUBHAV SHARMA
The appeal has been preferred by the Assessee against the order dated 09.03.2018 of CIT(A)-35, New Delhi (hereinafter referred as Ld. First Appellate Authority or in short Ld. ‘FAA’) in appeal no. 418/16-17 arising out of an appeal before it against the order dated 28.10.2016 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) by the DCIT, Circle-10(1), New Delhi (hereinafter referred as the Ld. AO).
The brief facts of the case are that Assessment in this case was completed on a total income of Rs. 58,09,620/- as against returned income of Rs.
41,95,030/-. While doing so the assessing officer has made the following addition. :
S.N. Particulars Amount (Rs.) 1. Alleged addition on account of disallowing 14,10,163/- business expenses. 2. 2,04,430/- Alleged addition on account of disallowance under section 14A 2.1 The Ld. AO observes that the entire activity of the assessee company revolves around earning of income from income from house property along with income under the head income from capital gain, there is no business activity, therefore, business expenses claimed by the assessee were disallowed and added back to the income of the assessee.
2.2 The detail of business expenses disallowed are as under: Salaries and other benefits 143,743/- Director Remuneration 600,000/- Staff Welfare & Other 56,699/- allowance Conveyance 48,300/- Membership Fee & 60,039/- Subscription Insurance Charges 46,808/- Vehicle Running & 61,725/- Maintenance Telephone expenses 54,936/- Audit Fees 29,214/- Donation 43,200/- Electricity expenses 82,484/- Security Charges 94,126/- Legal & professional expenses 29,680/- Other expenses 25,308/- 2.3 Ld. Counsel has submitted that the main activity of the company is sale/purchase and construction of the property and not the rental income. Apart from that the company is maintaining the Inventory of Rs. 59,580,020/- but due to adverse market condition no sale/ purchase of property could be made during the year under considerations. However, the company is to maintain the office to carry on its main business activity and to incurred the expenses wholly and inclusively for business purposes. Ld. Counsel has submitted that for maintenance & marketing for selling the existing inventory the company is to maintain all the basic expenses like Salary to staff & director, staff welfare, conveyance, telephone, electricity, insurance, membership fee, vehicle running expenses, security charges and other statutory expenses, otherwise the company could not sell the inventory. Therefore these expenses are mandatory in nature to meet out any business opportunity to sell the inventory and should be allowed as business expenses. It is submitted that the assessee was not carrying out business activity due to adverse market conditions, but the assessee being an artificial juridical person, has to incur expenditure for maintaining its existence and for carrying out whatever little activities that the assessee is involved in. Unlike a natural person, a company can only operate through other natural persons—whether employees or others.
Assessee has come in appeal before the Tribunal raising following grounds :
“1. On the facts and in the circumstance of the case and in law the CIT(A) was incorrect and unjustified in sustaining the addition of Rs 14,10,163 incorrectly and unjustifiably made by the assessing officer.
2. On the facts and in the circumstance of the case and in law the CIT(A) was incorrect and unjustified in holding that there was no business activity in the year under consideration even when the main purpose for which the company has been floated is carrying on the business.
3. On the facts and in the circumstance of the case and in law the CIT(A) was incorrect and unjustified in holding that the expenses of Rs 14,10,163 are part of expenses of Rs 34,10,822 claimed as deduction u/s 24 of the Act.
4. On the facts and in the circumstance of the case and in law the CIT(A) was incorrect and unjustified in holding that expenses of Rs. 14,10,163 are related to earning income from house property.
5. On the facts and in the circumstance of the case and in law the CIT(A) was incorrect and unjustified in rejecting the contention of the assessee that the expenditure of Rs 14,10,163 are for the purposes of maintaining the co operate structure of the company.
On the facts and in the circumstance of the case and in law the CIT(A) erred in not appreciating the fact that the expenses allowable u/s 24 can not include the expenses of Rs 14,10,163 which had been incurred for maintaining and running the business of the company and cannot be part of the expenses allowable u/s24.
On the facts and in the circumstances of the case and in law the CIT(A) was incorrect and unjustified in not allowing the expenses incurred and claimed rightly under the head of business income.” 3.1 Ld. CIT(A) has sustained the order of ld. AO.
3.2 On the other hand, Ld. DR supported the findings of Ld. Tax Authorities below.
Appreciating the matter on record, it can be observed from the order of Tax Authorities below that the 10% deduction from the income under the head, “income from house property” u/s 24 of the Act has been considered by them to take care of all expenses. On the contrary, the assessee has made a claim that apart from the income made by way of renting of properties, there were other inventories and the assessee was making certain expenses for preservation of that inventory.
After taking into consideration the details of business expenses disallowed. The Bench is of considered opinion that as for the purpose of Section 37 of the Act the Tax Authorities were under obligation to examine the expenses to consider if the same were for the purpose of business and had business expediency as explanation. It is now a settled proposition of law that merely because the business stands abandoned or closed or dormant due to market conditions, a corporate assessee still needs to incur certain expenditure to keep itself floated. Reliance in this regard can be placed on the judgment ;
ITO vs. Mokul Finance (P) Ltd. (2007) 110 TTJ 0445 (Del) 2. CIT vs. Ganga Properties Ltd., (1993) 199 ITR 0094 (Cal) 4