Deduction Can't Be Availed On Expenditure Incurred For Overseeing Project Of Holding Company: Telangana High Court

The Telangana High Court has held that deductions cannot be availed on expenditures incurred for overseeing the project of holding a company.The bench of Justice P. Sam Koshy and Justice Laxmi Narayana Alishetty has observed that, as per Section 37 of the Income Tax Act, 1961, the prerequisites for allowing deduction are that the expenditure should have been incurred in respect of a business carried on by the assessee and should be spent wholly and exclusively for its own business. The bench noted that the expenditure sought to be deducted was incurred for overseeing the project of the holding company. In order to be deductible as a business loss, the expenditure must be in the nature of a trading loss, not a capital loss stemming directly from trading activity, and it must be incidental to the business of the assessee. The appellant-company/assessee is in the business of providing consultants and advisors for the supply of industrial computer software systems for use in oil, gas, water pipelines, etc. The appellant filed its return for the assessment year 1999–2000, declaring a loss. The return was processed under Section 143(1), and a refund was issued to the appellant company.The case of the appellant was selected for scrutiny, and notices have been issued under Section 143(2) of the Act, 1961, to the appellant. During the course of the assessment proceedings, the assessing officer observed that the appellant had incurred certain expenditures and claimed the same as a business loss and called for an explanation from the appellant. In response, the appellant submitted all the documents called for by the assessing officer in support of its claim. On due verification of the same, the Assessing Officer disallowed the claim of the appellant on the ground that the same had not been incurred for the purpose of business. In fact, the appellant has provided support services to the parent company of the appellant and claimed the said expenditure as a business loss.The Assessing Officer further observed that the appellant has debited an amount towards the fee paid to the Registrar of Companies for the increase of authorized share capital from 1.00 crore to 2.4 crore under the heading 'rates & taxes'. The appellant filed an appeal before the CIT (A). The CIT(A), on considering the memorandum and articles of association of the appellant company, held that the appellant company was set up to carry on the activities of advisors and consultants of the parent company in India and such allied activities. The Assessing Officer has erred in taking the view that the appellant has not carried on business activity during the previous year under consideration for a claim of expenses as revenue expenditure. The CIT(A) observed that the appellant was in readiness to receive the clients to render services and consultation and finally held that the view of the assessing officer that the business of the appellant has not commenced is to be held as not justified. Therefore, he is directed to allow the expenses claimed to be revenue expenditures and determine the income or loss in light of the above observation, and accordingly, allow the appeal via order dated December 20, 2004.The department filed an appeal before the Income Tax Appellate Tribunal. The Tribunal, on due consideration of the material placed on record and submissions made, held that the holding company and the subsidiary company are separate entities. The expenditure pertaining to one cannot be claimed or allowed in the hands of the other, and it was opined that the First Appellate Authority has committed an error in allowing the appeal of the appellant and, therefore, set aside the order of the CIT(A), dated December 20, 2004, and allowed the appeal filed by the department.The assessee contended that the order of the Tribunal is erroneous, unjust, contrary to the facts of the case, and bad in law. That the Tribunal has failed to appreciate the material on record and the explanation offered before CIT(A). The Tribunal grossly erred in concluding that appellant-company has not engaged in business and expenditure claimed by the appellant company is totally disallowed without ascertaining and apportioning for the expenditure properly attributed to the assessee business. Even if the tax liability determined for the assessment year under consideration is meager, the business loss to be carried forward is denied by the Assessing Officer amounts, which has a substantial impact on the subsequent assessment years in which such brought-forward business losses were set off.The department contended that the Tribunal, while allowing appeal, had specifically observed that the holding company and the subsidiary company are separate entities and the expenditure pertaining to one cannot be claimed or allowed in the hands of the other. The Tribunal observed that the expenditure in question is not mere administrative expenditure, as in the case of a professional who opens an office and...

Deduction Can't Be Availed On Expenditure Incurred For Overseeing Project Of Holding Company: Telangana High Court

Mariya Paliwala

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