Non-business expense cannot be claimed as Business expense to set-off against house property Income

C. Krishniah Chetty & Co. Pvt. Ltd. Vs ITO (ITAT Bangalore)

The grounds raised by the assessee, are only seeking set off of current year loss against income from house property and carry forward of loss to the future years amounting to Rs.76,26,766/-.

The Ld.AR vehemently submitted that, the assessee incurred expenses in terms of salary, vehicle maintenance, taxes which were day-to-day expenses, to keep the business live. He submitted that, merely because no income could be generated during the year, cannot lead to disallowance of the expenditure, incurred for the purpose of business. He placed reliance on the decision of Hon’ble Karnataka High Court in case of CIT vs. Lawrence D’Souza reported in (2011) 203 Taxman 200, wherein it was held that, expenses incurred to keep the business as going concern, even in the absence of any income, should be allowed as deduction.

ITAT noted that the Ld.CIT(A) in para 7.4 reproduced hereinabove disputes the business activity of assessee maintained as a going concern. The Ld.CIT(A) has observed that the expenditure claimed in the form of business loss is incurred towards power and fuel, rent, repair to the building, travelling, interest paid etc. Before us, the Ld.AR has not been able to establish by way of any documents that these were incurred for the purposes of business. Assessee is renting a jewellery shop and nothing has been expended to have been incurred for the purposes of business by way of documentary evidences. The Ld.AR has not been able to disprove the findings of Ld.CIT(A) and therefore we are unable to agree with the submissions of the Ld.AR. We therefore do not find any infirmity in the view taken by the Ld.CIT(A) and the same is upheld. Accordingly the grounds raised by assessee stands dismissed.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

Present appeal is filed by assessee against order dated 03.0.2020 passed by Ld.CIT(A)-2, Bangalore for A.Y. 2016-17 on the following grounds of appeal:

“1.1 On the facts and circumstances of the case, the learned Commissioner of Income Tax erred in not allowing business loss for the year of Rs. 114,66.766/- on the ground that the business of the assessee company is closed and there are no receipts from operation of business.

1.2 On the facts and circumstances of the case, the learned Commissioner of Income Tax erred in not appreciating the fact that the assessee company was in existence for a long time and had business income in the earlier years and revenue expenditure incurred which will result in income in an ensuing year is also allowable.

1.3 On the facts and circumstances of the case, the learned Commissioner of Income Tax erred in not appreciating the fact the expenses incurred were for day to day activity of the company and to maintain the corporate status.

1.4 On the facts and circumstances of the case, the learned Commissioner of Income Tax erred in not allowing business loss to be set off against house property income on the ground that the expenses incurred were in personal in nature.

Your appellant seeks leave to add to, to amend any of the foregoing grounds as and when considered necessary/at the time of hearing.”

2. Brief facts of the case are as under:

2.1 The assessee is private limited company, and filed its return of income for year under consideration on 13.10.2016, declaring loss of Rs.76,26,766/-. The case was selected for scrutiny and notice u/s. 143(2) was issued, in response to which, representative of the assessee appeared before the Ld.AO.

2.2 During the assessment proceedings, the Ld.AO found that the assessee declared income from operations at Rs.56,26,199/-, and as per Note no.50, the income consists of Rs. 54,90,00/- from rental income and Rs.1,36,199/- from other sources. The Ld.AO disputed the rental income declared by the assessee, as it was shown under the head, “Income from business”. The Ld.AO assessed the rental income under the head, ”Income from house property”, after allowing deduction u/s. 24 of the Act. The Ld.AO did not allow setting off of the income under the head, “house property”, against the business loss claimed by the assessee.

2.3 Aggrieved by the order of Ld.AO, the assessee preferred appeal before the Ld.CIT(A).

2.4 Before the Ld.CIT(A), the assessee submitted that, the assessee received rent from letting out of a property located at Prestige Shantiniketan, Level 1, Crescent 4-Block, K R Puram Hobli, Bangalore to Prestige Estate Projects Ltd. The assessee submitted that, the said amount was reflected after deducting 30% u/s. 24 of the Act, and the total income under the head, “Income from house property” was mentioned at Rs. 38,43,000/- in the schedule.

2.5 The assessee thereafter, submitted that, it declared Rs.54,19,000/- as rent under the head, Part-A P&L account, however, in the computation, Rs. 38,43,000/- was considered after claiming deduction u/s.24, that was declared under Part B, mentioning the income from house property as per Schedule – HP. 2.6 The Ld.CIT(A) while passing the impugned order, accepted that, there was no discrepancy on account of showing income of house property under the head business income by the assessee and that the Ld.AO wrongly presumed that the income from house property was shown as income from business. However, with regard to the set off of current year business loss, against the income from house property, the Ld.CIT(A) did not allow the same for the reason that, the business of the assessee was closed and the assessee did not have any receipt from operations of business during the year. The Ld.CIT(A) observed as under:

“7. The second issue which the appellant has contended in the appeal is that the business loss of the current year should be allowed to be set off from the income from House property. As per section 72 of the Act, any loss under the head, ‘profit and gain of business,’ other than speculation loss and depreciation can be set off against any other business income or any other head of income, except salary income, in the same assessment year.

7.1 However, the pertinent question is that whether then Appellant has Business loss during the current year?. The Appellant has not shown any receipt from operation during the year and also admitted during the course of hearing that there was no business activity during the year due to internal dispute. The Appellant has incurred certain expenses which are debited in Profit and loss account. They are Power & Fuel, Rent, Repair to building, staff welfare, travelling, interest paid, depreciation and other expenses, the total of which comes to Rs.70,16,132/-resulting into loss of same amount The appellant has claimed for set off on this loss as Business loss against the income under House property.

7.2 Section 37 of the Income tax Act, 1961 is a section for allowability of business expenditure. It says

“37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, lord out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

[Explanation. —For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to hove been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.”

7.3 Thus the conditions for allowance under section 37 of the Act can be summarised as below:

a) Such expenditure should not be covered under the specific section i.e. sections 30 to 36.

b) Expenditure should not be of capital nature

c) The expenditure should be incurred during the previous year.

d) The expenditure should not be of personal nature.

e) The expenditure should have been incurred wholly or exclusively for the purpose of the business or profession.

f) The business should be commenced or continuing.

7.4 In the instant case, the Business of the Appellant is closed and it does not have any receipt from operation of business. The expenses are also of the nature which does not manifest any business activity, as the appellant was earlier engaged in the business of Jewellery trading. Since there is no business, any expenditure incurred can’t be termed as business expenditure but it will be a personal expenditure. Further, since there is no business loss available, the set off against the income of House property does not arise. Accordingly, I am of the considered view that there is no occasion to interfere in the order of AO and thus the grounds of appeal raised by the Appellant are dismissed.”

3. Aggrieved by the above observations of Ld.CIT(A), assessee is in appeal before this

4. The grounds raised by the assessee, are only seeking set off of current year loss against income from house property and carry forward of loss to the future years amounting to Rs.76,26,766/-.

5. The Ld.AR submitted that, the assessee is a going concern, and the business activity has not been closed and there was only a temporary lull in its activity. He submitted that the lull in the business was due to a dispute amongst the family, that was pending before “National Company Law Appellate Tribunal”, and therefore, the assessee could not concentrate much into the business. He placed reliance on the decision of Hon’ble Supreme Court in case of A. Builders vs. CIT reported in (2007) 288 ITR 1.

6. The Ld.AR further submitted that, it is not for the revenue to decide as to when a businessman should continue or to close its business and a temporary lull in the business cannot be treated as closure of such business.

7. The Ld.AR vehemently submitted that, the assessee incurred expenses in terms of salary, vehicle maintenance, taxes which were day-to-day expenses, to keep the business live. He submitted that, merely because no income could be generated during the year, cannot lead to disallowance of the expenditure, incurred for the purpose of business. He placed reliance on the decision of Hon’ble Karnataka High Court in case of CIT vs. Lawrence D’Souza reported in (2011) 203 Taxman 200, wherein it was held that, expenses incurred to keep the business as going concern, even in the absence of any income, should be allowed as deduction. The Ld.AR further placed reliance on following decisions of Coordinate Bench of this Tribunal.

8. On the contrary, the Ld.DR relied on the orders passed by authorities below.

9. We have perused the submissions advanced by both sides in the light of records placed before us.

10. We note that the Ld.CIT(A) in para 7.4 reproduced hereinabove disputes the business activity of assessee maintained as a going concern. The Ld.CIT(A) has observed that the expenditure claimed in the form of business loss is incurred towards power and fuel, rent, repair to the building, travelling, interest paid etc. Before us, the Ld.AR has not been able to establish by way of any documents that these were incurred for the purposes of business. Assessee is renting a jewellery shop and nothing has been expended to have been incurred for the purposes of business by way of documentary evidences. The Ld.AR has not been able to disprove the findings of Ld.CIT(A) and therefore we are unable to agree with the submissions of the Ld.AR. We therefore do not find any infirmity in the view taken by the Ld.CIT(A) and the same is upheld. Accordingly the grounds raised by assessee stands dismissed. In the result, the appeal filed by assessee stands dismissed. Order pronounced in open court on 21^st June, 2022.