Drishti India Ltd vs ITO – Disallowance of Business Expenses Due to No Revenue (AY 2013-14)

Drishti India Ltd vs ITO – Disallowance of Business Expenses Due to No Revenue (AY 2013-14)

Case Number: ITA 6537/DEL/2019

Appellant: Drishti India Ltd, New Delhi

Respondent: ITO, Ward-7(4), New Delhi

Assessment Year: 2013-14

Order Type: Final Tribunal Order

Date of Order: 2022-07-04

Pronounced on: 2022-07-04

Introduction

This case concerns an appeal filed by Drishti India Ltd against the order passed by the Income Tax Officer (ITO), Ward-7(4), New Delhi, for the assessment year 2013-14. The primary issue in the appeal was the disallowance of business expenses by the Assessing Officer (AO) on the grounds that the company did not have any revenue from operations during the assessment year. The Income Tax Appellate Tribunal (ITAT) reviewed the appeal and ruled in favor of the appellant, holding that necessary business expenses must be allowed even if no business activity was carried out during the relevant period.

Background of the Case

Drishti India Ltd, the appellant, had filed its return of income for the assessment year 2013-14. During the assessment proceedings, the AO disallowed certain expenses claimed by the appellant, amounting to Rs. 26,64,104/-. The disallowed expenses included Rs. 11,21,305/- under the head of ‘other expenses’ and Rs. 4,81,600/- under the head of ‘expenditure on salary.’ The AO’s primary basis for the disallowance was that the appellant had no revenue from operations and no business activity during the assessment year.

The appellant challenged the disallowance before the Commissioner of Income Tax (Appeals) [CIT(A)], who partly confirmed the AO’s order. Aggrieved by the decision, the appellant filed an appeal before the ITAT.

Proceedings Before the Tribunal

The appeal was brought before the ITAT, Delhi Bench ‘SMC’, presided over by Judicial Member Shri C.M. Garg. The hearing was conducted via Webex, and despite proper service of notice, neither the appellant nor their authorized representative appeared for the hearing. Consequently, the Tribunal proceeded to decide the appeal ex parte, based on the submissions of the Senior Departmental Representative (DR) and the material available on record.

Appellant’s Grounds of Appeal

The appellant raised several grounds in their appeal, the key ones being:

• The CIT(A) erred in upholding the AO’s addition of Rs. 26,64,104/- to the appellant’s income on the grounds of absence of business activity.
• The jurisdiction of the Revenue is confined to determining whether the expenses claimed were factually incurred and whether they were wholly and exclusively for the purpose of business. Once this is established, the deduction should be allowed.
• The CIT(A) erred in upholding the levy of interest under section 234B of the Income Tax Act, which was not justified in the appellant’s case.

Tribunal’s Observations and Findings

The Tribunal noted that the AO had disallowed the expenses on the grounds that no business activity was carried out by the appellant during the assessment year, as evidenced by the absence of electricity or generator expenses. The AO further observed that since there was no revenue from operations, the appellant’s claim of expenses, including salary and depreciation, was not justified.

However, the Tribunal found that the AO’s disallowance was based solely on the absence of revenue and business activity, rather than on any evidence that the expenses were not incurred or were not for the purpose of the business. The Tribunal emphasized that Drishti India Ltd, being a limited company, was required to maintain its legal status and comply with various statutory obligations under the Companies Act and other applicable laws. These obligations necessitate the incurring of certain expenses, even in the absence of revenue from operations.

The Tribunal observed that the CIT(A) had deleted the disallowance of depreciation after noting that the appellant had already disallowed it in the computation of income. However, the CIT(A) upheld the disallowance of ‘other expenses’ and ‘salary’ on the same grounds as the AO. The Tribunal disagreed with this reasoning, stating that the mere absence of business activity or revenue does not justify the disallowance of expenses that are necessary for the legal existence and compliance requirements of the company.

Conclusion and Ruling

After reviewing the submissions and the relevant records, the Tribunal concluded that the disallowance of ‘other expenses’ and ‘salary’ by the AO and CIT(A) was not justified. The Tribunal held that the appellant was entitled to claim these expenses as they were necessary for maintaining the company’s legal status and compliance with statutory obligations. The Tribunal directed the AO to delete the disallowed expenses and allowed the appeal in favor of the appellant.

Order: The appeal filed by Drishti India Ltd is allowed, and the AO is directed to delete the disallowance of Rs. 26,64,104/- on account of ‘other expenses’ and ‘salary.’

This decision reaffirms the principle that necessary business expenses must be allowed, even in the absence of revenue, if they are incurred to maintain the legal status and compliance obligations of the company.

Drishti India Ltd vs ITO – Disallowance of Business Expenses Due to No Revenue (AY 2013-14)