In a significant case, the Telangana High Court has held that income tax deductions cannot be availed on expenditures incurred for overseeing the project of holding a company.
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 like a trading loss, not a capital loss stemming directly from trading activity, and it must be incidental to the business of the assessee.
Pipelic Energy Software India, the appellant-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.
During the assessment proceedings, the Income Tax 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.
On due verification, the Assessing Officer disallowed the claim of the appellant on the ground that the same had not been incurred for business. 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’.
On appeal, the CIT(A) 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) directed to allow the expenses claimed to be revenue expenditures and determine the income or loss. The department filed an appeal before the Income Tax Appellate Tribunal.
The Tribunal held that the holding company and the subsidiary company are separate entities. The expenditure on 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.
The assessee contended 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 the appellant company has not engaged in business and expenditure claimed by the appellant company is disallowed without ascertaining and apportioning for the expenditure properly attributed to the assessee business.
On the other hand, the department contended that the Income Tax Tribunal, while allowing the appeal, had specifically observed that the holding company and the subsidiary company are separate entities and the expenditure on 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 is ready to receive clients, nor an expenditure that has been laid out with an intention to earn income.
The division 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.
While upholding the Income Tax Appellate Tribunal’s order, the court held that the amount incurred by the appellant company cannot be considered a revenue expenditure of the appellant company and is thus not eligible for reduction under Section 37 of the Income Tax Act, 1961.
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