The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) directed the Assessing Officer (AO) to verify the commencement of business in the case of the assessee regarding the disallowance of ₹50.05 lakh under Section 37(1) of Income Tax act,1961.
Mudaliar and Sons Hotels Pvt. Ltd.,appellant-assessee,filed its return of income for the year on November 30, 2013, declaring no income. The return was selected for scrutiny, and statutory notices were issued and complied with. The AO noted that the assessee earned income solely from interest on inter-corporate loans and claimed expenses of Rs. 2,49,05,027/-, including employee benefits, finance costs, depreciation, and other expenses.
The assessee treated the entire interest income as “Income from Other Sources” and claimed interest expenses under Section 57 of the Act. The remaining expenses were partly disallowed, including depreciation and other expenses, leaving Rs. 50,05,240/- under “Profit and Gains of Business or Profession.”
The AO concluded that no business income was declared and, therefore, disallowed the remaining expenses, finding them not incurred wholly for business purposes.The Commissioner of Income Tax(Appeals)[CIT(A)] upheld the disallowance made by the AO in the appeal filed by the assessee.
Read More: Disallowance u/s 37 of Income Tax Act: ITAT Allows Opportunity to Prove Genuineness of Payment
The two member bench comprising Sunil Kumar Singh (Judicial Member) and Om Prakash (Accountant Member) considered the disallowance of Rs. 50,05,240/- under Section 37(1) of the Act. After reviewing the submissions and relevant materials, we noted that the disallowed expenses included employee costs, filing fees, taxes, electricity, and other operational costs.
The assessee argued that certain expenses, like taxes and electricity, were related to property intended for lease. However, the assessee did not show that the leasing business had started in the year under consideration. Without evidence of business commencement, these expenses were not allowed.
For other expenses, if they were related to maintaining the corporate structure after business activities had commenced, they could be allowed, even if no business activity occurred that year. Therefore, we decided to send the matter back to the AO for verification and to allow the expenses if they were linked to a business that had already started.
In short,the appeal filed by the assessee was allowed for statistical purposes.
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