No disallowance towards business loss incurred Erection and Testing Services of Hindustan Thermal: ITAT [Read Order]

The two member bench of Delhi Income Tax Appellate Tribunal ( ITAT ) held that no disallowance should be made towards the business loss incurred on erection and testing services of Hindustan Thermal.

The Assessee, Hindustan Thermal Company Pvt. Ltd is engaged in the business of 'construction work relating to power projects and the year under consideration is the first year of business.

The assessee declared business income of Rs 10,38,018/- towards 'Erection and Testing Services rendered'; purchase of inventory during the year of Rs 46,87,125/- and the same shown as closing stock of inventory; employee benefit expenses of Rs 3,85,80,590/-; project management expenses of Rs 2,74,47,299/- apart from certain administrative expenses. Then the assessee declared net loss of Rs 6,51,44,188/- as per books of accounts.

Subsequently after filing the return of income AO observed that the income earned by the assessee was derived from a related party and majority of the expenses incurred were spent towards related party. Hence he concluded that the expenditure claimed by the assessee is not commensurate with the business income declared by the assessee and accordingly proceeded to disallow the net business loss of Rs 6,37,01,973/-.

Aggrieved, the assessee filed an appeal before the CIT(A) who upheld the addition made by the AO. Therefore the assessee filed another appeal before the tribunal.

The tribunal relied upon the decision of Supreme Court in the case of Madras Industrial Investment Corporation Ltd observed that assessee ought to have spread the incurrence of expenditure over the period of the contract as revenues were sought to be earned by the assessee in the future year.

Therefore Once an expenditure is of revenue nature, it is allowable in the year of incurrence and there is no concept of deferred revenue expenditure under the provisions of the Act except as specifically provided u/s 35AB, 35ABB etc.

Counsel for revenue argued that CIT(A) had duly examined the details of employee benefit expenses based on details filed by the assessee before him as additional evidence and the Id. AO was not given any opportunity to examine the same.It resulted in violation of provisions of Rule 46A of the Income Tax Rules.

Accordingly the tribunal observed that details of employee benefit costs were furnished by the assessee before the CIT(A), based on the directions of the CIT(A) as per section 250(4) of the Act and we hold that the same cannot be construed as violation of provisions of Rule 46A of the Income Tax Rules.

Accordingly the aircraft certainly was not allowed to fly to carry passengers or cargo in the absence of this certification by the competent authority, but that did not stop the assessee from holding it in its own name for the purpose of its business.

Therefore the bench relied upon the decision in the case of Capital Bus Service (P.) Ltd. v. CIT observed that  where an assessee puts assets ready for use that amounts to passive users and in such a case depreciation must be allowed.

After reviewing the submissions of both parties the two-member bench of M Balaganesh (Accountant Member) and C. N. Prasad, (Judicial Member) no disallowance should be made towards the business loss incurred on erection and testing services of Hindustan Thermal.

Satyen Sethi,counsel appeared for assessee and Sandip Kumar Mishra counsel appeared for revenue.

To Read the full text of the Order CLICK HERE

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