Entire Business Expenses Disallowed Despite Active Painting Business: ITAT Restricts Disallowance to 20%, Partly Allowing Appeal [Read Order]

The Kolkata Bench of Income Tax Appellate Tribunal ( ITAT ) partly allowed the appeal and restricted the disallowance to 20% in a case where entire business expenses were disallowed despite the assessee being actively engaged in the painting business.

Ishvatham,appellant-assessee, carried on the business of buying and selling paintings for several years. In the year under review, no sales were made, though expenses were incurred, including business expenses of Rs. 2,60,003, foreign travel of Rs. 7,79,968, club subscriptions of Rs. 72,864, travel expenses of Rs. 1,63,594, and motor car expenses of Rs. 14,88,543.

During the year, the assessee earned commission income of Rs. 1,23,125 from painting sales. On appeal, the Commissioner of Income Tax (Appeals)[CIT(A)] upheld the Assessing Officer’s (AO) order.

A single member bench of Rajesh Kumar (Accountant Member) after considering the rival submissions and reviewing the record, observed that the assessee was engaged in the business of painting. During the year under review, the assessee had earned commission income of Rs. 1,23,125 and had incurred various expenses under multiple heads, which were claimed in the profit and loss account.

The AO had disallowed the entire claim on the ground that no bills or vouchers were produced to show that the expenses were incurred wholly and exclusively for business purposes.

On examining the assessment order for the year 2012-13, the tribunal noted that the assessee had purchased six paintings worth Rs. 21,85,000 from six individuals and sold paintings to seven individuals/entities. This indicated that the appellant was actively engaged in business activities, and the AO’s claim that no business was carried out was incorrect.

The appellate tribunal further observed that the absence of sales in the year under review did not justify disallowing all expenses, as the appellant maintained an establishment to conduct such business activities.

The tribunal also reviewed the nature of the expenses and found them to be the type normally incurred in any business. While income tax law allows disallowance of expenses that are excessive, unreasonable, or inadequately documented, a complete disallowance was considered inappropriate.

Accordingly, the bench concluded that a reasonable portion of the expenses could be disallowed. It set aside the order of the CIT(A) and directed the AO to restrict the disallowance to 20% of the total expenses claimed under various heads.

Therefore the appeal of the assessee was partly allowed.

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