1992 (11) TMI 51 - HC - Income Tax

High Court allows deduction of business expenses for non-operational year

The High Court allowed the petitioner's claim for deduction of expenses in the arrack and brandy business for the assessment year 1984-85. The court held ... Business Issues:Assessment of allowable expenses in arrack and brandy business for the assessment year 1984-85.Analysis:The petitioner, a firm, filed its return for the assessment year 1984-85 declaring a loss of Rs. 1,41,960. The Income-tax Officer disallowed the deduction claimed by the petitioner as expenses to the extent of Rs. 1,91,040 in arrack and brandy business. The petitioner filed a revision under section 264(1) of the Income-tax Act, 1961, which was rejected. The main dispute was whether the petitioner could claim the expenditure incurred for obtaining a loan and interest on the loan as expenses during the year 1984-85. The assessing authority took the view that the petitioner's claim cannot be allowed as no arrack and brandy business was carried on by it during the relevant year of assessment.The petitioner argued that even though it could not carry on the business in buying and selling arrack and brandy during the relevant assessment year, it was continuously in business as it had participated in an auction for the business in the previous years and the subsequent year. The petitioner contended that it should be considered as carrying on the business since it had to participate in the auction before March 31, 1984, to conduct the business in the following assessment year. The petitioner relied on the decision of the Supreme Court in CIT v. Sarabhai Management Corporation Ltd. to support its contention.Additionally, the petitioner cited a decision of the Allahabad High Court in CIT v. Expanded Metal Manufacturers, where a similar claim for deduction of interest paid on a loan for starting a new business was allowed even though the business had not started functioning during the assessment year. The High Court found merit in the petitioner's contention and reliance on the decisions cited. It noted that the assessment was assessee-wise, and since the petitioner had to participate in the auction during the relevant assessment year and incur expenses for that purpose, it was entitled to claim deduction for the amount paid as interest for raising the loan during the assessment year.In conclusion, the High Court set aside the assessment order that refused the petitioner's claim regarding allowable expenses in arrack and brandy business for the assessment year 1984-85. The assessing authority was directed to pass a fresh assessment order in light of the findings in the judgment, allowing the petitioner's claim for deduction of the amount paid as interest for raising the loan during the relevant assessment year.