Tribunal allows appeal of finance company, directs deletion of disallowed salary deduction.

The Tribunal allowed the appeal of the assessee, a private limited company engaged in finance, hotel, and real estate business, by directing the Assessing Officer to delete the disallowed deduction of Rs. 1,50,00,000 towards salary expenditure. The Tribunal concluded that since the company was solely involved in financial services during the relevant year and had not commenced hotel business activities, the income earned should be treated as business income. Therefore, all expenses incurred for earning such income, including salary expenditure, were allowed as deduction.

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Issues:
- Disallowance of deduction towards salary expenditure incurred by the assessee

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax(Appeals) for the assessment year 2012-13, where the main issue was the denial of deduction for salary expenditure amounting to Rs. 1,50,00,000. The assessee, a private limited company engaged in finance, hotel, and real estate business, had initially admitted income of Rs. 1,09,25,509 for the year. The Assessing Officer disallowed expenditure of Rs. 2,06,42,360 as the company had only earned interest income and had not started operations related to hotel and resort business. The Commissioner allowed some expenditure but disallowed the salary expenditure. The argument presented was that since the company was engaged only in finance business during the relevant year, all expenses should be allowed as deduction. The contention was that the interest income earned was in the nature of business income. However, the opposing view was that only expenditure related to earning interest could be allowed as deduction under the head "Income from other sources."

The Tribunal observed that during the relevant assessment year, the company was solely involved in financial services despite having hotel business objectives in its Memorandum of Association. As the company had not commenced hotel business activities, it had deployed funds to earn interest income. Since the business conducted was financial services, the income earned had to be treated as business income, and all expenses incurred for earning such income should be allowed as deduction. The Tribunal found no evidence to suggest any other business activity by the company during the relevant year. Consequently, the Tribunal directed the Assessing Officer to delete the addition of Rs. 1,50,00,000 towards salary expenditure, thereby allowing the appeal of the assessee. The judgment was pronounced on 27th August 2018 in Chennai.

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