2020 (7) TMI 401 - HC - Income Tax

High Court clarifies Income Tax Act expenses interpretation & financial services income classification

The Madras High Court addressed issues concerning the interpretation of expenses under Section 37 of the Income Tax Act and the classification of income ... Allowable business expenses u/s 37 - main object of the company was hotel business - HELD THAT:- Factual position needed to be considered, as the assessee company, though was incorporated on 17.2.2006, till the financial year 2010-11, did not enter into its hotel business, which was the main object, for which, the assessee company was incorporated. Since the impugned order passed by the Tribunal did not give any independent reasons for allowing the assessee's appeal to follow the earlier decision in the assessee's own case, which order now stands confirmed because the appeal filed by the Revenue before this Court having been withdrawn on the ground of low tax effect, necessarily the factual position needs to be adjudicated by the Tribunal as it is the last fact finding forum in the hierarchy of remedies available under the Act. Tax case appeal is allowed, the impugned order is set aside and the matter is remanded to the Tribunal for a fresh consideration in accordance with law. Issues:1. Interpretation of expenses under Section 37 of the Income Tax Act2. Classification of income earned from financial services as business income3. Impact of altering memorandum of association on expenses under Section 37Analysis:1. The appeal before the Madras High Court involved the interpretation of expenses under Section 37 of the Income Tax Act, 1961. The Revenue raised questions regarding the allowance of expenses not directly related to the business as business expenses. The Tribunal had allowed the assessee's appeal based on a previous order, prompting the Revenue to challenge the decision.2. Another issue raised in the appeal was the classification of income earned from financial services as business income. The Revenue contested that the main object of the company was hotel business, which had not commenced during the assessment year in question. The Tribunal's reliance on a previous order in the assessee's case was a point of contention, leading to the appeal before the High Court.3. The alteration of the memorandum of association by the assessee, removing hotel business as a main object with effect from a later date, was also a significant aspect of the case. The Revenue argued that this change was not applicable to the assessment year under consideration. The High Court, after considering the arguments presented, set aside the impugned order and remanded the matter to the Tribunal for fresh consideration in accordance with the law, leaving the substantial questions of law open for further examination.