2020 (10) TMI 270 - AT - Income Tax

Tribunal affirms deductions for financial services expenses under sections 36(1)(iii) and 37(1)

Assistant Commissioner of Income Tax, Corporate Circle 6- (OSD), Chennai Versus M/s. Sunstar Hotels And Estates Pvt. Ltd.

The Appellate Tribunal upheld the Commissioner of Income Tax (Appeals)' decision to allow the assessee's claimed expenditures for assessment year 2016-17, ... Disallowance of expenditure u/s. 36(1)(iii) - Disallowance of expenditure u/s. 37(1) r.w.s. 57(iii) - CIT-A deleted disallowance - As per CIT-A assessee business was of provision of financial services and hence held that the pre-commencement expenses were allowable - Whether CIT(A) ought not to have allowed entire business expenditure against interest income without examining the nature of expenses ? - HELD THAT:- We find that the Ld. CIT(A) has also taken cognizance of the fact that during the assessment year 2016-17, the assessee has changed the main object as business and removed the object of hotel business from the Memorandum of Association Since the business of the assessee company during the relevant assessment year was only financial services, the income earned during the relevant assessment year ought to be assessed as business income and the entire expenditure incurred by the assessee for earning such income has to be allowed as deduction. Needles to mention, nothing on record is before us to suggest that the assessee company was indulging in any other business activity during the relevant assessment year. Therefore we are of the considered view that the expenditure incurred by the assessee towards salary has also to be allowed as deduction while computing the business income of the assessee for the relevant assessment year. Accordingly we hereby direct the Ld.AO to delete the addition - Decided in favour of assessee. Issues:1. Disallowance of expenditure u/s. 37(1) and u/s. 36(1)(iii) for assessment year 2016-17.2. Whether the business activity of the assessee justifies the claimed expenditures.3. Interpretation of the main object of the assessee company and its impact on allowable deductions.Analysis:The appeal before the Appellate Tribunal ITAT Chennai involved the disallowance of certain expenditures by the Assessing Officer (AO) for assessment year 2016-17. The assessee, engaged in financial services, had claimed deductions for various expenses including foreign travel expenditure and salary to directors. The AO disallowed these expenditures under sections 37(1) and 36(1)(iii). The Commissioner of Income Tax (Appeals) allowed the entire expenditure claimed by the assessee, relying on a previous tribunal decision in the assessee's favor for assessment year 2012-13.The Revenue filed an appeal against the CIT(A)'s order, contending that the disallowance of expenditures was contrary to law and facts. The Revenue argued that the CIT(A) erred in deleting the disallowance of expenditures under sections 36(1)(iii) and 37(1) based on the earlier tribunal decision for assessment year 2012-13. The Revenue also challenged the CIT(A)'s interpretation of the assessee's business as provision of financial services and the allowance of pre-commencement expenses without proper examination.During the Tribunal proceedings, it was noted that the assessee had shifted its main business object to financial services and had not engaged in hotel business activities during the relevant assessment year. The Tribunal upheld the CIT(A)'s decision, emphasizing that the assessee's business during the assessment year was financial services, and thus, the claimed expenditures were allowable deductions. The Tribunal dismissed the Revenue's appeal, stating that there was no substantial change in facts and law, and the CIT(A) had correctly followed the earlier tribunal order.In conclusion, the Appellate Tribunal upheld the CIT(A)'s decision to allow the assessee's claimed expenditures, considering the nature of the assessee's business activity during the assessment year and the applicable legal provisions. The Tribunal dismissed the Revenue's appeal, affirming the allowance of deductions for the assessee's financial services business.