1981 (8) TMI 89 - AT - Income Tax

Tribunal denies deduction for preliminary expenses in business income case.

The Tribunal upheld the decision to disallow certain expenditure claimed by the assessee for income from business. The disallowed expenses included ... - Issues:Claim of expenditure for income from business, disallowance of preliminary expenses, interpretation of objects clause for deduction of expenses, relevance of previous court decisions, commencement of business based on company's main objects.Analysis:The judgment revolves around the disallowance of certain expenditure claimed by the assessee in relation to income from business. The Income Tax Officer (ITO) had disallowed part of the expenditure on the grounds that the income was categorized as income from other sources. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the ITO's decision, specifically mentioning that the income in question was interest earned on a loan given by the company to one of its Directors against an equitable mortgage. Additionally, preliminary expenses totaling Rs. 795 were not allowed as the assessee had not initiated business activities at the time the loan was provided.The counsel representing the assessee argued that the act of giving loans was one of the company's stated objectives, thus justifying the deduction of preliminary expenses. The counsel referred to the objects clause of the company, highlighting clauses related to investment activities, money lending, and capital deployment. However, the Tribunal noted that even if money lending was an objective, it needed to be directly connected to the company's main business activities, such as manufacturing or trading, as outlined in the objects clause. The Tribunal emphasized that the loan was given merely as a temporary measure until the company commenced its primary business, thus not constituting the initiation of business activities.The Tribunal further analyzed previous court decisions cited by the counsel, emphasizing that the commencement of business must align with the main objects specified in the company's memorandum. The judgment distinguished cases where business activities were considered initiated before the actual commencement based on specific circumstances, which were not applicable in the current scenario. It was clarified that the company could only commence business in activities explicitly mentioned as main objects, not ancillary or incidental ones.Moreover, the Tribunal highlighted the Companies Act's amendment from October 15, 1965, which mandated a clear distinction between main and ancillary objects. The judgment clarified that companies formed before this amendment could only commence business in activities explicitly listed as main objects. Therefore, on the date of advancing the loan, the company could not be deemed to have commenced its business, leading to the rejection of the appeal and confirmation of the CIT(A)'s order disallowing the preliminary expenses as a deduction.