TaxTMI 
TaxTMI 
2005 (12) TMI 449
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.... common issues are involved, all these appeals are disposed of by this common order. 2. The first ground of appeal of assessee is against reopening of assessment under section 147. 2.1 It is contended in the ground that the condition precedent for reopening of assessment is absent and hence assessment is bad in law. 3. At the time of hearing, this ground was not pressed and hence, the same is dismissed for want of prosecution. 4. The next ground of appeal by assessee for all the years is against treatment of income from lease rent received by assessee. 4.1 The assessee was carrying on hotel business at Bangalore. Since it was running into loss, the management was changed and new management decided to lease out the entire asset, as it would have been advantageous in the situation. Accordingly, the assessee entered into an agreement dated 1-6-1997 with Indian Hotels Company Ltd. (Taj Group) under which the hotel building etc. was given on lease for a period of 33 years. The lease was renewable/expandable for a further period of 33 years. The assessee was to receive licence fee, which was either minimum guaranteed or percentage of net sales, whichever is higher. The Ass....
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....scription to club 3,500 - 3,500 16. Entertainment expenses as in earlier year 9,500 - 9,500 17. Advertisement charges 8,350 8,350 - 18. Interest on purchase of car 30,000 - 30,000 19. Gratuity provided under section 40A(7) 47,794 47,794 - 20. Legal expenses 30,000 30,000 - Total 13,58,057 7,11,254 6,46,803 Learned CIT(A), after considering the argument of assessee and various case laws, upheld 50 per cent disallowance of driver's salary, bonus, gratuity, road tax, car insurance, security charges, staff welfare expenses and vehicle maintenance expenses. He also disallowed perquisite to Managing Director, expenses on flowers and plants and entertainment expenses, miscellaneous expenses, garden expenses, telephone expenses and subscription to club in its entirety. The assessee as well as the revenue are in appeal before us. 5.1 Learned counsel for assessee submitted that the assessee is a Limited Company. It was once a listed company at Bangalore Stock Exchange. The assessee has to fulfil its obligation legally and statutorily. As per the agreement, the assessee is entitled ....
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....of running the hotel himself has leased out the premises. Thus it is not running the hotel business. The assessee has leased the premises for a long period of 33 years. The lease is thereafter renewable for a further period of 33 years. Thus, the intention of assessee is clear, that is, to receive only rental income and not to carry on any business. Thus, the income is rightly treated as income from other sources. Once it is held that income is to be computed under the head 'Income from other sources', only expenses available is under section 57(iii) of the Act. As per section 57(iii), only such expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income is allowable. The words "wholly and exclusively for the purpose of making or earning such income" are narrower than the words 'wholly and exclusively for the purpose of business' appearing in section 37(1) of the Act. If the expenses are not for the purpose of earning the income, the same cannot be allowed. The expenses like perquisite to Managing Director, travelling expenses of Directors and others, security charges, vehicle maintenance expenses, advertisement expenses and general expe....
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.... to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business'; (d) beyond that no hard and fast rule can be laid down to explain what is meant by the word 'solely'. Hon'ble Gujarat High Court in the case of Smt. Virmati Ramakrishna v. CIT/Smt. Arundhati Balkrishna v. CIT [1981] 131 ITR 659 (Appendix) laid down following principles and propositions while entertaining a claim under section 57(iii) of the Act : "(i) in order to decide whether an expenditure is a permissible deduction under section 57(iii), the nature of the expenditure must be examined; (ii) the expenditure must not be in the nature of capital expenditure or personal expenses of the assessee; (iii) the expenditure must have been laid out or expended wholly and exclusively for the purpose of making or earning 'income from other sources'; (iv) the purpose of making or earning such income must be the sole purpose for which the expenditure must have been incurred, that is to say, the expenditure should not have been incurred for such purpose as also for anoth....
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.... CIT v. H.H. Maharani Shri Vijaykuverba Saheb of Morvi [1975] 100 ITR 67 laid down the law as under:- "The deduction which is permissible under sub-section (2) of section 12 of the Indian Income-tax Act, 1922, is an expenditure incurred solely for the purpose of making or earning the income which has been subjected to tax, and, for determining whether an expenditure is deductible, the nature of the expenditure has to be examined. The purpose for which the expenditure is incurred must be to earn the income. The connection between the expenditure and the earning of the income need not be direct. However indirect connection may be, there must be a connection or a nexus between the expenditure incurred and the income earned. If an assessee had no option except to incur an expenditure in order to make the earning of the income possible, then undoubtedly the exercise of that option is compulsory and any expenditure incurred by reason of the exercise of that option would come within the ambit of section 12(2). In the instant case, it was clear that the assessee had no other option except to incur expenditure in order to make the earning of an income possible and that the....
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....rovided with welfare activities. To maintain the office in its proper decorum, flowers and plants are to be put therein or nearby. The assessee has also to entertain its guests or the officials from the lessee. Hence, such entertainment expenses are also inevitable and is to be considered as incurred wholly and exclusively for earning the income. The assessee has also to visit places and hence, vehicle has to be maintained. Similarly, the assessee has also to communicate with several agencies as well as the lessee. For this purpose, telephone, telex expenses are also to be incurred. Other general expenses like advertisement, interest on purchase of car, rent for executive's residence are also spent out of necessity to indirectly facilitate or earning of the income. Insurance is also necessarily to be paid to effectively safeguard the assets. When the expenses are incurred which are either under compulsion or obligatory on the ground of commercial expediency, it is not for Assessing Officer to decide as to what can be the reasonability or necessity for the same. What is to be seen is whether such expenses are incurred wholly and exclusively for the purpose of earning the income. Hon....
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....uggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. A limited company, even if it does not carry on business, even if it derives income only from 'other sources', has to maintain its establishment so long as it is in operation and its name is not struck off the register or until the company is dissolved which means cessation of all corporate activities of the company. Irrespective of the question whether the activity of earning rental income and income from other sources is a business activity of the company, a limited company is to act through its employees, whatever may be the nature of income derived by it. It is necessary that the company should have proper staff to enable it to function properly. It has to maintain a registered office for which rent has to be paid for its continued existence. The limited company has to carry on its activities in regard to allotment of shares, transfer of shares and to record proper entries in proper registers, and file returns as required by the statute. It has to discharge its statutory obligations so long as it is in operation whether or not it carries o....