TaxTMI 
TaxTMI 
2025 (12) TMI 1580
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....n of income on 10-07-2023. Thereafter, after issuance of notice and calling for the necessary information and documentation, the assessment order was passed u/s. 147 r.w.s. 143(3) of the Act, vide order dt. 28-03-2024, wherein the AO has determined the assessed income at Rs. 29,48,080/-, disallowing expenses amounting to Rs. 3,01,988/- u/s. 37(1) of the Act, working out notional interest on advance given to the Directors amounting to Rs. 29,93,220/- and making a protective addition of Rs. 38,64,815/- in respect of transfer of property by way of gift to M/s.Vidya Vikas Education Trust. 3. The assessee thereafter carried the matter in appeal before the Ld.CIT(A), who has since set aside the findings of the AO and against the said order, the Revenue is in appeal before us. 4. The Ld. Sr.DR has been heard, who has relied on the findings of the AO, which read as under: "3. Disallowance of indirect expense claimed of Rs. 3,01,988/- During the year the assessee company claimed expenses of Rs. 3,32,149/- out of which finance cost is of Rs. 248, depreciation and amortization expense Rs. 29,913/- and other expense of Rs. 3.01,988/-, Since in the case there is no busin....
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.... rather company is incurring expense on different heads. Therefore notional interest @ 18% is charged on the advances given to the share holder. So the total interest income worked out to be 29,93,220/- which is added to the total income of the assessee as income from other sources and penalty u/s 270A is initiated for under reporting of income. Further more, in this case as per the details submitted by the assessee company one property of book value of Rs. 38,64,815/- was transferred to M/s Vidya Vikas Education Trust by virtue of a gift deed. The same gift deed is registered on 15.09.2018. The assessee company in AY 2020-21 has affected the said gift as donation to the said trust and claimed in profit and loss account. The said donation is disallowed in computation of Income for AY 2020-21. Since, the subject transaction is affected in F.Y, 2018-19, so the donation should be shown in AY 2019-20, accordingly it should be disallowed in profit and loss account. Therefore, the same addition is made in this year on protective basis." 5. Per contra, the Ld.AR has relied on the written submissions filed before the Ld.CIT(A), which reads as under: "GROUND NO. 1: DISA....
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.... Allow us to draw your attention to the provisions of section 37(1) of Income Tax Act, 1961 which reads as "Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Thus, it may be noted that following are the conditions for allowing expenses as a deduction u/s 37 (1): -Such expenditure should not be covered under the specific section i.e. sections 30 to 36; -Expenditure should not be of capital nature -The expenditure should have been incurred wholly and exclusively for the purpose of the business or profession; -The expenditure incurred should not be personal in nature. In the given case, the Appellant has incurred various expenses which are wholly and exclusively for the purpose of running its business. During the course of assessment proceedings vide letter dated 26.03.2024, the Appellant had provided t....
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....pellant maintains its registered office address at Filka Co-Operative Housing Society, Daftary Road, Opp. Railway Station, Malad (East), Mumbai 400097 which is taken on rent from Mrs. Neelam Lall for a nominal license fee of Rs 5,000/- per month plus GST as applicable. Even if the company is not earning immediate revenue, the premises are necessary for maintaining the company's operations and legal status and as a correspondence address. Rental payments by a business entity falls under the operating expenses. Therefore, the rent expenditure incurred is wholly and exclusively for the purposes of business and are allowable expenditure u/s 37 of the Income Tax Act, 1961. Copy of rent agreement between Neelam Sudhir Lall and the Appellant was attached as Annexure 7.2 to submission e-filed on 26.03.2024. Copy of submission e-filed on 26.03.2024 is attached above as Exhibit 5. (Refer Pg No 209 to 213 of Paper Book). C) Professional Fees of Rs 45,500/- A Company is liable to adhere to numerous statutory compliance requirements under various laws. These obligations necessitate engaging professional services to ensure timely and accu....
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....e company has never involved in activity which will create revenue. Rather the assessee company issued shares to Mr. Jesus Lall and the share subscribed money is taken by the director as loan. The company is not involved in any activity but it is a paper company only." It may be appreciated that one of the objects for which the Appellant Company was formed was with an objective to acquire real or leasehold estate. In the initial years of business, the company had purchased land at Survey No: 189/3, Kaman-Bhiwandi Road, Village Kaman, Taluka Vasai, District Thane 401202 on 29.10.2008. The ownership of the land can be verified from Note 5 of the audited financial statements attached above as Exhibit 1 (Refer Pg No 94 of Paper Book). Thus, the same reflects the intention of the Company to start a business activity. Hence, it cannot be said that the Appellant Company is a paper Company merely because the Appellant had not generated any revenue. Further, it may be appreciated that, it is not necessary to earn income for claiming deduction u/s 37(1) of the Act, what is important to claim deduction u/s 37(1) of the Act is that the expenditure should wholly & exclusively ....
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....e company has issued shares to Mr. Jesus Lall and Sh. Jesus Lall is holding 99.98% share of the company. The total subscribed amount as well as part of the reserve is given as advance to the same share holder. For the same no interest is charged, rather company is incurring expense on different heads. Therefore, notional interest @ 18% is charged on the advances given to the shareholder. So, the total interest income worked out to be 29,93,220/- which is added to the total income of the assessee as income from other sources." 2.3 Appellant's Contention 2.3.1. Addition of Notional Interest Income Concept of Real Income vs Notional Income The Ld. AO has made an ad-hoc addition at the rate of 18% on the closing balance of the interest-free unsecured loans & advances provided by the Appellant to Mr. Jesus Lall based on a notional arbitrary rate, (i.e., Rs 29,93,220/- being 18% of 1,66,28,990/-). As per the AO's own admission, "The total subscribed amount as well as part of the reserve is given as advance to the same share holder" i.e. interest free funds have been used for the purpose of advancing interest free loans and hence by making notio....
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.... commercial decision and AO cannot step in the shoes of a businessmen The Appellant had given an advance to Mr. Jesus Lall without interest on account of commercial exigencies during the course of business. As per the understanding between the parties, no interest is receivable by the Appellant on the said advance. It is a settled proposition of law that in what manner an assessee should conduct his business is best left to the discretion of the assessee and the Assessing Officer cannot sit in the arm chair of the businessman to decide, what should have been the income earned. If an assessee does not bargain to earn income, then an Assessing Officer cannot compel him to earn such income and cannot assume accrual of income, based entirely on his subjective notions as what constitutes fair return on investment. In business there cannot be certainty about earning of income and therefore business income cannot be assessed on notional basis. In our respectful submission, none of the provisions of the Income Tax Act authorize the Assessing Officer to assess notional or hypothetical income. The assessee places reliance on the case of CIT Vs. Oracle India Pvt. Lt....
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....r Pg No 237 to 243 of Paper Book). Copy of the ITR for AY 2020-2021 along with computation of income reflecting the disallowance of donation was attached as Annexure 9.2 to submission e-filed on 26.03.2024 is attached above as Exhibit 5 (Refer Pg No 244 to 326 of Paper Book). 3.2 Assessing Officers Contention The Ld AO has stated in the Assessment order that, "Furthermore, in this case as per the details submitted by the assessee company one property of book value of Rs. 38,64,815/- was transferred to M/s Vidya Vikas Education Trust by virtue of a gift deed. The same gift deed is registered on 15.09.2018. The assessee company in AY 2020-21 has affected the said gift as donation to the said trust and claimed in profit and loss account. The said donation is disallowed in computation of Income for AY 2020-21. Since, the subject transaction is affected in F.Y. 2018-19, so the donation should be shown in AY 2019-20, accordingly it should be disallowed in profit and loss account. Therefore, the same addition is made in this year on protective basis. 3.3 Appellant's Contention In the present case, the Ld. AO proposed to make a protective addition of....
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....nd examined the documents uploaded by the appellant at the time of filing of appeal. The appeal is being decided as below: 6.2 GROUND 1: DISALLOWANCE OF EXPENSES U/S 37 OF THE ACT. During assessment proceedings, the AO observed that the appellant company has not done any business during the year. It was also observed that it has incurred other expenses amounting to Rs. 3,01,988/- which consisted of audit fees, rent expenses, professional fee, property maintenance expenses and other similar expenses. Accordingly, he disallowed these u/s 37(1) of the Income Tax Act, 1961. In appeal the appellant has contested this disallowance. It has been stated that the company was formed in the year 2000. The expenses in question have been incurred to maintain its existence and corporate entity. Accordingly, it has been claimed that the same may be allowed. I have perused the whole situation. In addition to what has been stated by the appellant, it is observed that in the balance sheet it has share premium and accumulated losses. It seems that it has been doing some business in the past, although no business has been done during the year under appeal. Moreover, the expen....
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....sallowed the same on protective basis. However, no such addition has been made in the computation part of the assessment order. In appeal the appellant has contested this action of the AO. It has been contended that no such deduction or expenditure has been claimed. Moreover, no substantive addition has been made and without that there cannot be any protective addition. I am in agreement with the claim of the appellant. When something has not been claimed there is no question of its disallowance or addition. Moreover, in the absence of any addition in the computation of income, this so called addition is only academic and has no real value. Keeping in view of the same this ground of appeal of the appellant is allowed." 7. We have heard the rival contentions and perused the material available on record. Firstly, as regards expenses amounting to Rs. 3,01,988/- which have been disallowed by the AO u/s. 37(1) of the Act, we find that these expenses are in the nature of statutory audit fees, rent expenses, rates and taxes, professional fees and property maintenance expenses which have been incurred by the assessee and necessary documentation have been placed on record. The l....