TaxTMI 
TaxTMI 
2026 (9) TMI 1143
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.... Year 2022-23 on 29.11.2022 declaring total income of Rs. 1,27,76,240/- and claimed refund of Rs. 3,30,40,420/- against total taxes paid 3,84,61,635/- on account of TDS. The case was selected for Scrutiny under CASS and a notice u/s 143(2) of the Income Tax Act, 1961 ('the Act') was issued to the assessee on 31.05.2023. 2.1 During the year, the AO noted that A.T. Kearney Limited ('Head Office') had entered into a 'business transfer agreement' with A.T. Kearney Consulting (India) Private Limited ('ATK Consulting'), a wholly owned subsidiary of the Head Office for transferring the entire business of its India Branch Office on a going concern basis w.e.f. 1 April, 2021. The AO further noted the details of carrying value of assets and liabilities as on 31 March 2021 that were transferred as under: Assets Amount (in lacs) Property, plant and equipment 221.44 Loans and advances (except advance tax recoverable and advance with statutory authorities) 419.50 Trade receivables 7,090.72 Cash and bank balances 1,296.78 Other current assets 2,213.53 11,241.97 Liabilities Provisions 2,573.58 Trade payables 672.99 Oth....
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.... connected to its PE shall be allowed to be set-off against the expenses connected with such PE. In this regard, the company submits that the business expenses referred by your goodself in the above question are the expenses incurred to maintain the existence of branch office in India, such expenses are effectively connected with the PE of A.T. Kearney Limited. The interest on income tax refund earned by the assessee is on the refund of excess tax deducted. Such tax is deducted upon receipt of income earned by ATKBO, therefore it is evident that such income tax refund it is connected with the PE. Accordingly, interest earned of such refund shall be considered as connected with the PE. In view of the above, the company shall be allowed the set-off the business expenses against the income of income-tax refund. Further, it is humbly submitted that the assessee is set up as a branch office of a foreign company in India and has to incur expenditure to keep itself afloat and maintain its existence. Upon perusal of the financial statements of the Company for FY 2021-22 (enclosed as Annexure-6), your goodself may appreciate that the expenses debited to the Profit....
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....ew of taxing the interest on refund at a rate of 15% as per India-UK DTAA....." (Emphasis supplied by us) 2.6 The AO did not accept of above explanation of the assessee and held that from a reading of section 28(i) of the Act, it was clear that business expenses can be allowed only when the business was carried on by the assessee, at any time during the previous year. The AO further, held that from the facts of the case post the 'business transfer agreement', it was clear that the present case could not be termed as 'Temporary Lull in business' / 'Temporary Slump' / 'Slowdown' and it was a clear case of 'Cessation of business'. The AO further noted that judicial precedents also make this distinction clear which have held that the expenses incurred during the temporary lull period have been allowed but the expenses incurred after the cessation of business could not be allowed as an expense. The AO further noted that in the present set of facts, the assessee had transferred its entire business on a going concern basis, which clearly meant that its business had ceased to exist, w.e.f. from 01st April, 2021 and therefore, in terms of section 28(i) the expenses was not allowable a....
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....s. Here the assessee has claimed expenses pertaining to its Branch office from the interest income earned by its Head Office, which is not justified. Even, going forward the assessee shall only offer to tax any income in a case where it as a PE in India. 6.9 From the above fact finding, it is clear that the present case cannot be termed as 'Temporary Lull in business' / 'Temporary Slump' / 'Slowdown' as it is a clear case of 'Cessation of business'. The judicial precedents also make this distinction clear and the expenses incurred during the temporary lull period have been allowed, however, expenses after the cessation of business cannot be allowed as an expense. 6.13 As in the present set of facts, the assessee has transferred its business on a going concern basis, which clearly means that its business had ceased to exist, w.e.f. from 01st April, 2021 only. Therefore, in terms of section 28(i) the expenses claimed by it are hereby disallowed for the reasons cited in detail, as above. 6.14 Regarding the assessee's alternative argument it being a non-resident which is subject to 15% tax rate under the India UK DTAA. I have considered the argument, however,....
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....e facts, and in the circumstances of the case, and in law, the Appellant craves to prefer an appeal against order dated 27 January 2025 passed by the Deputy Commissioner of Income Tax, Circle 1(1)(1), International Tax, New Delhi (hereinafter referred to as the 'Ld. Ao'), under Section 143(3) r.w.s 144C(13) of the Income-tax Act, 1961 ('the Act'), on the grounds as set out herein: The following grounds are independent of, and without prejudice to one another: "1. Grounds pertaining to disallowance of expenses amounting to INR 2,72,03,648/- relates to operational and administrative expenses incurred for maintaining the existence of branch office in India, thus shall be allowed as business expenditure under the provisions of the Act 1.1 On the facts and circumstances of the case and in law, the Ld. AO has erred in unjustifiably making disallowance of business expenses of INR 2,72,03,648/- due to cessation of business of the Appellant. 1.2 The Ld. AO has erred in holding that in absence of business or profession carried on at any time during the previous year, income cannot be chargeable to tax under the 'profit and gains on business or professi....
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....own. Thus, while the Appellant had no undertaking the Appellant did exist as a taxable entity on which it was due to earn income being interest on income tax refunds amongst other collectible statutory dues. XXXXXXX Legal Submissions: 7. In the present appeals the ground of challenge that arises is that the Assessee cannot be disallowed expenses to maintain its branch office in India despite there being no current business activity. In this regard the following submissions are made: a. It is a settled proposition of law that expenditure incurred for maintaining the corporate existence of an assessee and preserving its establishment is allowable, even where no active business operations are carried out during the relevant year. b. Courts have consistently held that expenses incurred for maintaining the legal and regulatory existence of an entity cannot be disallowed merely because business activity was not carried on during the year. c. In this regard the following decisions are relied upon: i. ACIT, Circle 25 (2) vs. Tulip Star Hotel Ltd, ITA No. 4387/Del/2017-In the present this Hon'ble Tribunal allowed expenses incurred....
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....ed as follows: "The expression 'for the purpose of business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide: it may take in not only the day-to- day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for preservation of business and for protection of its assets and property from expropriation, coercive processor assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on a business; it may comprehend many other acts incidental to the carrying on of a business." (emphasis supplied) 16. Continuous correspondences between the appellant and ONGC with regard to supply of manpower for oil drilling purposes and its unsuccessful bid in 1996 demonstrates various acts aimed at carrying on business in India which unfortunately did not fructify in procuring a contract. 17. In this factual backdrop, the High Court erred in holding that the appellant was not carrying on business as it had no subsisting contract with ONGC during the relevant....
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....ions of the Hon'ble High Court and the Supreme Court cited above the appeal of the Assessee be allowed." 7. On the other hand, the Ld. CIT DR supported order of the AO/Ld. DRP. 8. We have heard both the parties and perused the material on record. As noted above, the AO added a sum of Rs. 2,72,03,648/- towards 'expenses disallowed due to cessation of branch office' against the interest income of Rs. 3,99,79,892/- received by the assessee from income tax refunds. The AO in view of the fact that during the year, A.T. Kearney Limited ('Head Office') had entered into a business transfer agreement with A.T. Kearney Consulting (India) Private Limited ('ATK Consulting'), a wholly owned subsidiary of the Head Office for transferring the entire business of its India Branch Office on a going concern basis w.e.f 1 April, 2021 held that the business of the assessee could not be termed as 'Temporary Lull in business' / 'Temporary Slump' / 'Slowdown' as it was a clear case of 'Cessation of business' and thus said expenses was not allowable. Further, the AO relied upon various case laws in support of his findings as referred above. On the other hand, the Ld. AR submitted that the fact th....
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....xpenditure of the total expenditure amounting to Rs. 2,72,03,648/- disallowed by the AO was incurred for the continuation of business in respect of the pending litigation related to the Branch Office or otherwise. In this regard, the Hon'ble Supreme Court of India in the case of Pride Foramer S.A. v. Commissioner of Income-tax(supra) underlined that the expression 'for the purpose of business' is wider in scope than the expression 'for the purpose of earning profits' and would also encompass in its fold "many other acts incidental to the carrying on of a business", which is very wide in its scope. In this regard, the relevant observations of the Hon'ble Apex court in the said case are reproduced as under: "15. The word 'business' has a wide import and connotes some real, substantial and systemic or organised course of activity or activity with a set purpose. Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax [1954] 26 ITR 765(SC)/(1954) 2 SCC 546. In CIT v. Malayalam Plantations Ltd. [1964]53 ITR140 (SC) this Court further underlined that the expression 'for the purpose of business' is wider in scope than the expression ....