If business not closed down, expenses allowed u/s 37(1) even if turnover was low as it was temporary lull which assessee was trying to revive – ITAT
ABCAUS Case Law Citation:
ABCAUS 3113 (2019) (08) ITAT
The instant appeal had been filed by the assessee against impugned order passed by the CIT(Appeals) in upholding disallowance of claim of revenue expenditure on the ground that no business activities was carried out by the assessee.
It was submitted that the assessee was an individual and was engaged in the business of computer software and hardware in his proprietorship firm. The assessee had been in this business since nearly 25 years and had a flourishing business for long period. However, later on due to stiff competition and poaching of his employees the business of the assessee had slowed down and could hardly procure any orders.
It was further submitted that the assessee had not closed his business and to maintain the set up, he had to incur expenses like salaries of the employees and other basic expenses. These expenses were bare minimum to run the set up and for looking for further business opportunities. The expenses like salary and wages were only for four employees who had been working with assessee since long and assessee had also incurred certain telephone expenses, etc.
It was submitted that business of the assessee firm was still in operation and even though assessee could only procure order for a very low amount it did not mean that assessee’s business had been closed down. Assessee was still making efforts to revive the business and is looking for procurement of orders.
It was the submission that the expenses claimed as per profit and loss account were factual and had been incurred during the course of the running of the business activities, therefore, same could not be disallowed mainly on the ground that assessee was not carried out any business activities.
It was also pointed out that in preceding assessment year also when assessee had a meagre sale and similar quantum of expenditure was incurred, expenses had been allowed by the Assessing Officer (AO).
On the other hand, the Revenue submitted that the assessee had no business as such and the only objective of claiming such expenses was that business loss could be offset rental income. The assessee had income from salary and income from house property and also business loss which was only on account of expenditure. Thus, it was contended that it was clear cut case of evasion of tax and therefore, order of the AO and CIT (A) should be confirmed.
The Tribunal observed that the assessee had started its business in information technology and software 25 years ago and since then, for many years assessee had shown huge turn over. However, due to huge competition and poaching of his employees, the turnover of the assessee from last few years had scaled down to a negligible level.
The Tribunal observed that the nature of expenditure debited to the profit and loss accountwere basically relating to establishment expenses which were mainly salary and wages given to four employees and other routine expenses which were bare minimum for the office establishment and for surviving the business entity.
If business not closed down, expenses allowed u/s 37(1) even if turnover is low
The Tribunal stated that if the business of the assessee had not been closed down then, even if the turnover was low, it could not be said that expenditure incurred was not wholly and exclusively for the purpose of business. If the expenses had not been found to be for personal nature or non-genuine, or was not in the nature of capital expenditure, then no disallowance could be made u/s 37(1).
The Tribunal opined that it was not a case of cessation of business albeit it was a case of temporary lull in the business, which assessee was trying to revive. Moreover the Tribunal noted that in the earlier year on exactly similar set of facts and circumstances, the expenditure claimed by the assessee had been allowed by the AO in scrutiny proceedings u/s 143(3).
Accordingly, the Tribunal allowed the expenses claimed by the assessee.
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