Business Expenses Expenses Incurred to Maintain Legal Status Till LiquidationWhether Allowable As Deduction

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The Tax Publishers Income Tax--Business Expenses Expenses Incurred to Maintain Legal Status Till Liquidation--Whether Allowable As Deduction CA. Nisha Bhandari section 37(1) provides for the deduction of all expenditures laid out or expended wholly and exclusively for the purposes of the business. Thus carrying on of business in the relevant year is one of the condition precedent for allowability of an expenditure. The learned author in the present write up identifies certain circumstances where expenditure held allowable even after stoppage of business activities. 1. Carrying on of business--One of the condition precedent for allowability of business expenditure In Sherwani Bros. Co. Ltd. v. CIT (1953) 23 ITR 51 (All),it was observed that the question of deduction of expenditure from business arises only if there is a business that is being carried on of which income has to be computed and the Income Tax Officer has to make an allowance for the expenditure incurred wholly and exclusively for the purpose of such a business. Where no business is carried on at all and no expense is incurred wholly and exclusively for the purpose of such a business, Section 37 would have no application. 2. Circumstances where expenditure held allowable even though business stopped In Hindustan Chemical Works Ltd. v. CIT (1980) 124 ITR 561 (Bom),it was observed that expenses relating to the holding on of assets is deductible where business is stopped. In Dy. CIT v. Ashik Wollen Mills Ltd. 2017 TaxPub(DT) 1000 (Mum 'A'-Trib) : (2017) 56 ITR (Trib) 184 (Mum 'A'-Trib), almost 12 years have passed since the assessee unit was lying closed and it could not settle its dues with the secured bankers till date matter/litigations were still pending with DRT/BIFR etc and litigations are going on. Thus under these peculiar facts and circumstances, it could not be termed and classified as temporary lull in the business as it was not possible for assessee to recommence its business even if it secures orders or so otherwise desires to restart its manufacturing unit, as the possession of the secured assets was with bankers and the same being a severe and serious disability. Therefore, no business expenses were deductible. However, AO was directed to allow the expenses like auditor fees and ROC fee, etc. incurred for meeting and complying with statutory obligations. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Income Tax--Business Expenses

Expenses Incurred to Maintain Legal Status Till Liquidation--Whether Allowable As Deduction

CA. Nisha Bhandari

section 37(1) provides for the deduction of all expenditures laid out or expended wholly and exclusively for the purposes of the business. Thus carrying on of business in the relevant year is one of the condition precedent for allowability of an expenditure. The learned author in the present write up identifies certain circumstances where expenditure held allowable even after stoppage of business activities.

1. Carrying on of business--One of the condition precedent for allowability of business expenditure

In Sherwani Bros. Co. Ltd. v. CIT (1953) 23 ITR 51 (All),it was observed that the question of deduction of expenditure from business arises only if there is a business that is being carried on of which income has to be computed and the Income Tax Officer has to make an allowance for the expenditure incurred wholly and exclusively for the purpose of such a business. Where no business is carried on at all and no expense is incurred wholly and exclusively for the purpose of such a business, Section 37 would have no application.

2. Circumstances where expenditure held allowable even though business stopped

In Hindustan Chemical Works Ltd. v. CIT (1980) 124 ITR 561 (Bom),it was observed that expenses relating to the holding on of assets is deductible where business is stopped.

In Dy. CIT v. Ashik Wollen Mills Ltd. 2017 TaxPub(DT) 1000 (Mum 'A'-Trib) : (2017) 56 ITR (Trib) 184 (Mum 'A'-Trib), almost 12 years have passed since the assessee unit was lying closed and it could not settle its dues with the secured bankers till date matter/litigations were still pending with DRT/BIFR etc and litigations are going on. Thus under these peculiar facts and circumstances, it could not be termed and classified as temporary lull in the business as it was not possible for assessee to recommence its business even if it secures orders or so otherwise desires to restart its manufacturing unit, as the possession of the secured assets was with bankers and the same being a severe and serious disability. Therefore, no business expenses were deductible. However, AO was directed to allow the expenses like auditor fees and ROC fee, etc. incurred for meeting and complying with statutory obligations.