ITAT allows guest house maintenance charges incurred to promote business activities

Saurashtra Cement Limited v DCIT (ITAT Rajkot)

In a recent ruling, the Income Tax Appellate Tribunal (ITAT), Rajkot heard two appeals filed by Saurashtra Cement Limited relating to assessment years (AY) 2014-15 and 2015-16. These appeals were directed against separate orders passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Center (NFAC), Delhi, which arose out of assessment orders passed by the Assessing Officer Assessment (AO) under Section 143(3) of the Income Tax Act, 1961.

Both appeals, identified under ITA numbers 362/Rjt/2023 and 363/Rjt/2023, faced filing delays – 13 days and 12 days respectively. The company filed a motion asking the Court to accept the delay, claiming sufficient cause existed due to disputes over legal ownership of a property. The property in question was in the unauthorized possession of relatives of the former president of the company. Initially, the company chose not to appeal, but later decided to do so after realizing the ownership issue had been resolved in its favor.

Saurashtra Cement’s lawyer argued that the delay occurred while the company was in the process of gathering the necessary documents to support its legal ownership claim, and therefore requested that the delay be condoned in the interest of justice .

However, Revenue’s senior ministerial representative objected to the application, arguing the company had not sufficiently explained the delays, suggesting the appeals should not be allowed.

After considering both arguments, the ITAT decided to accept the delay, admitting both appeals for hearing. Since the issues raised in both appeals were identical, the Tribunal consolidated the cases for a consolidated order.

In ITA main case No. 362/Rjt/2023, the central issue revolved around the disallowance of maintenance charges of the Mumbai guest house amounting to ₹7,71,084 by the agent of ‘assessment. The AO had noted that the guest house was occupied by relatives of the ex-president and the expenses incurred were not for business purposes. The AO disallowed these expenses, stating that they constituted personal expenses.

Saurashtra Cement, dissatisfied with the decision of the AO, took the matter before the Ld. CIT(A), which upheld the decision of the AO. The CIT(A) reiterated that the expenses were indeed not commercial in nature, especially since the company had lost a court case regarding the ownership of the guest house.

The company’s legal counsel countered that the guest house legally belonged to Saurashtra Cement and that maintenance expenses were necessary for its operation, arguing that these were legitimate business expenses. The lawyer cited legal precedent, saying businesses are entitled to claim deductions for expenses incurred to maintain properties they legally own, regardless of whether they are occupied by relatives of former executives.

On the other hand, the Revenue representative reaffirmed the AO’s position, reiterating the reasons for disallowing the expenses as personal and not professional.

After careful deliberation, the ITAT considered the evidence and arguments of both parties. The Tribunal highlighted the legal ownership of the guest house by Saurashtra Cement during the assessment years in question, noting that the maintenance costs incurred were justifiable as business expenses.

The ITAT also referred to established legal principles that allow businesses to claim deductions for voluntarily incurred expenses that promote business activities and profitability. Citing a Supreme Court ruling in the case Sasoon J. David and Co. (P) Ltd.the Court reiterated that such expenses should be authorized when incurred for the business.

Therefore, the Tribunal directed the Assessing Officer to authorize the expenditure for the years 2014-15 and 2015-16, thereby overturning the earlier disallowances made by the AO. As a result, the appeals filed by Saurashtra Cement Limited were allowed, marking an important decision in favor of the company.

The order was publicly announced in open court on September 9, 2024, highlighting the Court’s recognition of the legitimacy of the company’s claims regarding maintenance expenses.

FULL TEXT OF THE ORDER OF ITAT RAJKOT

Subtitled two appeals filed by the assessee, relating to Assessment Years (AY) 2014-15 and 2015-16, both are directed against the separate orders passed by the learned Commissioner of Income Tax (Appeals ), National Faceless Appeal Centre, Delhi (for short “Ld. CIT(A)/NFAC”), which in turn arise from separate assessment orders issued by the Assessing Officer (for short, “the AO”) under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).

2. The two appeals filed by the assessee in ITA Nos. 362/Rjt/2023 and 363/Rjt/2023 are barred by 13 days and 12 days respectively. The assessee filed a petition condoning the delay, requesting the bench to accept the delay. The contents of the two requests for excuse for delay are similar and identical.

3. Learned counsel for the assessee contended that the assessee had given sufficient reasons in his plea seeking excuse for the delay, stating that the legal ownership of the property was in dispute and its unauthorized possession belonged to relatives from the former president of the company. The company had initially decided not to appeal this issue before the Hon’ble ITAT but it was noticed and subsequently realized that the issue relating to legal ownership of the property had been decided in favor of the assessee company and the property was sold by the assessee company during AY.2015-16. The company, after gathering the documents relating to legal ownership, decided to appeal to the Court and in this process, a delay of 13 days occurred, which can be tolerated in the interest of justice .

4. However, the learned Principal Departmental Representative (Ld. Sr. DR) of Revenue contended that the assessee had not explained sufficient cause in both the appeals and, therefore, the delay should not be condoned.

5. We have heard both parties on this preliminary issue and noted that the assessee has explained sufficient cause in the application for condonation for delay as stated above. Therefore, in view of the reasons mentioned in the two applications for excuse for delay, we condone the delay of 13 days and 12 days respectively in filing these two appeals and admit these two appeals for hearing.

6. The issues in dispute in these two appeals being common and identical; therefore, we have consolidated these two appeals and heard them together, and a consolidated order is being adopted for convenience and brevity. The grounds of appeal as well as the facts reported in ITA No. 362/Rjt/2023 were taken into consideration to decide these two appeals. in mass.

7. The grounds of appeal raised by the assessee as per ‘typical case’ in ITA No. 362/Rjt/2023 are as follows:

“1. The learned Assessing Officer erred in law as well as on facts in disallowing the Mumbai Guest House maintenance charges of Rs.7,71,084/- and the learned CIT(A) , NFAC made a mistake in confirming this.

8. The facts of the case, which may be stated quite briefly, are as follows: During the assessment proceedings, the AO observed that in the accounting notes (No. 12), the auditor has pointed out that the assessee company had incurred expenditure on maintenance etc. for a guest house in Mumbai amounting to Rs.7,71,084/-. The guest house was occupied by relatives of the company’s former president. Therefore, the company filed a suit in court, but it lost in the suit filed in court. Expenses incurred by the business are not for business purposes. The AO stressed that the ex-president’s relatives benefit from the benefit of the guest house. In these circumstances, the amount of Rs. 7,71,084/- was disallowed by AO as personal and non-business expenses.

9. Aggrieved by the order of AO, the assessee appealed the matter before the Ld. CIT(A) which confirmed the action of AO. The Ld. CIT(A) observed that the AO had disallowed the said expenses of Rs.7,71,084/- in the assessment order declaring them as non-business/personal expenses and also pointed out that the company had lost in the lawsuit filed in court. regarding the ownership of Guest House Mumbai.

10. Aggrieved by the order of Ld. CIT(A), the assessee is in appeal before us.

11. The Lord. Learned counsel for the assessee pleaded that during the year under consideration, the guest house was occupied by the relative of the former chairman of the assessee company, however, the legal owner of the property is the company assessed, therefore the assessee company had to incur the expenditure on maintenance of the guest house, therefore, the expenditure incurred on the maintenance of the guest house to the tune of Rs.7,71,084/- should be authorized because it is a business expense. Thus, Ld. Learned counsel contended that since the legal ownership of the guest house lies with the assessee company and therefore the assessee company has to maintain the guest house and has therefore incurred expenses for the maintenance of the guest house to the tune of Rs.7,71,084/-, which should be allowed.

12. On the other hand, the learned Principal Ministerial Representative (ld. Sr. DR) for Revenue has mainly reiterated the stand taken by the Assessing Officer, which we have already noted in our previous paragraph and which is not not repeated for brevity.

13. We have heard both the parties and carefully considered the arguments made on behalf of the assessee along with the materials furnished and the jurisprudence relied upon, and have considered the facts of the case including the findings of the learned Magistrate. CIT(A) and other documents placed on file. We find that the legal ownership of the guest house was with the assessee company during the assessment year, and the assessee company incurred expenditure for the maintenance of the guest house, during the assessment year under consideration, to the extent of Rs.7,71,084/-, which is for the purpose of the company, hence it should be allowed. It is also a well-settled principle that it is generally for the assessee to decide whether any expenses are to be incurred in the course of his business. In the matter of Sasoon J. David and Co. (P) Ltd. v. CIT, 118 ITR 261 (SC), the Hon’ble Apex Court held that the expenses can be incurred voluntarily and without any necessity and if they are incurred for promoting the business and for earning profit, the assessee can claim a deduction for this. Therefore, we find that for AY.2014-15, the assessee company incurred expenditure to the extent of Rs.7,71,084/- and for AY.2015-16 to the extent of Rs.5,03,091/-, hence , we find that the expenditure incurred during the two assessment years is for commercial purposes and hence should be allowed to the assessee company. Therefore, we direct the AO to sanction the expenditure on maintenance of the guest house for AY.2014-15 and for AY.2015-16. Therefore, the additions made by the AO in AY.2014-15 and 201516 should be deleted.

14. In the result, both the appeals filed by the assessee are allowed.

The order is pronounced in public hearing on 09/09/2024