ITAT rules tax deduction allowed on business expenses until liquidation of the firm

ITAT rules tax deduction allowed on business expenses until liquidation of the firm

Allows the assessee's appeal by holding that disallowance of municipal expenses and security charges are not sustainable

The Ahmedabad bench of the Income Tax Appellate Tribunal (ITAT) has held that expenses incurred for business are allowable as a deduction until the actual liquidation of the firm.

The assessee Annapurna Polymers Pvt. Ltd challenged the August 2016 order passed by the Principal Commissioner of Income Tax (Appeals) under the Income Tax Act, 1961 for the Assessment Year 2012-2013.

The appellant company was in voluntary liquidation by a resolution passed in its March 2014 general meeting. The company claimed a tax deduction on municipal taxes of Rs.13,98,8737 and security charges of Rs.5,54,4647.

But the expenditure claimed by the assessee was not allowed under the IT Act by the Assessing Officer (AO). The AO held that as the assessee company did not carry any business activity during the previous year, the income earned was taxable under the 'Income from other Sources'. The expenditure was not to earn interest, hence the claim was disallowed.

The PCIT)A) noted that since the assessee was in voluntary liquidation, the case was squarely covered by the decision in the Vijaylaxmi Sugar Mills Ltd. vs. CIT wherein it was held that expenses incurred (when the assessee was in liquidation) had nothing to do with the business of the assessee. It was submitted that the company was continuing and its name was not struck from the Register of Companies.

The profit and loss account showed revenue of Rs.17,23,77,975 from operations earned during the impugned year, which included the sale of the products. The statement also reflected expenses claimed against the revenue totaling Rs.15,98,83,984, including the material cost of Rs.14.94 crores and employee, finance, and depreciation costs.

The ITAT bench comprising Madhumita Roy (judicial member) and Annapurna Gupta (accountant member) observed that the assessee was carrying on its business during the year and also incurred several expenses. But the revenue department disallowed the deduction based on the fact that the assessee company went into voluntary liquidation in March 2014.

However, the tribunal noted that the assessee company was not into liquidation in the impugned year but a year later. Thus, it allowed the appeal of the assessee and held that the disallowance of municipal expenses and security charges was not sustainable.