IMPORTANT POINT
Expenditures must be incurred wholly and exclusively for the business of the assessee to qualify as deductible business losses under Section 37(1) of the Income Tax Act, 1961.

JUDGMENT :

LAXMI NARAYANA ALISHETTY, J.

The present appeal has been filed under Section 260-A of Income Tax Act, 1961 (for short, the “Act, 1961”) assailing the order passed by Income Tax Appellate Tribunal, Bench-B, Hyderabad (for short “Tribunal”) in ITA No.148/Hyd/2005, dated 08.02.2006 for the Assessment Year 1999-2000. Vide impugned order, dated 08.02.2006, the Tribunal allowed the appeal filed by the respondent herein setting aside the order of the Commissioner of Income Tax (Appeals) II, Hyderabad (for short, ‘CIT(A)’), dated 20.12.2004.

2. Heard Sri S.Ravi learned senior counsel representing Ms. K.Prabhavathi, learned counsel for appellant and Sri Vijhay K Punna, learned standing counsel for Income Tax Department appearing on behalf of the respondent.

3. The brief facts leading to filing of present appeal are as under:

4. The appellant-company was incorporated on 19.12.1997 for carrying on business of consultants and advisors for supply of industrial computer software systems for use in oil, gas, water pipelines etc. The appellant filed its return on 24.12.1999 for the assessment year 1999-2000 declaring a loss of Rs.55,68,141/-. The said return was processed under Section 143(1) of the Act, 1961 on 29.12.2000 and a refund of Rs.4,194/- was issued to the appellant company.

5. The case of the appellant was selected for scrutiny and notices have been issued under Section 143(2) of the Act, 1961 to the appellant. During the course of assessment proceedings, the Assessing Officer observed that appellant has incurred certain expenditure and claimed the same as business loss and called for explanation from the appellant. That in response, the appellant submitted all the documents as called for by the Assessing Officer in support of its claim. On due verification of the same, the Assessing Officer had disallowed the claim of appellant on the ground that the same has not been incurred for the purpose of business. In fact, the appellant has provided support services to the parent company of the appellant and claimed the said expenditure as business loss.

6. The Assessing Officer further observed that appellant has debited an amount of Rs.42,000/- towards fee paid to the Registrar of Companies for increase of authorized share capital from 1.00 crore to 2.4 crores under the head ‘rates & taxes’. However, the Assessing Officer disallowed the said expenditure taking into consideration the decision rendered by the Hon’ble Supreme Court in Punjab State Industrial Development Corporation [225 ITR 792] and also Brooke Bond (India) Ltd., [225 ITR 798] and consequently, a demand of Rs.7,763/- against the appellant vide assessment order dated 26.03.2002 under Section 143(3) of the Act, 1961 was issued.

7. Aggrieved by the assessment order dated 26.03.2002, the appellant filed an appeal before the CIT(A). The CIT(A), on considering the memorandum and articles of association of the appellant company, held that appellant-company was set up for carrying on the activity of advisors and consultants of the parent company in India and such allied activities. That the Assessing Officer has erred in taking the view that appellant has not carried on business activity during the previous year under consideration for claim of expenses as revenue expenditure. The learned CIT(A) further observed that appellant was in readiness to receive the clients to render services and consultation and finally held that the view of the Assessing Officer that the business of the appellant has not commenced is to be held as not justified. Therefore, he is directed to allow the expenses claimed as revenue expenditure and determine the income/loss in the light of above observation and accordingly, allowed the appeal vide order dated 20.12.2004.

8. Aggrieved by the appeal order dated 20.12.2004, the respondent herein had filed appeal before the learned Income Tax Appellate Tribunal, Hyderabad, (for short, ‘Tribunal’). The learned Tribunal, on due consideration of the material plac