Itta/561/2006 Of M/S. Pipelic Energy Software India Pvt. Limited v. The Dy. Commissioner Of Income Tax

IN THE HIGH COURT FOR THE STATE OF TELANGANAAT HYDERABAD FRIDAY .THE TWENTY EIGHTH DAY OF JUNETWO THOUSAND AND TWENW FOUR PRESENTTHE HONOURABLE SRI JUSTICE P.SAM KOSHYANI) THE HONOURABLE SRI JUSTICE LAXMI NARAYANA . INCOME TAX TRIBUNAL APPEAL NO: 561 OF 2006 lncome Tax Tribunal Appeal under Section 260-4 of the [lncome ][tax ][Act,]1961, against the order of the lncome [Tax ][Appellate Tribunal, Hyderabad Bench "8"]Hyderabad in l.T.A.No. 148 I HYD12005 [( ][Asst. ][Year ][1999 ]- [2000 ]) [dated]8-02-2006 preferred against the order of the [Commissioner ][of ][lncome ][Tax](Appeals) -ll, Hyderabad dated 20-12-2004 in ITA No. 0206 / CIT [(A) ]-lU [04-05]preferred against the order of the lncome Tax Officer, Ward- 2 [(1) ], Hyderabad ,dated 26-3-2002 in PAN /GlR No AABCP [2325 ] [.] Between: M/s. Pipelic Energy Software lndia [Pvt. ][Limited, Presently known ][as ].Energysolution! lnternatio=nal [(lndia) Pvt. Ltd., ][Saptagiri ][Tower, ][Begumpet, ][Hyderabad]presently al 2O1 . 2'd floor. ltr1an;eera Trinity Corporate , JNTU - Hitect City^Road.kukatpaily, Hyderabad - [( ]500072) [rep ][by its Director K. ][Venkata Siva ][Rao, ][S/o. ][Sri]Nageshwar Rao, aged about 33 [years, ]R/o. [Hyderabad.] (Address of Sole Appellant rs amended vide Court order dated 02'02-2024 [in ][l.A.No.]3 of 2023 ) ..APPELLANTAND The Deputy Commissioner of [lncome ][Tax, ][Circle ][1(3), Hyderabad.] ...RESPONDENT Counsel for the Appellant: SRI S. [REP.]Ms-PRABHAVATHI Counsel for the Respondent: SRI VIJHAY , [Standing ][Counsel ][for]lncome Tax Department The Court delivered the following [Judgment:] HONOI'RABLE SRI WSTICE P.SAM KOSITYANDHON'BLE SRI JUSTICE LAXMI NARAYANA INCOME TAX TRIBUNAL APPEAL NO.561 [2006] JIJDGMENT: [(pet ]Hon'ble Si Justice [Loxmi Narayana ][ALishefta)] 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. ]A8/Hyd/2OOS, [dated]08.02.2006 for the Assessment Year [1999-2OOO. ][Vide ][impugned]order, dated 08.02.2006, the Tribunal allowed [the appeal ][Iiled ][by]the respondent herein setting aside the order of the [Commissioner]of Income Tax (Appeals) II, Hyderabad [(for ]short, ['CIT(A)J, ][dated]20.12.2004. 2. Heard Sri S.Ravi learned senior counsel representing Ms.K.Prabhavathi, learned counsel for appellant and Sri [Vij ]hay KPunna, learned standing counsel for lncome Tax Departmentappearing on behalf of the respondent. 3. The brief facts leading to filing of prcsent appeal are asunder: 4. The appellant-company was incorporated on 19.12.1997 forcarrying 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 ][1a3(1) ][of ][the ][Act,]1961 oh 2g.l2.2o}o [and a refund of Rs.4,194/- ][was issued ][to ][t}le]appellant company. 2. Heard Sri S.Ravi learned senior counsel representing Ms.K.Prabhavathi, learned counsel for appellant and Sri [Vij ]hay KPunna, learned standing counsel for lncome Tax Departmentappearing on behalf of the respondent. 3. The brief facts leading to filing of prcsent appeal are asunder: 4. The appellant-company was incorporated on 19.12.1997 forcarrying 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 ][1a3(1) ][of ][the ][Act,]1961 oh 2g.l2.2o}o [and a refund of Rs.4,194/- ][was issued ][to ][t}le]appellant company. 5. The case of the [appellant ][was ][selected ][for ][scrutiny ][and]notices have been [issued ][under Section ][143(21 ][of the ][Act, ][1961 to]the appellant. [During ][tlte ][course ][of ][assessment proceedings' ][the]Officer [observed ][that ][appellant ][has ][incurred ][certain]Assessing expenditure [and ][claimed ][the ][same ][as business loss ][and ][called ][for]from [the appellant That ][in ][response' ][the ][appellant]explanation submitted [all ][the ][documents ][as ][called ][for ][by ][the ][Assessing ][oflicer]in support of [its ][claim. ][On due ][verification ][of ][the ][same' ][the]Officer [had ][disallou'ed ][the claim ][of ][appellant ][on ][the]Assessing ground that the sarne [has ][not ][been ][incurred ][for the ][purpose ][of]business. In [fact, the ][appellant ][has ][provided ][support ][services ][to]the parent [company ][ol ][the ][appellant ][and ][claimed ][the ][said]expenditure [as ][business ][loss'] 6. The Assessing [Officer ][further ][observed ][that ][appellant ][has]debitedanamountofRs.42,O0o/.to\^.ardsfeepaidtotheRegistrarof Companies [for ][increase ][of ][authorized share ][capital ][from ][1'O0] Z. crore to 2.4 crores under the head [,rates ]& taxes'. However, theAssessing Officer disallowed the said expenditure taking intoconsideration the decision rendered by the Hon,ble Supreme Courtin Punjab State Industrial Developmetrt Corporation ITR[225 consideration the decision rendered by the Hon,ble Supreme Courtin Punjab State Industrial Developmetrt Corporation ITR[225 7921 anp, also Brooke Bond (Indta) Ltd,., [225 ITR 798] andconsequently, a demand of Rs.7,763/- against the appellant videassessment order dated 26.03.2002 under Section 143(3) of theAct, 196l was issued.Act, 196l was issued. 7. Aggrieved by the assessment order dated 26.03.2002, theappellant filed an appeal before the CIT(A). The CIT(A), onconsidering the memorandum and articles of association of theappellant company, held that appellant-company was set up forcarrying on the activity of advisors and consultants of the parentcompany in India and such allied activities. That the AssessingOfficer has erred in taking the view that appellant has not carriedon business activity during the previous year under considerationfor claim ol' expenses as revenue expenditure. The learned CIT(A)further observed that appellant was in readiness to reccive thechents to render services and consultation and fina y held that thevierv of the Assessing Officer that the business of the appellant hasnot commenced is to be held as not justified. Therefore, hc isdirected to allow the expenses claimed as revenue expenditure and determine the income/loss in the light of above observation andaccordingly, allowed the appeal vide order d,aLed 2O.12.2OO4. determine the income/loss in the light of above observation andaccordingly, allowed the appeal vide order d,aLed 2O.12.2OO4. 8. Aggrieved by the appeal order dated 20.12.2OO4, therespondent herein had filed appeal before the learned Income TaxAppellaie Tribunal, Hyderabad, (for short, 'TribunalJ. The learnedTribunal, on due consideration of the material placed on recordand submissions made, held that the holding company and [the]subsidiary company are separate entities. The expenditurepertaining to one cannot be claimed or allowed in the hands of theother and opined that First Appellate Authority has [committed ][an]error in allowing the appeal of the appellant and, therefore, [set]aside the order of the CIT(A), dated 20. [l2.2oo4 and ][allowed ][the]appeal filed by the respondent herein [vidc ordcr dated ][O8.02.2006.] 9. Aggrieved by the order of Tribunal dated [O8.O2.2006, ][the]appellant filed the present appeal. 10. The learned standing counsel lor [the ][appellant ][during ][the]course of hearing submitted that the order of [Tribunal ][is]erroneous, unjust and contrary to the [facts of ][thc ][case ][and ][bad in]law. That the Tribunal has failed to apprcciatc [the ][material ][on]record and the explanation offered before [CIT(A). ][That ][the ][Tribunal]grossly erred in concluding that appellant-company [has ][not]engaged in business and expenditure claimed by the appellant- 5 company is totally disallowed without ascertaining andapportioning for the expenditure properly attributed to theassessee business. That even if the tax liabilify determined for theassessment year under consideration is meager, the business lossto be carried forward denied by the Assessing Officer amounts toRs.55,68,14I/-, which has substantial impact in the subsequentassessment years in which such brought forward business losswere set o[f. I I. The learned counsel for appellant further submitted thatthis Tribunal ought to have considered that the expenditureamounring to Rs.50,64,152/- incurred by the appellant pertains tothis Tribunal ought to have considered that the expenditureamounring to Rs.50,64,152/- incurred by the appellant pertains tobusiness expenditure for participating in the project allotted to itspare nt company, which is in line with the appellant,s businessobjectii,c as per its memorandum of association. That the Tribunalought to have considered that the Assessing Officer failed to verifythat n'ith thc effort made by the appellant for its parent companyin the assessment year 1999-2000 had resulted in earning anincome oi Rs. I ,39,33, 163/ - and Rs.2,07,86,750/ - lor thesubsequent assessment years and finally prayed to alk;u, theappeal.that n'ith thc effort made by the appellant for its parent companyin the assessment year 1999-2000 had resulted in earning anincome oi Rs. I ,39,33, 163/ - and Rs.2,07,86,750/ - lor thesubsequent assessment years and finally prayed to alk;u, theappeal. 12. Lcerrncd counsel for appellant relied upon the followingdecigions in supporr of appellant contentions: 6 i) Sri Veakata Satyatrarayana Rice Mill Contractors Co.Vs. Commissioner of Income Tax, A.p.II1; ii) Commissioner ofIncome Tax vs. Samsung IndiaElectroaics Ltd.,z; iiil Commissioner of Income Tax, West Bengal vs.RoyalCalcutta Turf Clubs; 13. In Sri Venkata Satyanarayana Rice Mill Contractors Co. (supra), the Hon'ble Apex Court held as under: 12. Lcerrncd counsel for appellant relied upon the followingdecigions in supporr of appellant contentions: 6 i) Sri Veakata Satyatrarayana Rice Mill Contractors Co.Vs. Commissioner of Income Tax, A.p.II1; ii) Commissioner ofIncome Tax vs. Samsung IndiaElectroaics Ltd.,z; iiil Commissioner of Income Tax, West Bengal vs.RoyalCalcutta Turf Clubs; 13. In Sri Venkata Satyanarayana Rice Mill Contractors Co. (supra), the Hon'ble Apex Court held as under: "15. [.... ][that ]any contribution made by an assessce to a public weltarefund which is directly connected or related wirh rhc carr,\-ing on of rhcassessee's business or which results in rhe benefrr to the assessee sbusiness has to be regarded as an allowable dcduction undcr Secrion37(1) of the Act. Such a donation, whether voluntary or at rhe insranceof the authorities concemed, when made to a Chief Mrnrster s DroughtRelief Fund or a Diatrict Wetfare Fund established by rhe DisrricrCollector or any other fund for the benefit of thc publrc ancl $,irh a vreu,.to secure benefit to the assessee,s business, cannot l)e rcgarded aspalrment opposed to public policy. It is not as rf rh. palment in rhepresent case had been made as an illegal gratificatir:n. There is no la\r,which prohibits the making of such a donarion. The mere f{rcr rharmaking of a donation for charitable or public cause or in public interestresults in the Government giving paronage or benefil r.an be no groundto deny the assessee a deduction of that amount und(,r Sectron 37 l o[the Act when such payment had been made ft)r rhe purpose ofassessee's business.' 14. In Saasung India Electronics Ltd., (supra), the Hon,bleDivision Bench of Delhi High Court held as uncler: "24. ...... The linding of the Tribunal that a parr of rheadvertisement expenditure is reimbursed b]-the parcnt contpan\is not under challenge. This itself should settle rhe issue in far,,our ' (1996)6 SCC 611 SCC 611- 2012 SCC Online Del4587- 2012 SCC Online Del4587 ' [ntn ][t96t ]sc 1028 of the assessee because even if it is assumed that a part of theexpenditure inured for the benefrt of the parent company, theassessee is getting compensated for it. The view that in any case,expenditure, the benetit of which inures partly to the assesseeand partlv to another person, cannot be allowed as a deduction,we are afraid, is not the correct view to take in law since it hasbeen settled bY a long line of cases that expenditure incurred bythe assessee in the running of his business cannot be disallowedmerely on the ground that a part of the expenditure results insome benefit to a third party. ...." 15. In Royal Calcutta Turf Club (supra), the issue before theBench was whether the expenditure incurred for running theschool for jockeys is deductible. The business of the respondentwas to run race meetings on a commercial scale for which it isnecessary to have races of as high an order as possible. For thepopularin. of the races run by the respondent and to make itsbusiness profitablc, it was necessary that there were jockeys ofrequisite skill and experience in sufficient numbers who would bea'ailablc to the o$ ners and trainers because without such efficientjockevs, the running of race meetings would not be commerciallyprofitable. Ir.,r'as for rhis purpose that the respondent started theschool for training Indran jockeys. If there were not sufficientnumber of cfficicnt Inclian jockeys to ride horses its interest wouldhave suffered, and it might have had to abandon its business if itdid not take steps ro make jockeys of the necessary caiibreavailable. Therefore any expenditure which was inanned" for preuenting the ertinction of the respondenf,s business would", in ouropinion, be expenditure uthollg and. exclusiuelg laid out for thepurpose of the business of the assessee and. would be an a owabrededuction. preuenting the ertinction of the respondenf,s business would", in ouropinion, be expenditure uthollg and. exclusiuelg laid out for thepurpose of the business of the assessee and. would be an a owabrededuction. 16. _Per contra, learned standing counsel for respondentsubmitted that appear rrled by the appellant is devoid of merits andfailed to make out any case, much less the substantial questions oflaw for consideration. L,earned standing counsel further submittedthat the Tribunal, on due consideration of the facts and law, hadrightly allowed the appeal filed by the Department and the samedoes not warrant any interference by this Court. He furthersubmitted that the Tribunal while allowing appeal had specificallyobscrved that the hoiding company and the subsidiary companyare separate entities and the expenditure pertaining to one cannotbe claimed or allowed in the hands of the other. The Tribunalfurther observed that expenditure in question is not mereadministrative expenditure as in the case of a professional u.hoopens an office and is ready to receive clients, nor an expenditurewhich has been laid out with an intention to earning incomc. Healso referred to the observations of the Tribunal that the u.orkorders in question were those of the holding companJ. and that theassessee company had deputed its engineers at its ou.n cost forfulfilling the contractual obligation of the holding compan\,. 17. The learned standing counsel for respondent placed relianceon the follovving decisions: i) Mira Kulkarni vs. Assistant Commissioner of InconeTaxa; iif Crescent Organics (P.) Ltd., v. Deputy Commlssionerof Income-tax Range-8( 1 l, Mumbals; iii) P.Amarnath Reddy v. Assistant Commissioner ofIncome Tax, Central Circle-I[(31, Chennaio 18. [n Mira Kulkarni (supra), the assessee was the owner of t]reproperty and a portion of property is leased to a company, underan agreement, for being used as a hotel and the assessee wasentitled to minimum guaranteed amount per quarter or 3Oyo ofgross operating profits whichever was higher; that as per the termsof agreemcnr all facilities, amenities including salaries to staff etc.,to be maintained by hotel. The assessee declared income eamedunder said agreemenr as income from business and she claimedreduction in respect of foreign travel expenditure, repairs,maintenance expcnscs and salary under Section 37(l) of the Act,i961. The Hon'ble High Court of Delhi held that as per the terms ofagreemcnt, all facilrties, amenities and business activities were tobc maintaincd bv the hotcl and insofar as the foreign travel o 120121 [l7 ][tar.ann.com ]160 (Dethi)l- I2014)49 taxma^n.com 128 (Bombay)J120121 [l7 ][tar.ann.com ]160 (Dethi)l- I2014)49 taxma^n.com 128 (Bombay)J +!202U [128 ][tdxmann.(om ][244 (Madras)l] expenditure, there was no evidence or material on record showingthat said expense was connected with or for purpose of businesslncome and, therefore, rejected the claim 19. Jn Crescent Organics (p., Ltd., (supra), the theassesseeclaimed for deduction under Section 36(1)(iii) of the Act,196 I inrespect of foreign company. interest paid The on Honbleborrowals Bombay utilized for High Courtinvestments held thatin arnvestments were not in course of assessee,s business,therefore,reJected the claim for reduction. The assessee alsoclaimedbusiness expenditure withregard to foreign travel expenses underSecrion 37(1) of the Act, 1961. The High Court held that assesseefailed to prove that entireforeign travel expenses of directors andauditors were incurred forits business affairs, therefore, rejectedthe claim of the assessee. 20. [n P.Amaruath Reddy (supr4, the assessee claimedbusiness expenditure of foreign travel expenses of his wife in thecapacitv of marketing execudve of concern and that the same v,.crcmade for the purpose of business. The High Court of Madras heldthat the assessee failed to place on record sufficient evidence toprove that his wife was an employee of its proprietary concern andIurther, there is no evidence on record to establish as to u,hen she 20. [n P.Amaruath Reddy (supr4, the assessee claimedbusiness expenditure of foreign travel expenses of his wife in thecapacitv of marketing execudve of concern and that the same v,.crcmade for the purpose of business. The High Court of Madras heldthat the assessee failed to place on record sufficient evidence toprove that his wife was an employee of its proprietary concern andIurther, there is no evidence on record to establish as to u,hen she was appointed and what was her salary and ultimately, rejectedthe claim. Consideration: 21. Now the point for consideration is whether the businessexpendrture incurred by the appellant herein for fr.rlfillingcontractual obligations of parent company can be considered asbusiness loss ol appellant company. 22. Admittedly, the appellant company is a subsidiary companyof LIC Energz, Denmark. The appellant company disclosed loss ofRs.55,68, ta 1/- for the asse ssment year 1999-2OOO towardssalaries, travelling expenses, rent, printing and stationery, postage,telegrams and telephone charges and other administrativeexpenses etc. The Assessing Officer during the assessment hadtaken a view that the appellant company did not carry on businessactivity during the 1,ear, but helped its parent compaly incompleting the projects of the parent company. Therefore, theexpenses incurred bv the appellant were not for carrying on thebusiness and for market survey etc. of appellant and thus, samecannot be treated .ls revenue expenscs. The A.O., fUrther observedthat the appellant incurred were not exclusively for training of themanpower, but for providing support services for the works contract undertaken by the parent company and are not connectedor related to the business activity of the appellant. 23. The Appellate Authority by relying upon the decision ofMadras High Court in case of CIT vs. Electron India? heid thatbusiness can be said to have been commenced.the very momentthe party is ready to receive the clients a-trd for the purpose ofbeing in readiness to receive the client, the party has to stay readyfor which expenses are required to be incurred to provide servicesand consultation to its clients. By observing so, the appellateaut-hority allowed the appeal fited by the appellant company andthereby set aside the assessment order of A.O. 24.In CIT vs. Electron India (supra), the Hon,ble Madras HighCourt held as under:Court held as under: "Thus in the case of a professional, the date on which he is readyto receive clients should be the date of commencement. In thecase of trader, acquisition of goods for sale would amount tocommencement, though no sale might have been occurred. Inthe case of manufacture, the fact that the production unit is setup so as to enable manufacture without actually manufacturing,operations or sale sould amount to commencement of business." 25. In considered opinion of this Court the facts of above caseand facts of present casc are different and hence, does not come toaid of appellant. tl 26. However, on appeal by the Department, the Tribunal hadtaken a different view that assessee company had deputed itsengineers at its own cost for fulfilling the contractual obligation ofthe holding company and as such, expenditure cannot beconsideied as one incurred wholly and exclusively for the purposeof the assessee's business and further the hotding company andthe subsidiary company are separate entities and the expenditurepertaining to one cannot be claimed or allowed in the hands of theother. 25. In considered opinion of this Court the facts of above caseand facts of present casc are different and hence, does not come toaid of appellant. tl 26. However, on appeal by the Department, the Tribunal hadtaken a different view that assessee company had deputed itsengineers at its own cost for fulfilling the contractual obligation ofthe holding company and as such, expenditure cannot beconsideied as one incurred wholly and exclusively for the purposeof the assessee's business and further the hotding company andthe subsidiary company are separate entities and the expenditurepertaining to one cannot be claimed or allowed in the hands of theother. 27. The Bench relying upon the decision in CIT vs. ChandulalKeshavlal & Co,8 held that "in ord.er to justifg a ded.uction thedbbursement must be for reasons of commercial expediency; it maA beuoluntary but incuned for the assessee s business,. and. if the expense isinanned. for the purpose of the business oJ'the assessee it d.oes not matterthat the paAment olso enures b the benertt of a third partg. Another testlaid douttt uas that if the transaction is properlu entered. into as a part oflhe assessee's legitimate commerclal undertaking in ord.er to facititate thEcorrytng on of its business it is immateial that a third party o,lso benefitstherebg." 28. At this stage, it is relevant to refer Section 37 of the Act,1961, which reads as under t tssr scc qao "S.37. (l) Any expenditured e sc n be i i capital expenditure ;,#il"",;l; or personal ;"q1 5,j [-.:r.Tru ]oi'it. '""""."i.f, if ff",i: fil, ;?b,"i,,";;;';;;;"#;""r:ii;.:li:l:.jiJLff out or expended whollv anr."*p".,"."- ,^iachargeable under the hearl ,,protrts ,?:..T;::fj.*:profession"."rJ [l"r.i"- ]"i"ur"]*"" [*] i:::.'* i";lli.ii #:i'i-"-r-g:"b':'ir is herebv decrared that anvalowance shall o rncurred for ne.,ce o. * n,l lhc i-i; be purpose made ;;";io, in of il; respecr busrness- i; ;;""", of such or ii,. profession expenditur; ":ii"oJg;"""0 and no deduction or[.- ][T.I", ---*L:X the Explanaton purposes 2. _For the oI sub-sectionremov^t o[doubts, ir is hereby declared that forassessee on the acdviries .",rl.ll' [un, ][expenditure ][incurred ]by anrererrea to in :orlorat^e- [social ][responsibility]no r be a ce m "".,t..'i:'iTr iif':le -I: d- i o purposes o[ lhe " business ;'; or ; ;:;.:,1,Tjiil:". professron.fi' &. h.",,"r";:3j ii : Hi IExplanation J. For thc removalexpressron ['expendirure ]rhe,n.rr."nol.9llo^t::]'^l:.h:-bv [clarified ][that ]is an offence ;. *;,.; ," ;;;;:. _u\ [an ][assessee ][Ior ][anv purpose which]rncurred inctuae ana."nuii.il,;;:;";,i;,,"" bv an assessee have [b! ]always included [taw ][under ][E.@tandtion ]the expenditure[1. ][aha]- a-ny (, for lau any purposc ,or rhe ump whrch bprnq rn rs ror( an ult.n(c F. In Irrdra undcr. , .r, or whtch ts prohiblted by,,"a" irj,aloi."",."" (rd to prolrde an\ ben.lir or D.an]. Ia\r.or rule acceptar.e " [r,.,r,., ][., ]or [n ][o, ]su.h [.*it;;';,1',, ]or r.$llatton lrenefir or p.rqrrsrrr or[;:,1 ][l;l: ]rr', ;: .u.t ;:il:ft p".in [r:T-l:"3,j,.:xi],! ii, u..r'm""-"rtime belns m,;.; ;;:;;;;;: .-;..1',':l:,::.fi".ffi ly be, ror rhe rndra or outsrde lndra)Irii to,,,rrirou.nd tut oft.n,r ur(ler -ur\ laB lor th. rrme betng in force, in {2t r".) (28) Notwirhsranding a n vthineu"".""". arrowance ,h;ir ;;;".j;'i,'ljl*--'^1":'"0 expenditure [in ][sub-section ]incurred [(r), ]bv an[no]; [';,j*;,:;";,'-:j":'-:' ]pam phle r .. th" r i k"';;;;;;J ;," :',-;ii.'.',';:.,f, ':'n "",,'"",, 29. As per the dccision of Hon,blcApex Court in SaravanaSpianing Mills pvt. Ltd., (supra), rheprerequisites for allowingreduction under Section 37 of the Act, l96l are as under "(a) if the expenditure does not fall within sections 30 to 36; (b) that it should have been incurred in the accounting (c) that it should be in respect of a business carried on by the assessee; (d) that it should not be in the nature of capital expenditure and (e) that it should be spent wholly and exclusively for business. {2t r".) (28) Notwirhsranding a n vthineu"".""". arrowance ,h;ir ;;;".j;'i,'ljl*--'^1":'"0 expenditure [in ][sub-section ]incurred [(r), ]bv an[no]; [';,j*;,:;";,'-:j":'-:' ]pam phle r .. th" r i k"';;;;;;J ;," :',-;ii.'.',';:.,f, ':'n "",,'"",, 29. As per the dccision of Hon,blcApex Court in SaravanaSpianing Mills pvt. Ltd., (supra), rheprerequisites for allowingreduction under Section 37 of the Act, l96l are as under "(a) if the expenditure does not fall within sections 30 to 36; (b) that it should have been incurred in the accounting (c) that it should be in respect of a business carried on by the assessee; (d) that it should not be in the nature of capital expenditure and (e) that it should be spent wholly and exclusively for business. 30. An analysis of the authorities, precedents relied upon byboth the counsels would make it clear that business can be said tohave been commenced, the very moment the party is ready toreceive the clients. For the purpose of being ready to receive theclient to provide services and consultation to its clients, the partyhas to stay ready for which expenses are required to be incurred. 31. Perusal of the record would show that the holding companyhad received five orders to supply LEAK dctection and locationsystem to lndia apart from several enquiries on other modelingsoftware. The appellant company incurred expenditure foroverseeing and execution of contracts entered by the holdingcompany. It is also clear that the appellant company did notundertake any business on its own and thus, the expensesincurred by the appellant company are not occasioned in theprocess or for its own business. Therelore, the cxpenditureincurred by the appellant company cannot be considered asexpenditurein connection with its business or incidental to itsbusiness. 32. For allowing loss, the expenditure must be connected with orrelated to the business carried on by the assessee and profits andgains therein. However, in the present case, the losses incurredare for the purpose of giving support services to the holdingcompany and the assessee did not derive any proht and gain fromsuch expenditure, therefore, the loss incurred by the appellantcompany is not related to its own business. It is relevant to notethat the holding company and the subsidiary company areseparate entities and the expenditure pertaining to one entitycannot be claimed or allowed in the hands of the other. 33. The [judgments ]relied upon by the learned counsel forappellant will not support the contentions of the appellantcompany since the expenses incurred in those cases are part of itsown business and are related to preparedness of those companiestowards training and to strengthcn the busincss. However, in thepresent case, it is not the case of the appellant that expenses areincured for its own business or tou,ards training etc., but wereincurred for overseeing the project of the holding company and wasincurred towards travel, administrative and other expenses of itst---staff and personnel. -J.J 34. As per Section 37 of the Act, 1961, the prerequisites forallowing deduction are that the expenditure should have beenincurred in respect of a business carried on by the assessee andshould be spent wholly and exclusively for its own business. In thepresent case, admittedly, the expenditure sought to be deductedwas incurred for overseeing the project of the holding company.Further, in order to be deductible as a business loss, theexpenditure must be in the nature of trading loss, not as capitalIoss springing directly out of trading activity and it must beincidental to the business of the assessee. It is not sufficient that itfalls on the assessee in some other capacity or is merely connectedwith its business and a-lso the amount incurred by the assesseewhich is not in the ordinary course of business cannot be alkrwedas a deduction. 35. In the light of above discussion and legal position, theamount incurred by the appellant company cannot be consideredas revenue expenditure of the appellant company and thus, noteligible for reduction under Section 37 of the Act, 196 I . 36. [n view of above discussion, this Court is of the considercdvic'",r, that the appellant failed to make out anv case to interfere w,iththe impugned order passed by the Income Tax Appellate Tribunal II and thus, the Appeal fails and is accordingly dismissed. Thereshall be no order as to costs. Pending miscellaneousapplications, it any, shall stand closed. Sd/- B.S. CHIRANJEEVIJOINT REGISTRAR t.\ //TRUE COPY// cON OFFICER One Fair Copy to the Hon'ble Sri [Justice ][P. ][Sam ][Koshy] (For His LordshiPs Kind Perusal) One Fair Copy to the Hon ['ble Sri Justice Laxmi Narayana ][Alishetty] (For His LordshiPs Kind Perusal) To 1. The lncome Tax Appellate [Tribunal, ][Hyderabad Bench ]["8" ][Hyderabad'] (With record, if any) ihe Commissioner of lncome [Tax ][(Appeals) ]-ll, [Hyderabad] 2 The lncome Tax Officer, Ward- [2 (1) ], [Hyderabad-] 3 11 LR Copies 4 5The Under Secretary, Union [of ][lndia Ministry of ][law' Justice and]Company Affairs, New Delhi'Company Affairs, New Delhi' 6. The Secietary Teiangana [High ][Court Advocates ][Association, Library']High Court Buildings HYderabadHigh Court Buildings HYderabad 7. On-e CC to Ms. K. PRABHAVATHI ,Advocate [oPUC] 8. One CC to SRl. VIJHAY [PUNNA, ][S.C. ][for ][l'T' ][Dept', ] 9. Two CD CoPies kul s I rl iI HIGH COURTDATED:2810612024 l ril: s T,q a(.JUDGMENT/,1(r'ITTA.No.561 of 2006fi'0 0 iAr{ 2oz5v*,,ATcH E-c DISMISSING THE ITTAWITHOUT COSTS$ef4'W