Case Note & Summary
The Revenue appealed against the order of the Income Tax Appellate Tribunal (ITAT) which had allowed the assessee's claim for deduction of lease rentals amounting to Rs.25,90,448/- for three dozers that remained idle throughout the previous year. The assessee, engaged in iron ore extraction and sale, had filed a return declaring a loss of Rs.1,39,89,493/- for assessment year 1989-90. The Assessing Officer disallowed the lease rental expenditure on the ground that the dozers were not used at all. The CIT(A) partly allowed the appeal, holding that the business decision of hiring dozers, though erroneous, could not be questioned by the Assessing Officer. The ITAT confirmed this finding. The High Court admitted the appeal on the substantial question of law whether the finding that a business decision cannot be challenged is perverse, especially when no prudent businessman would keep machinery idle and pay huge lease rentals and maintenance charges without any benefit. The court noted that the assessee had taken four dozers on lease, but only one was used; the other three were idle. The court found that the ITAT and CIT(A) had erred in law by not examining the commercial expediency of the expenditure. The court held that the finding was perverse and set aside the orders of the ITAT and CIT(A) on this issue, remanding the matter to the ITAT for fresh consideration in accordance with law. The appeal was allowed.
Headnote
A) Income Tax - Business Expenditure - Allowability of Lease Rentals for Idle Machinery - Section 37(1) Income Tax Act, 1961 - The issue was whether lease rentals paid for dozers that remained idle throughout the year are allowable as business expenditure. The court held that the finding of the ITAT and CIT(A) that a business decision cannot be challenged by the Assessing Officer is perverse, as no prudent businessman would incur such expenditure without any benefit. The matter was remanded to the ITAT for fresh consideration. (Paras 2-4)
Issue of Consideration
Whether the finding of the ITAT and CIT(A) that a business decision of the assessee could not be challenged by the Assessing Officer is perverse, particularly when no prudent businessman would keep machinery idle and pay huge lease rentals and maintenance charges without any benefit.
Final Decision
Appeal allowed. Orders of ITAT and CIT(A) set aside to the extent they allowed deduction of Rs.25,90,448/- towards lease rentals. Matter remanded to ITAT for fresh consideration in accordance with law.
Law Points
- Business expenditure
- Allowability of lease rental for idle machinery
- Prudent business test
- Perverse finding
- Section 37(1) Income Tax Act
- 1961
