Delhi ITAT Allows Partial Deduction for Legal and Security Expenses: Business Not Abandoned Despite No Revenue in FY 2017–18

Headnote:

The Delhi Bench ‘G’ of the Income Tax Appellate Tribunal (ITAT) held that SNW Smith Consultant Pvt. Ltd. had not ceased its business operations despite no business income during the assessment year 2018–19. The Tribunal allowed security service expenses in full and restricted the disallowance of professional (legal) fees to 50%. The Bench observed that the mere absence of revenue does not imply cessation of business if the establishment continues and expenses are incurred to keep the business functional. It emphasized that under Section 37(1) of the Income-tax Act, 1961, genuine business-related expenses remain allowable, provided they are incurred wholly and exclusively for business purposes.

Background:

The assessee, SNW Smith Consultant Pvt. Ltd., engaged in consultancy and trade finance services, filed its return for AY 2018–19 declaring no operational income but claiming total expenses of ₹22.55 lakh, including ₹10 lakh towards legal fees paid to Adv. Rajesh Narain Gupta for advisory opinions and ₹8.66 lakh towards security charges. The Assessing Officer (AO) disallowed these two expenses, holding that the company had no active business and that such expenditure could not be justified.

The CIT(A) upheld the disallowance, reasoning that the assessee failed to prove that its business was ongoing or that the legal and security expenses were incurred wholly for business purposes. The assessee appealed before the ITAT, arguing that the company had only experienced a lull in operations, not a cessation of business, and that expenses were essential to maintain its establishment and evaluate business reorganization.

Court Opinion:

The Tribunal, comprising Shri Satbeer Singh Godara (Judicial Member) and Shri S. Rifaur Rahman (Accountant Member), noted that the AO had failed to consider the difference between business inactivity and cessation. It held that the company continued to maintain its establishment, comply with statutory requirements, and pay necessary charges to safeguard assets.

Relying on judicial precedents such as L. Ve. Vairavan Chettiar v. CIT (72 ITR 114), the ITAT reaffirmed that absence of revenue does not preclude the allowability of business expenditure under Section 37(1). Since the security charges were genuine and supported by invoices from G4S Secure Solutions (India) Pvt. Ltd., they were fully allowed.

However, regarding the ₹10 lakh legal fees paid to Adv. Rajesh Narain Gupta, the Tribunal found the purpose of the legal opinion unclear and partially unrelated to the company’s consultancy business. Considering prudence and lack of evidence linking the expenditure directly to business activity, the ITAT allowed 50% of the legal fees as a reasonable business expense.

Accordingly, the appeal was partly allowed, modifying the earlier disallowance.

Legal Provision Concerned:

1. Income-tax Act, 1961 – Section 37(1) (General deduction for business expenditure)
2. Income-tax Rules – Assessment under Section 143(3) read with Section 254

Case Title: SNW Smith Consultant Pvt. Ltd. v. DCIT, Central Circle-5, New Delhi

Case No: ITA No. 2635/DEL/2023

Assessment Year: 2018–19

Bench: Delhi Bench ‘G’ – ITAT

Judges: Hon'ble Mr. Justice Shri Satbeer Singh Godara & Justice Shri S. Rifaur Rahman