Facts of the Case

The assessee, Adarsh Journal Pvt. Ltd., engaged in liquor trading, filed its return of income for Assessment Year 2016–17. During the year, the assessee was operating its licensed liquor business from premises located at 4, 5 and 6, Omaxe Square, Jasola, New Delhi. In August 2015, the assessee entered into a lease agreement for another shop, being Shop No. 1, Ground Floor, Omaxe Square, Jasola, New Delhi, with the intention of shifting its business to a larger and better-located premises. The assessee paid rent of ₹23,20,000 during the relevant year. The Assessing Officer disallowed the rent on the ground that no liquor business was carried on from the new premises during AY 2016–17, as the requisite excise licence for the new shop was not granted during the year. The CIT(A) confirmed the disallowance. The ITAT partly allowed the assessee’s appeal but upheld the disallowance of rent. Aggrieved, the assessee filed an appeal under Section 260A before the High Court.

Issues Involved

Whether rent paid for a new business premises is allowable as a deduction under the Income-tax Act when the premises was not actually used for business during the relevant assessment year due to absence of statutory permission, and whether the Tribunal’s findings gave rise to any substantial question of law.

Petitioner’s Arguments

The assessee contended that it had clearly demonstrated its intention to use the new premises for business by entering into a rent agreement and by submitting an application dated 03.09.2015 to the Excise Department for shifting of the liquor licence. It was argued that these facts were sufficient to establish business purpose and that the rent paid should be allowed as a deduction for AY 2016–17.

Respondent’s Arguments

The Revenue supported the orders of the lower authorities and submitted that under the excise law, liquor business can be carried on only from licensed premises. Since the excise licence for the new shop was granted only in AY 2017–18, the premises could not have been legally or actually used for business during AY 2016–17. Accordingly, the rent was rightly disallowed.

Court Order / Findings

The Delhi High Court examined the findings of the Tribunal and noted that although the assessee had expressed an intention to shift its business and had applied to the Excise Department on 03.09.2015, the formal application in the prescribed format was made only on 26.07.2016 and the excise licence for the new premises was granted only in AY 2017–18. The Court held that without permission from the Excise Authorities, the assessee could not have legally shifted or operated its liquor business from the new premises. Consequently, it could not be said that the premises was utilised for business during AY 2016–17. The Court found no perversity in the Tribunal’s conclusion and held that no substantial question of law arose for consideration under Section 260A.

Important Clarification

The Court clarified that for allowance of business expenditure, mere intention to use a premises is insufficient where statutory permissions are mandatory for carrying on business. Actual or legally permissible use of the premises during the relevant year is a condition precedent for claiming deduction of rent.

Final Outcome

The appeal filed by the assessee was dismissed. The disallowance of rent expenditure of ₹23,20,000 for Assessment Year 2016–17 was upheld, and it was held that no substantial question of law arose for consideration.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769502803_ADARSHJOURNALPVT.LTD.VsCOMMISSIONEROFINCOMETAXWARD13.pdf

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