Facts of the Case

  1. The assessee had transferred certain business segments including Medianet and content selling business.
  2. Despite such transfer, the assessee continued to claim business expenditure comparable to earlier years.
  3. The AO inferred that since certain business activities had ceased, expenditure should have correspondingly declined.
  4. On this basis, ad hoc disallowances of ₹16.12 crore and ₹28.41 crore were made.
  5. The AO also disallowed website development expenditure treating it as capital expenditure.
  6. The CIT(A) deleted the additions.
  7. The ITAT upheld the CIT(A)’s findings.
  8. Revenue filed appeals before the Delhi High Court under Section 260A.

 Issues Involved

1. Whether business expenditure can be disallowed merely because a business vertical was transferred?

2. Whether website development expenditure is capital expenditure or revenue expenditure?

3. Whether any substantial question of law arose for consideration under Section 260A?

 Petitioner’s Arguments (Revenue’s Contentions)

  • The Revenue argued that once the business verticals had been sold or transferred, the assessee could not justify maintaining high expenditure levels.
  • It was contended that expenditure should proportionately decline after transfer of revenue-generating activities.
  • The Revenue further submitted that website development created enduring benefit and therefore should be capitalized.

 Respondent’s Arguments (Assessee’s Contentions)

  • The assessee contended that merely because certain business divisions were transferred, it did not mean all business activities ceased.
  • The remaining business operations continued, requiring expenditure.
  • No specific expenditure was shown by the AO to be unrelated to business purposes.
  • Regarding website expenditure, reliance was placed on judicial precedent holding such expenditure to be revenue in nature.

 

Court Findings / Court Order

1. Ad hoc disallowance of business expenditure invalid

The Court held that the AO had made disallowance purely on mathematical assumptions without identifying specific non-business expenditure.

2. Commercial expediency must be examined holistically

The Court clarified that sale of one business vertical does not automatically imply that overall expenditure must reduce.

3. Website development expenditure is revenue expenditure

Following the precedent in CIT vs India Visit.com (P) Ltd., the Court upheld that website development expenditure falls within revenue expenditure.

4. No substantial question of law

The Court held that concurrent factual findings of CIT(A) and ITAT did not warrant interference under Section 260A.

Final Order

Revenue’s appeals dismissed.

 Important Clarification

This judgment clarifies:

  • Expenditure cannot be disallowed merely on assumptions based on reduced business activity.
  • The AO must specifically identify expenditure not incurred for business purposes.
  • Website development expenses are generally revenue expenditure where they facilitate business operations without creating an independent capital asset.
  • Concurrent factual findings of appellate authorities are generally not interfered with under Section 260A.

 Sections Involved

  • Section 37(1), Income Tax Act, 1961 – Business expenditure
  • Section 260A, Income Tax Act, 1961 – Appeal to High Court 


    Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:5197-DB/SRB06092017ITA7242017.pdf

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