Business Loss allowable even when major transactions being intra-group : Tax dept. cannot Second-Guess Commercial Decisions

 In a recent ruling, the Bangalore Tribunal held that business losses, including those arising from inter-group transactions, are allowable where the expenditure is incurred wholly and exclusively for business purposes, and cannot be disallowed based on the Revenue’s subjective assessment of business expediency.

In the present case, the assessee, a private company engaged in the business of logistics, courier and allied services, had claimed substantial business losses during the year under consideration. During the assessment proceedings, the income tax authorities called upon the assessee to explain the reason for incurring such losses. The assessee submitted that its business was in a nascent stage and and, in order to remain competitive in the market, it had priced its services at discounted rates in line with prevailing industry practices. However, the Assessing Office (‘AO’) noting that nearly 90% of the assessee’s revenue was derived from a group company and observing that the assessee faced no apparent risk of losing such business, disallowed the claimed losses. The AO held that there was no commercial rationale for charging unviable rates and that the losses arose from the assessee’s own deliberate and imprudent business decisions.

The above findings of the AO were upheld by the CIT(Appeals). Aggrieved by the same, the assessee preferred an appeal before the Hon’ble Tribunal. The assessee submitted that its business revenue were not derived exclusively from its group companies but also from independent third party customers, to whom similar rates were charged. Further, the assessee contended that all expenses claimed were incurred wholly and exclusively for business expenses and in absence of any specific restriction, the same should not be disallowed where genuineness of such expenses has not been questioned by the revenue.

The Hon’ble Tribunal held that only the real income of the assessee shall be taken into consideration and not any notional income which the revenue assumes could have been earned. Further, after taking into consideration the facts of the case the Tribunal observed that where similar rates are being charged to third party customer the allegation that business was carried out with the intention of charging discounted rates to group company and booking loss does not hold good. Accordingly, the Hon’ble Tribunal decided the issue in favour of the assessee and held that business expenses shall not be subject to arbitrary disallowance, where the loss is real, revenue in nature, incidental to trade and not barred under any limitation, even if the same does not result in immediate profit.

Tax authorities often question business losses by reassessing the commercial rationale behind pricing and profitability, particularly in group-related transactions. This ruling reaffirms the settled position that genuine business decisions and real losses cannot be disregarded merely on the basis of revenue’s perceived lack of commercial expediency or notional expectations of income.