Page 97 - DTPA Journal December 21

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Nov. - Dec., 2021

Q. & A

Q1. If an Assessee is doing business without trade liscence, whether whole expenses incurred
u/s37(1) of income tax act, 1961 may be disallowed by the assessing officer as he is doing business
against the provisions of law ?

Ans :-
Expenses incurred wholly and exclusively for business and profession are allowed against
income. But such expenses should incur legally or for doing law ful business.

As per Explanation -1 of section 37(1) of income tax act, any expenditure incurred by an assessee
for any purpose which is an offence or which is prohibited by law shall not be deemed to have
been incurred for the purpose of business or profession and no deduction or allowance shall be
made in respect of such expenditure.

Recently, Karnataka High court has disallowed expenses of iron ore business as it was carried on
without obtaining necessary permits/licenses as required under law. It was observed by the
Hon'ble HIGH Court that since object of Explanation 1 to section 37(1) is to discourage
businesses and professions that are tainted with illegality, no deduction or allowance would be
admissible in respect of expenditure incurred for purchasing iron ore under section 37(1) [2021]
133 taxmann.com 72 (Karnataka)

Trade Liscence is compulsory in law. Doing trade/business or profession without trade license is
an offence in India.

As the Hon'ble Karnatak High court cited above clarifies that doing business activities without
obtaining liscence for particular business is not legal and accordingly, the TRADE LISCENCE is
a permission without which business is prohibited. The businessman need to pay penalties for not
obtaining trade liscence.

Therefore, if the assessees are doing business without trade liscence , it is likely that the expenses
incurred in said business can be fully disallowed.

Q2. Section 12A(b) of Income tax Act says that Audit of Trust is required if its total income exceeds
the maximum amount not chargeable to tax. But the Act nowhere prescribes the Maximum amount
not chargeable to tax (i.e., basic exemption) in case of trust. Basic exemption of Rs 2.5 Lakh is
provided only for individuals, HUF, AGP, BOI but not for Trust. Does it mean that Audit as per Sec
12A(b) is applicable to all Trusts in the absence of Basic Exemption?

Ans :-
Yes, it is absolutely correct that as per provisions of Section 12A(b)of the I.T. Act, 1961, if the
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