MERCURY PAINTS & VARNISHES LTD, MUMBAI V. ITO 6(3)(3), MUMBAI

ITA 1532/MUM/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84639 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-12-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 26-11-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 25-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AKHILENDRA YADAV
• Assessee Lawyers: APURVA R SHAH
• Keywords: Business income; Business expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH B, MUMBAI BEFORE SHRI D. KARUNAKAR RAO, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO. 1532/MUM/2013 ASSESSMENT YEAR: 2007-08 M/S. MERCURY PAINTS & VARNISHES LTD. ALLANA HOUSE, ALLANA MARG. COLABA, MUMBAI- 400 001 PAN:AAACM 3469 N VS. ITO WD - 6(3)(3) 5 TH FLOOR, R. NO. 524, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020 (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI APURVA R. SHAH REVENUE BY : SHRI AKHILENDRA YADAV DATE OF HEARING : 26 . 11 . 2014 DATE OF ORDER : 19 . 1 2 .2014 O R D E R PER AMIT SHUKLA, JM: THE AFORESAID APPEAL HAS BEEN FILED BY THE ASSES SEE AGAINST ORDER DATED 21.01.2013, PASSED BY THE LD.CIT-1, MUM BAI, FOR THE QUANTUM OF ASSESSMENT PASSED U/S 143(3) FOR THE A.Y . 2007-08. THE ASSESSEE IS MAINLY AGGRIEVED BY DISALLOWANCE OF BUS INESS EXPENDITURE OF RS.8,26,080/-. ON THE GROUND THAT ASSESSEE HAD NOT CARRIED OUT BUSINESS DURING THE YEAR. 2. FACTS IN BRIEF ARE THAT, THE ASSESSEE COMPANY WA S IN THE BUSINESS OF MANUFACTURING AND SALE OF INDUSTRIAL PAINTS. ITS FACTORY WAS SOLD OUT IN A.Y. 2006-07 AND WAS LEFT WITH CERTAIN STOCK OF PAI NTS AND RECEIVABLES ITA NO. 1532/MUM/2013 M/S. MERCURY PAINTS & VARNISHES LTD. ASSESSMENT YEAR: 2007-08 2 FROM SUNDRY DEBTORS. FROM THE PERUSAL OF THE P/L AC COUNT, THE AO NOTED THAT ASSESSEE HAD SHOWN SALES OF STOCK AT RS.4,13,5 21/- AND INTEREST INCOME OF RS.12,07,305/-. AFTER MAKING THE ADJUSTME NT OF BUSINESS LOSS OF RS.4,30,398/- THE ASSESSEE HAD SHOWN INCOME OF R S.11,90,427/-. THUS THE ASSESSEES TOTAL INCOME MAINLY CONSISTS OF INTEREST INCOME AND OTHERS. THE AO FURTHER NOTED THAT THE ASSESSEE HAD SHOWN CERTAIN SALES OF OPENING STOCK ON WHICH IT HAD INCURRED LOSSES, W HICH HAS BEEN ADJUSTED AGAINST THE OTHER INCOME MAINLY INTEREST A ND HE ALSO ADJUSTED EXPENSES AGAINST SUCH INCOME. THE ASSESSEES CASE B EFORE THE AO WAS THAT, THE EXPENSES AGGREGATING TO RS.8,26,080/- HAV E BEEN INCURRED DURING THE COURSE OF THE BUSINESS ONLY AND THEREFOR E, IS ALLOWABLE, AS THE ASSESSEE HAD SOLD ITS STOCK DURING THE YEAR AND ALS O COLLECTED RECEIVABLES FROM ITS CUSTOMERS LOCATED AT HEAD OFFI CE AND OTHER BRANCHES AT AHMADABAD, CHENNAI, COIMBATORE AND GOA AND SUCH COLLECTIONS AMOUNTED TO RS.10,55,818/-. THE ASSESSEES MAJOR EX PENSES PERTAIN TO SALARY PAID TO THE EMPLOYEES DEBITED UNDER THE HEAD PERSONNEL EXPENSES, TRAVELLING EXPENSES, AND OTHER OPERATING EXPENSES. THE ASSESSEE ALSO SUBMITTED COPY OF SALE BILLS, BANK ST ATEMENT AND DETAILS OF EXPENSES. HOWEVER, THE ASSESSING OFFICER REJECTED T HE ASSESSEES CONTENTION ON THE GROUND THAT THE ASSESSEE HAS ONLY SOLD OPENING STOCK ON WHICH IT HAS INCURRED LOSSES AND THE SAME HAS BE EN ADJUSTED AGAINST THE INTEREST INCOME, WHICH IS TO BE TAXED AS INCOME FROM OTHER SOURCES. NO BUSINESS ACTIVITIES AS SUCH HAVE BEEN CARRIED OU T BY THE ASSESSEE. THE SALE BILLS DOES NOT MENTION ABOUT THE DELIVERY DETAILS AND DELIVERY CHALLANS. THE ENTIRE OF SALES HAS BEEN SHOWN IN ORD ER TO REDUCE THE TAXABLE INCOME BY CLAIMING EXPENSES. FOR DISALLOWIN G THE EXPENSES, AO STRONGLY RELIED UPON THE DECISION OF BOMBAY HIGH CO URT IN THE CASE OF ITA NO. 1532/MUM/2013 M/S. MERCURY PAINTS & VARNISHES LTD. ASSESSMENT YEAR: 2007-08 3 GODAVARI SUGAR MILLS LTD. VS. CIT, 191 ITR 359. THUS HE DISALLOWED THE ENTIRE EXPENSES AND TREATED THE INTEREST INCOME ASS ESSABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. SINCE THE EXPENSES INCURRED WERE NOT IN RELATION TO EARNING OF INTEREST INCOME THEREFORE , THESE EXPENSES OF RS.8,26,080/- WERE DISALLOWED. 3. BEFORE THE LD.CIT(A), THE SAME SUBMISSIONS WERE REITERATED THAT THE EXPENSES DIRECTLY RELATED TO ITS BUSINESS ACTIV ITIES, AS THE ASSESSEE HAS MADE SALES DURING THE YEAR AND ALSO RECOVERED D EBTS FROM THE CUSTOMERS. THE LD.CIT(A) TOO DISAGREED WITHIN THE A SSESSEES CONTENTION AND HELD THAT ASSESSEE HAS NOT COMMENCED HIS BUSINE SS AND THEREFORE, ALL ITS EXPENSES CANNOT BE TREATED AS REVENUE EXPEN DITURE. HE STRONGLY RELIED UPON THE DECISION OF THE HONBLE SUPREME COU RT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERILISERS LTD. VS. CIT (1997) 227 ITR 172, AND HELD THAT INTEREST IS TO BE TREATED AS INCOME FROM OTHER SOURCES AND THE EXPENSES CANNOT BE ALLOWED. HE ALSO SUPPORTED T HE AOS ACTION IN RELYING UPON THE DECISION OF HONBLE BOMBAY HIGH CO URT IN THE CASE OF GODAVARI SUGAR MILLS LTD. VS. CIT 191 ITR 359. 4. BEFORE US, LEARNED COUNSEL SUBMITTED THAT, THE F INDING AND THE CONCLUSION OF THE LD.CIT(A) IS WHOLLY ON A WRONG PR EMISE AS IT IS NOT A CASE OF PRE COMMENCEMENT OF BUSINESS OR CAPITALIZAT ION OF INITIAL EXPENSES. THE ISSUE IS, WHETHER THE BUSINESS EXPEND ITURE DEBITED IN THE P&L ACCOUNT SHOULD BE ALLOWED OR NOT. THOUGH THE AS SESSEE HAS SOLD ITS FACTORY IN THE EARLIER ASSESSMENT YEAR, HOWEVER, IT HAS CONTINUED TO MAKE SALES OF THE STOCKS LYING WITH THE ASSESSEE AN D HAS ALSO MADE COLLECTION OF PAST AND CURRENT RECEIVABLE FROM ITS CUSTOMERS. FOR THIS PURPOSE, THE ASSESSEE COMPANY HAD TO RETAIN EMPLOYE ES TO UNDERTAKE TRAVELLING TO VARIOUS LOCATIONS TO VISIT CUSTOMERS FOR RECOVERY OF ITA NO. 1532/MUM/2013 M/S. MERCURY PAINTS & VARNISHES LTD. ASSESSMENT YEAR: 2007-08 4 OUTSTANDING DUES AND OTHER OPERATIONAL ACTIVITIES. ALL THESE EXPENSES ARE PURELY FOR THE BUSINESS PURPOSE. HE SUBMITTED THAT THOUGH THE FACTORY WAS CLOSED BUT IF, BUSINESS WAS NOT DISCONTINUED IN THIS YEAR AND THERE WAS A TAXABLE BUSINESS INCOME IN THIS YEAR. HE ALSO DREW OUR ATTENTION TO SUNDRY DEBTORS TO WHOM SALES WERE MADE EARLIER A ND RECOVERY OF AMOUNT WAS MADE IN THIS YEAR. THUS SUCH A BUSINESS EXPENDITURE IS TO BE ALLOWED. 5. ON THE OTHER HAND, LD. DR, THOUGH AGREED THAT TH E FINDING OF THE LD.CIT(A) IS SLIGHTLY ON A DIFFERENT FOOTING, BUT T HE MAIN ISSUE IS THAT SUCH AN EXPENDITURE CLAIMED BY THE ASSESSEE CANNOT BE ALLOWED AS NO ACTUAL BUSINESS ACTIVITY WAS CARRIED OUT BY THE ASS ESSEE EXCEPT FOR SALE OF OPENING STOCK FOR WHICH HUGE EXPENSES HAVE BEEN SHOWN BY THE ASSESSEE, RESULTING INTO LOSS WHICH HAS BEEN ADJUST ED AGAINST THE INTEREST INCOME. THEREFORE, AO HAS RIGHTLY TREATED THE INTEREST INCOME FROM OTHER SOURCES AND DISALLOWED THE EXPENDITURE C LAIMED BY THE ASSESSEE. THUS, HE STRONGLY RELIED UPON THE ORDER O F THE AO. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO PER USED THE RELEVANT FINDING AND ALSO MATERIAL PLACED ON RECORD. THE ASS ESSEE COMPANY WAS EARLIER ENGAGED IN THE SALE OF INDUSTRIAL PAINTS TH ROUGH ITS HEAD OFFICE AND VARIOUS BRANCHES ALL OVER THE COUNTRY. ITS FACT ORY WAS SOLD IN THE EARLIER ASSESSMENT YEAR, HOWEVER, THERE WERE STOCK OF PAINTS WHICH THE ASSESSEE HAD SOLD DURING THIS YEAR FOR RS.4,13,521/ -. THE ASSESSEE HAS ALSO COLLECTED DEBTS RECEIVABLE FROM THE CUSTOMERS LOCATED AT HEAD OFFICE AND VARIOUS BRANCHES IN THIS YEAR FOR SUMS AGGREGAT ING RS.10,65,818/- IN THE P&L ACCOUNT, THE ASSESSEE HAS DEBITED PERSON NEL EXPENSES OF RS.5,35,346/- WHICH WERE MOSTLY ON ACCOUNT OF SALAR Y PAID TO THE EMPLOYEES, TRAVELLING EXPENSES OF RS.63,367/- AND O THER OPERATING ITA NO. 1532/MUM/2013 M/S. MERCURY PAINTS & VARNISHES LTD. ASSESSMENT YEAR: 2007-08 5 EXPENSES RS.2,27,367/-, ALL AGGREGATING TO RS.8,26, 080/-. THE MAIN REASON FOR DISALLOWANCE OF EXPENDITURE BY THE AO IS THAT, EXCEPT FOR SALE OF STOCK NO BUSINESS ACTIVITY HAS BEEN CARRIED OUT BY THE ASSESSEE. THE INTEREST INCOME WHICH HAVE BEEN SHOWN HAS BEEN TREA TED AS INCOME FROM OTHER SOURCES. THE LD.CIT(A) HAS GONE ON A COM PLETELY WRONG FOOTING BY TREATING THESE EXPENSES AS PRE OPERATIVE EXPENSES, THAT IS, INCURRED FOR THE PRE COMMENCEMENT OF BUSINESS. THER E IS NO PRE COMMENCEMENT OF BUSINESS HERE IN THIS CASE. THEREFO RE, THE DECISIONS RELIED UPON BY THE LD.CIT(A) IS NOT APPLICABLE AT A LL. EVEN IF THE INTEREST INCOME EARNED BY THE ASSESSEE IS TREATED AS INCOME FROM OTHER SOURCES, THEN IT IS NOT UNDERSTOOD AS TO WHY THE EXPENDITURE DEBITED BY THE ASSESSEE CANNOT BE ALLOWED AGAINST THE OTHER BUSINE SS RECEIPTS LIKE SALE OF STOCK AND THE RECEIVABLES COLLECTED FROM SUNDRY DEBTORS. THE SALE AMOUNT IS ASSESSABLE UNDER THE HEAD BUSINESS INCOME ONLY AS IT IS NOT A CASE OF THE REVENUE THAT THE RECEIPTS FROM SALE OF PAINTS AND OTHER AMOUNTS RECEIVED BY THE ASSESSEE ON ACCOUNT OF DEBT ORS, IS TO BE TAXED UNDER THE SOME DIFFERENT HEAD. THE BUSINESS EXPENDI TURE PERTAINING TO EMPLOYEES AND OTHER OPERATING EXPENSES IS TO BE ALL OWED AS BUSINESS EXPENDITURE. THUS, WE DIRECT THE AO TO ALLOW EXPEND ITURE OF RS.8,26,080/- AS BUSINESS EXPENDITURE. ACCORDINGLY, THE GROUND RAISED BY THE ASSESSEE IS ALLOWED AND THE ORDER OF THE LD. CIT(A) IS SET ASIDE. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 19 TH DAY OF DECEMBER, 2014. SD/- SD/- (D.KARUNAKAR RAO) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 19.12.2014 *SRIVASTAVA ITA NO. 1532/MUM/2013 M/S. MERCURY PAINTS & VARNISHES LTD. ASSESSMENT YEAR: 2007-08 6 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR B BENCH //TRUE COPY// BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.