FIBROLITE AUXILIARIES, MUMBAI V. ACIT CIR 24(1), MUMBAI

ITA 2488/MUM/2009

• Counselvise Citation: 248819914 RSA 2009
• Duration Of Justice: 2 year(s) 5 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-10-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 27-09-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 17-04-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANTAM BOSE
• Assessee Lawyers: SUBRAMANIAN
• Keywords: Depreciation; Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH F, MUMBAI BEFORE SHRI P.M.JAGTAP (A.M) & SHRI N.V.VASUDEVAN (J.M) ITA NO.2488/MUM/09(A.Y. 2005-06) M/S. FIBROLITE AUXILIARIES, SAHIL, 111, B.J.ROAD, BANDRA (W), MUMBAI 50. PAN:AAAFF1614M (APPELLANT) VS. THE ACIT, CIR. 24 (1), PRATYAKSHAKAR BHAVAN, BANDRA KURLA COMPLEX, BANDRA (E), MUMBAI 51 (RESPONDENT) APPELLANT BY : SHRI SUBRAMANIAN RESPONDENT BY : SHRI SANTAM BOSE DATE OF HEARING : 27/09/2011 DATE OF PRONOUNCEMENT : 05/10/2011 ORDER PER N.V.VASUDEVAN, J.M, THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE OR DER DATED 5/2/2009 OF CIT(A) 24 MUMBAI RELATING TO ASSESSEE.Y 2005-06. T HE GROUNDS OF APPEAL RAISED BY THE ASSESSEE READ AS FOLLOWS: 1. THE LEARNED ASSISTANT COMMISSIONER OF INCOME TA X ERRED IN DISALLOWING EXPENDITURE OF RS.12,74,892/- INCURRED UNDER VARIOUS HEADS VIZ. WAGES, BONUS, SALARIES, ADMINISTRATIVE E XPENSES ETC. ON THE GROUND OF CLOSURE OF BUSINESS, 2. THE LEARNED ASSISTANT COMMISSIONER OF INCOME TAX FAILED TO APPRECIATE THE CONTENTION OF THE APPELLANT THAT THE CLOSURE OF BUSINESS OF CHEMICAL ACTIVITY AND SWITCHING OVER TO NEW SHAR E TRADING ACTIVITY IS NOT A CLOSURE OF BUSINESS. 3. THE LEARNED ASSISTANT COMMISSIONER OF INCOME TAX FAILED TO APPRECIATE THAT THE EXPENDITURE INCURRED ON STAFFS AND OTHER EXPENDITURE DURING THE INTERIM PERIOD WERE ALL NECE SRY TO KEEP ITS BUSINESS AFLOAT AND HAVE ITS CONTINUED EXISTENCE AN D TO CONTINUE TO HAVE SERVICES EXISTING EMPLOYEES. ITA NO.2488/MUM/09(A.Y. 2005-06) 2 2. THE FACTS ARE AS FOLLOWS: THE ASSESSEE IS A PARTNERSHIP FIRM. IT WAS CARRYI NG ON THE BUSINESS OF MANUFACTURING CHEMICALS. ADMITTEDLY THIS BUSINESS WAS DISCONTINUED SINCE 22/4/2002, WHICH WAS THE LAST DATE OF SALES INVOICE RAISED. ALL THE DEBTOERS WERE REALIZED BY 31/3/2003. ACCORDING TO THE ASSES SEE IT RETAINED CERTAIN WORKERS AND STAFF AND SOME WERE PAID AND SETTLED IN JUNE 2004 AND NOVEMBER, 2004. IN SEPTEMBER 2004 THE ASSESSEE STA RTED THE SHARE TRADING ACTIVITY. THE ASSESSEE ALSO LET OUT ITS BUSINESS P REMISES TO MTNL AND FINALLY THE SAME WAS SOLD IN JULY 2004. FOR A.Y 2005-06 TH E ASSESSEE DECLARED TOTAL INCOME OF RS.45,75,074/-. ACCORDING TO THE A O IN COMPUTING THE INCOME AS AFORESAID, THE ASSESSEE HAD CLAIMED EXPEN SES WHICH WERE ATTRIBUTABLE TO THE EARLIER BUSINESS OF MANUFACTURE OF CHEMICALS AND TO THIS EXTENT THOSE EXPENSES CANNOT BE ALLOWED AS DEDUCTIO N BECAUSE THE BUSINESS OF MANUFACTURE OF CHEMICALS HAD BEEN CLOSED DOWN. ACCORDING TO AO EXPENSES INCURRED IN RESPECT OF A BUSINESS WHICH IS CARRIED ON BY THE ASSESSEE DURING THE PREVIOUS YEAR ALONE CAN BE ALLO WED AS DEDUCTION. ACCORDINGLY THE AO DISALLOWED THE FOLLOWING ITEMS O F EXPENSES AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. (I) WAGES RS. 54,079/- (II) EX-GRATIA (FACTORY) RS. 7,545/ (III) BONUS (FACTORY) RS. 22,296/- (IV) SALARIES RS. 1,49,600/- (V) BONUS (OFFICE) RS. 49,280/- (VI) EX-GRATIA (OFFICE) RS. 885/- (VII) ADMINISTRATIVE CHARGES RS. 8921- (VIII) STAFF WELFARE RS. 63,678/- (IX) CONVEYANCE RS. 10,845/- (X) MOTOR CAR EXPENSES RS. 4,185/- (XI) PRINTING & STATIONERY RS. 6 10/- (XII) TELEPHONE CHARGES RS. 12,740/- (XIII) SUNDRY EXPENSES RS. 25,595/- (XIV) BUS. PROM. EXPENSES RS. 2,182/- (XV) REP & MAINT. RS. 2,411/- ITA NO.2488/MUM/09(A.Y. 2005-06) 3 (XVI) COMPUTER MAINT. RS. 2,195/- (XVII) FORWARDING CHGS. RS. 2,900/- (XVIII) SUBSERIP. CHGS. RS. 900/- (XIX) BANK CHAGS. RS. 897/- (XX) INTEREST ON CAR LOAN RS. 4,4521- (XXI) BAD DEBTS RS. 18,548/- (XXII) RETRENCHMENT COMP. RS. 1,38,544/- (XXIII) GRATUITY RS. 1,01,351/- (XXIV) GARDEN UPKEEP EXPENSES RS. 45,633/- (XXV) BLDG. INSURANCE RS. 10,169/- (XXVI) CAR INSURANCE RS. 7,296/- (XXVII) DEPRECIATION ON FIXED ASSETS RS. 73,534/- (XXVIII)PROF. FEES FOR TITLE RS. 3,00,000/- (XXIX) PROF. FEES FOR POA RS. 1,15,200/- (XXX) PROF. FEES FOR LEGAL WORK RS. 17,500/- (XXXI) CITY SURVEY WORK RS. 28,950/- ----------------- T OTAL RS. 12,74,892/- ============= THE PLEA OF THE ASSESSEE WAS THAT THOUGH THE BUSINE SS OF MANUFACTURE OF CHEMICALS WAS DISCONTINUED COMPLETELY FROM NOVEMBER , 2004, THE ASSESSEE INTENDED NOT TO WIND OUT THE BUSINESS BUT EXPLORE T HE LIQUID ASSETS OF THE FIRM FOR A MORE LUCRATIVE BUSINESS AND SWITCH OVE R TO THE SHARE TRADING ACTIVITY. THE ASSESSEE THUS CLAIMED THAT THE EXPEN SES SHOULD BE ALLOWED AS DEDUCTION. AS ALREADY STATED THE AO HELD THAT EXPE NSES IN RELATION TO DISCONTINUED BUSINESS CANNOT BE ALLOWED AS DEDUCTI ON AND IN THIS REGARD REFERRED TO SEVERAL JUDICIAL PRONOUNCEMENTS NAMELY (1) GEMINI CASHEW SALES CORPORATION, 65 ITR 643, (2) M. SHESHADRI IYENGAR & SONS VS. CIT 152 ITR 734 (MAD). ON APPEAL BY THE ASSESSEE THE CIT(A) CO NFIRMED THE ORDER OF THE AO. 3. BEFORE US LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT WAS A CASE OF TEMPORARY SUSPENSION OF BUSINESS AND NOT A CLOSURE OF BUSINESS AND, THEREFORE, THE EXPENSES DISALLOWED SHOULD BE ALLOWE D. IN THIS REGARD LD. COUNSEL FOR THE ASSESSEE RELIED ON THE DECISION OF THE HONBLE SUPREME COURT ITA NO.2488/MUM/09(A.Y. 2005-06) 4 IN THE CASE OF K.RAVINDRANATHAN NAIR VS. CIT, 247 I TR 178, WHEREIN IT WAS HELD THAT WHERE AN ASSESSEE TRANSFERRED TWO OUT ITS TEN UNITS AND PAID RETRENCHMENT COMPENSATION IN RESPECT OF THE TRANSF ERRED UNITS THE SAME WAS ALLOWED AS A DEDUCTION. IT WAS HELD THAT THERE WAS ONE SET OF ACCOUNTS MAINTAINED FOR ALL 10 UNITS AND THERE WAS UNITY OF MANAGEMENT AND CONTROL, THEREFORE, ALL THE 10 UNITS CONSTITUTED A SINGLE BU SINESS. THE LD. D.R HOWEVER SUBMITTED THAT THE CASE RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE IS A CASE WHERE THERE WAS FINDING THAT TH ERE WAS COMPOSITE BUSINESS. SIMILARLY LD. D.R ALSO POINTED OUT THAT THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF VEECUMSEES VS. CIT, 22 0 ITR 185 (SC), THE DECISION RELIED UPON BY THE LD. COUNSEL FOR THE AS SESSEE WAS A CASE WHERE THERE IS A FINDING THAT THE JEWELLERY BUSINESS AND RUNNING A CINEMA THEATRE WERE SINGLE BUSINESS. ACCORDING TO HIM IN THE CASE OF THE ASSESSEE THERE WAS NO SUCH FACTS EXISTING AND, THEREFORE, THERE IS NO QUESTION OF ALLOWING THE EXPENSES CLAIMED BY THE ASSESSEE. THE LD. D.R FURT HER POINTED OUT THAT IN A.Y 2005-06 SIMILAR EXPENSES WERE DISALLOWED AND SU CH DISALLOWANCE WAS ACCEPTED BY THE ASSESSEE. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSION. IN OUR VIEW THE CONTENTIONS RAISED BY THE LD. D.R HAVE TO BE ACCEPTED. ADMITTE DLY THE BUSINESS OF MANUFACTURE OF CHEMICALS HAD BEEN COMPLETELY CLOSED . THERE WAS NO INTENTION OF RESUMING THE SAID BUSINESS AND THIS FA CT HAS BEEN ACCEPTED BY THE ASSESSEE BEFORE THE AO. THE BUSINESS OF TRADIN G IN SHARES HAD NO CONNECTION WHATSOEVER WITH THE BUSINESS OF MANUFACT URING CHEMICALS. THEREFORE, THE EXPENSES INCURRED IN CONNECTION WITH THE BUSINESS OF MANUFACTURE OF CHEMICALS HAD TO BE DISALLOWED. WE HOWEVER, FIND THAT THERE IS NO CLEAR FINDING WITH REGARD TO THE EXPENSES DIS ALLOWED BEING EXCLUSIVELY ATTRIBUTABLE ONLY TO THE OLD BUSINESS. WE, THEREFO RE, REMAND THE ISSUE OF QUANTUM OF DISALLOWANCE MADE TO THE AO FOR FRESH CO NSIDERATION. THE AO WILL ALLOW EXPENSES WHICH ARE RELATABLE TO THE NEW BUSINESS OF SHARE TRADING ITA NO.2488/MUM/09(A.Y. 2005-06) 5 CARRIED ON BY THE ASSESSEE DURING THE PREVIOUS YEAR . FOR STATISTICAL PURPOSES APPEAL OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED . 5. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TRE ATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON T HE 5 TH DAY OF OCT. 2011. SD/- SD/- (P.M.JAGTAP ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 5 TH OCT. 2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RF BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.2488/MUM/09(A.Y. 2005-06) 6