S.B. Cottons Pvt. Ltd., Ahmedabad V. The Income Tax Officer, Ward-4(1)(3), Ahmedabad

ITA 2612/AHD/2016

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 9145 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 2 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-12-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2012-2013
• Appeal Filed On: 10-10-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: J P SHAH
• Keywords: Business income; Depreciation; Business expenditure
• Section: 143(3); 142(1); 37(1); 143(1); 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, AHMEDABAD BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER & MS. MADHUMITA ROY, JUDICIAL MEMBER I.T.A. NO.2612/AHD/2016 (ASSESSMENT YEAR : 2012-13) S. B. COTTONS PVT. LTD., S/6, FOUNTAIN PLACE COMPLEX, MITHAKHALI SIX ROAD, NAVRANGPURA, AHMEDABAD 9. VS. ITO, WARD - 4(1)(3), B-203, 2 ND FLOOR, AMBAWADI, AHMEDABAD. [PAN NO. AACCS 1091 G] ( APPELLANT ) .. ( RESPONDENT ) APPELLANT BY : SHRI J. P. SHAH, A.R. RESPONDENT BY : SHRI MUDIT NAGPAL, SR. D.R. DATE OF HEARING 03/12/2018 DATE OF PRONOUNCEMENT 17/12/2018 O R D E R PER MS. MADHUMITA ROY - JM: THE INSTANT APPEAL FILED BY THE ASSESSEE IS AGAINS T THE ORDER DATED 04.08.2016 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS)- 7, AHMEDABAD ARISING OUT OF THE ORDER DATED 26.12.2014 FOR THE ASSESSMENT YEAR 2012 -13 PASSED BY THE ITO, WARD 4(1)(3) UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT) WHEREBY AND WHEREUNDER DISALLOWANCE TO THE TUNE OF RS.24,76,606 /- WAS UPHELD BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ON THE GROUND THAT DURING THE YEAR UNDER CONSIDERATION ASSESSEE DID NOT CARRY OUT ANY BUSINE SS ACTIVITY. - 2 - ITA NO.2612/AHD/2016 S.B. COTTON PVT. LTD. VS. ITO ASST.YEAR 2012-13 2. BRIEF FACTS RELATING TO THE CASE IS THIS THAT TH E ASSESSEE BEING A TRADER OF COTTON FILED ITS RETURN OF INCOME ON 22.09.2012 DECLARING TOTAL INCOME AT RS.24,57,238/-. UPON SCRUTINY A NOTICE U/S 143(2) WAS ISSUED ON 08.08.20 13 FOLLOWED BY SUBSEQUENT NOTICE U/S 142(1) DATED 22.04.2014 ALONG WITH DETAILED QUESTIO NNAIRE UPON WHICH THE PROFIT AND LOSS INCLUDING ALL OTHER DOCUMENTS WERE DULY SUBMITTED B Y THE ASSESSEE. THE INTEREST INCOME EARNED ON FDR KEPT WITH NATIONALIZED BANK AT RS.48, 03,247/- AND FURTHER INTEREST INCOME OF RS.1,33,631/- REPRESENTING INTEREST RECEI VED FROM OTHER PARTIES WERE DISCLOSED BY THE ASSESSEE. NO OTHER REVENUE EARNED WAS REPORT ED DURING THE YEAR UNDER CONSIDERATION. THE ASSESSEE CLAIMED THE FOLLOWING E XPENDITURE; SR. NO. NATURE OF EXPENSES AMOUNT 1. EMPLOYEE BENEFIT EXPENSES : RS.12,00,000/- (BEING REMUNERATION PAID TO DIRECTORS) 2. FINANCIAL COSTS (INCLUDES BANK : RS.11,52,59 3/- CHARGES, BANK INTEREST AND INTEREST PAID ON DEPOSIT S) 3. DEPRECIATION : RS. 55,808/- 4. ADMINISTRATIVE EXPENSES : RS. 68,204/- TOTAL EXPENSES CLAIMED : RS.24,76,605/- 3. A SHOW CAUSE NOTICE DATED 21.10.2014 WAS SERVED UPON THE ASSESSEE ALLEGING THAT THE ASSESSEE HAS NOT CARRIED OUT ANY BUSINESS ACTIV ITY DURING THE FINANCIAL YEAR UNDER CONSIDERATION AND HAS REPORTED ONLY INTEREST INCOME EARNED ON FDRS. THE ASSESSEE WAS DIRECTED TO SHOW CAUSE AS TO WHY SUCH INTEREST EARN ED ON FDRS WOULD NOT BE CONSIDERED TO BE INCOME FROM OTHER SOURCES AS WELL AS THE DEPR ECIATION AS DEBITED IN THE PROFIT AND LOSS ACCOUNT. IN RESPONSE TO THE SAID SHOW-CAUSE NO TICE, THE ASSESSEE BY AND UNDER A REPLY DATED 29.10.2014 SUBMITTED HIS EXPLANATION BE FORE THE LEARNED ASSESSING OFFICER. HOWEVER, SUCH EXPLANATION GIVEN BY THE ASSESSEE WAS NOT ACCEPTED BY THE LEARNED AR AND THE ENTIRE EXPENDITURE AS CLAIMED BY THE ASSESS EE AS DEDUCTION U/S 37(1) OF THE ACT AGGREGATING RS.24,20,798/- AND DEPRECIATION CLAIMED U/S 32 OF THE ACT TO THE TUNE OF - 3 - ITA NO.2612/AHD/2016 S.B. COTTON PVT. LTD. VS. ITO ASST.YEAR 2012-13 RS.55,808/- HAS BEEN DISALLOWED WHICH WAS FURTHER U PHOLD BY THE LEARNED CIT(A). HENCE THE INSTANT APPEAL. 4. AT THE TIME OF HEARING OF THE INSTANT APPEAL, LE ARNED COUNSEL APPEARING FOR THE ASSESSEE SUBMITTED BEFORE US THAT THERE WAS A TEMPO RARY CESSATION OF THE BUSINESS FACT OF WHICH IS CLEARLY EVIDENT FROM THE RETURN OF INCOME FILED BY THE ASSESSEE FOR ASSESSMENT YEAR 2013-14 ONWARDS. THE CHART SHOWING INCOME FROM OPERATION FROM A.Y. 2013-14, 2015-16 TO 2017-18 HAS BEEN HANDED OVER TO US BY TH E LEARNED COUNSEL APPEARING FOR THE ASSESSEE. THE LEARNED COUNSEL FOR THE ASSESSEE FURT HER SUBMITTED BEFORE US THAT THERE WAS INADVERTENT ERROR COMMITTED BY THE REVENUE IN NOT A LLOWING CURRENT YEAR BUSINESS LOSS OF RS.3,00,705/- WHICH WAS SUBSEQUENTLY RECTIFIED COPY WHEREOF WAS ALSO SUBMITTED BEFORE US. 5. THE BALANCE SHEET, PROFIT AND LOSS ACCOUNT ALONG WITH THE NOTICE AND STATEMENT OF TOTAL INCOME OF A.Y. 2013-14, 2015-16, 2016-17 & 20 17-18 WAS ALSO PLACED ON RECORD BY WAY OF PAPER BOOK FILED BY THE ASSESSEE BEFORE US T O ESTABLISH THAT THE ASSESSEE IS STILL IN THE TRADING BUSINESS OF COTTON AND THERE WAS A TEMP ORARY LULL DURING THE YEAR UNDER CONSIDERATION IN THE BUSINESS ACTIVITY OF THE ASSES SEE AND THE ASSESSEE HAD AGAIN STARTED ACTIVITIES DURING THE SUBSEQUENT YEAR BY RECEIVING ORDERS AND AFFECTED SALE THEREON. ON THE CONTRARY, THE LEARNED DR RELIED UPON THE ORDER PASSED BY THE AUTHORITIES BELOW. 6. HEARD LEARNED COUNSEL APPEARING FOR THE PARTIES, PERUSED THE RELEVANT MATERIALS AVAILABLE ON RECORD. IT APPEARS FROM THE RECORDS PA RTICULARLY SUBMITTED AT THE TIME OF HEARING, THAT IN THE RETURN OF INCOME U/S 143(1) OF THE ACT DATED 14.01.2012 CURRENT YEAR BUSINESS LOSS OF RS.3,00,705/- WAS NOT ALLOWED TO T HE ASSESSEE DUE TO MISMATCH IN THE - 4 - ITA NO.2612/AHD/2016 S.B. COTTON PVT. LTD. VS. ITO ASST.YEAR 2012-13 COMPUTER DATA BASE. SUBSEQUENTLY, IT WAS VERIFIED W ITH THE I. T. RETURN FOR A.Y. 2011-12 AND SAME WAS ACCORDINGLY RECTIFIED BY AND UNDER THE ORDER DATED 07.11.2013 PASSED BY THE DCIT, CIRCLE-8, AHMEDABAD. 7. WE HAVE CONSIDERED THE ORDER PASSED BY THE LEARN ED AO. WE FIND THAT DURING THE ASSESSMENT PROCEEDINGS THE ASSESSEE DULY EXPLAINED THE SITUATION BY AND UNDER A REPLY DATED 29.10.2014 STATING THAT DURING THE RELEVANT P ERIOD WHEN THE TRADING OF COTTON WAS VERY RISKY THE ASSESSEE COULD NOT CARRY OUT THE BUS INESS. NEITHER THE COMPANY GOT EXPORT QUOTA LICENSE FROM THE GOVERNMENT AS A RESULT WHERE OF NO SALE WAS AFFECTED. HOWEVER, IT WAS CONTENDED BY THE ASSESSEE THAT ALL ALONG AND AL THOUGH THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF COTTON TRADE BUT DUE TO THE REASON MENTIONED ABOVE THERE WAS TEMPORARY LULL IN THE BUSINESS. THE ASSESSEE SOUGHT TO JUSTIF Y THE CONTINUITY OF BUSINESS BY STATING THAT DURING THE FINANCIAL YEAR 2012-13 & 2013-14 CO MPANY HAS AFFECTED SALES AND PAID VAT THEREON. IT WAS FURTHER CONTENTED BY THE ASSESS EE THAT THERE IS NO COMPULSION THAT IN EACH FINANCIAL YEAR THE COMPANY HAS TO AFFECT SALE EVEN IF THE MARKET CONDITION IS NOT FAVORABLE. THE ASSESSEE BY AND UNDER A FURTHER REPL Y DATED 20.11.2014 SUBMITTED THE FOLLOWING: '------FURTHER IT IS SUBMITTED THAT YOUR HONOUR HAS RAISED THE QUESTION OF NON OPERATIVE INCOME DURING THE YEAR. IT IS SUBMITTED T HAT THERE WAS ACTIVE PARTICIPATION BY ALL THE DIRECTORS TO CONCLUDE BUSI NESS IN COTTON DURING THE YEAR BUT IT COULD NOT MATERIALIZE ON ACCOUNT OF : [A] EX CESS CREDIT DEMANDED BY THE CUSTOMERS WITHOUT ANY GUARANTEE FOR REPAYMENT OF DU ES AND [B] THE ATTEMPT TO OBTAIN EXPORT QUOTA DID NOT MATERIALIZE. THE DIRECT ORS TRIES TO OBTAIN DEPB LICENSE FOR THE EXPORTS OF COTTON CONCLUDED IN THE EARLIER YEAR AND ITS SALE IN THE SUBSEQUENT YEAR IS PROOF OF THE CONTINUITY OF BUSIN ESS IN THE CURRENT YEAR. THE BUSINESS IS ALWAYS A CONTINUOUS PROCESS EVEN THOUGH THERE COULD BE A TEMPORARY LULL IN THE BUSINESS ACTIVITY FOR ANY REASON. SECTI ON 2[13] OF THE ACT NOWHERE DEFINES THAT BUSINESS MUST A CONTINUOUS ACTIVITY AN D GOES FURTHER TO INCLUDE A SOLITARY TRANSACTION AFTER FEW YEARS OR AN ACTIVITY IN THE NATURE OF ENTERPRISE AS A BUSINESS. WE ATTACH HEREWITH ANNEXURE 'A' AS A WRIT E UP ON 'DORMANT BUSINESS' DULY SUPPORTS BY CASE LAWS TO JUSTIFY THAT EVEN IN CASE OF TEMPORARY LULL IN THE - 5 - ITA NO.2612/AHD/2016 S.B. COTTON PVT. LTD. VS. ITO ASST.YEAR 2012-13 BUSINESS ACTIVITY , ATTEMPT TO CARRY ON ANY ACTIVIT Y WILL BE TREATED AS ONGOING BUSINESS AND ALL EXPENSES FOR ITS ESTABLISHMENT INC LUDING EXPENSES FOR EXPLORATION OF NEW ACTIVITIES WILL BE BUSINESS EXPENDITURE ALLO WABLE AS BUSINESS EXPENSES U/S.28 R.W.S. 37(1) OF THE ACT. 3. ASSESSEE IS A COMPANY ASSESSEE AND A COMPANY IS INCORPORATED WITH MAIN OBJECT TO CARRY ON BUSINESS. IT HAS PERPETUAL EXIST ENCE AND THEREFORE, NO MATTER FOR WHAT REASON THE ACTUAL TRADING ACTIVITY WAS NOT EAR NED ON DURING A SPECIFIC PERIOD, ITS EXISTENCE TO CARRY THE BUSINESS CANNOT BE OVERLOOKED AND ANY ACTIVITY TO EXPLORE A BUSINESS, WITH OR WITHOUT SUCCESS MUST BE REGARDED AS CONTINUITY OF BUSINESS. ASSESSEE COMPANY IS NOT A SECTION 25 COMP ANY TO TAKE UP NONPROFIT ACTIVITY AND HENCE BUSINESS MUST BE TREATED AS PART OF ITS VERY EXISTENCE. IN ADDITION TO THE SAID REPLY RELIANCE WERE MADE IN THE JUDGMENT PASSED BY GENERAL CORPORATION LTD.-VS-CIT, 3 ITR 350, CIT-VS-BHARAT N IDHI LTD., 60 ITR 520 (PUNJ) & INDERCHAND HARIRAM-VS-CIT, 23 ITR 437 (ALL.). HOWEVER, THE CONTENTION MADE BY THE ASSESSEE WAS NO T ACCEPTED BY THE LEARNED AO AND HE THEREAFTER MADE THE ENTIRE EXPENDITURE CLAIMED B Y THE ASSESSEE AS DEDUCTION U/S 37(1) OF THE ACT AGGREGATING TO RS.24,20,798/- AND THE DE PRECIATION CLAIMED U/S 32 OF THE ACT AT RS.55,808/-; THE ENTIRE AMOUNT OF RS.24,76,606/- WE RE ADDED TO THE TOTAL INCOME OF THE ASSESSEE AGAINST WHICH APPEAL WAS PREFERRED BEFORE THE LEARNED CIT(A) WHO IN TERM CONFIRMED THE SAME WITH THE FOLLOWING OBSERVATION: 4.2 I HAVE CONSIDERED THE ASSESSMENT ORDER AND TH E SUBMISSIONS MADE BY THE APPELLANT A PERUSAL OF THE SAME SHOWS THAT THE APPE LLANT HAS NOT CARRIED OUT ANY BUSINESS DURING THE YEAR UNDER CONSIDERATION. THE A O HAS MADE THE IMPUGNED ADDITION OF TREATING THE BUSINESS INCOME OF RS.49,3 6,878/- AS INCOME FROM OTHER SOURCES SINCE HE WAS OF THE VIEW THAT, AS NO BUSINE SS HAD BEEN DONE DURING THE YEAR, INTEREST INCOME FROM FDRS COULD NOT BE CATEGO RIZED AS BUSINESS INCOME. THE APPELLANT, ON THE OTHER HAND, HAS CONTENDED THAT IT S BUSINESS HAD DISCONTINUED DURING THE YEAR UNDER CONSIDERATION BUT WAS REVIVED IN SUBSEQUENT YEAR AND HENCE IT WAS CONTINUING BUSINESS. THEREFORE, IT WAS CLAIM ED THAT THE INTEREST EARNED ON FDRS COULD NOT BE SAID TO BE INCOME FROM OTHER SOUR CES. - 6 - ITA NO.2612/AHD/2016 S.B. COTTON PVT. LTD. VS. ITO ASST.YEAR 2012-13 4.2.1 A PERUSAL OF THE SUBMISSIONS MADE BY THE APP ELLANT SHOWS THAT THE CLAIM OF THE APPELLANT THAT THE BUSINESS HAS CONTINUED IN SU BSEQUENT YEAR IS FACTUALLY INCORRECT. IT IS SEEN FROM THE RETURNS OF INCOME FI LED THAT NO BUSINESS ACTIVITY HAS BEEN CARRIED ON BY THE APPELLANT IN THE TWO SUBSEQU ENT YEARS I.E. ASST. YEAR 2013- 14 AND 2015-16 AS WELL. AS SUCH, THE CLAIM THAT THE BUSINESS IS MAINTAINING CONTINUITY CANNOT BE ACCEPTED. SIMPLY BECAUSE THE F DRS IN BANKS HAVE BEEN MADE OUT OF SURPLUS AVAILABLE FUNDS WITH IT ON ACCOUNT O F DISCONTINUATION OF BUSINESS CANNOT IMPLY THAT THE INTEREST EARNED ON THESE DEPO SITS WILL BE BUSINESS INCOME. !N FACT, IT HAS BEEN ADMITTED BY THE APPELLANT THAT TH E FDRS WERE PLACED WITH BANKS IN ORDER TO EARN INTEREST INCOME. IT IS ALSO SEEN F ROM THE SUBMISSIONS AND FINANCIAL STATEMENTS THAT EVEN IN EARLIER YEAR I.E. ASST. YEA R 2011-12, INTEREST ON FDRS WAS SHOWN BY THE APPELLANT AS INCOME FROM OTHER SOURCES . CONSIDERING THE FACTS OF THE CASE, I AM OF THE VIEW THAT THE APPELLANT COMPANY H AS NOT DONE ANY BUSINESS ACTIVITY DURING THE YEAR UNDER CONSIDERATION AND EV EN DURING THE FOLLOWING TWO FINANCIAL YEARS, THE ACTION OF THE AO IN DISALLOWIN G THE EXPENDITURE CLAIMED BY THE APPELLANT SINCE THE SAME HAS NOT BEEN INCURRED WHOL LY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, IS UPHELD. THE ACTION OF THE A O IN TREATING THE INTEREST EARNED ON FDRS OF RS.49,39,878/- AS INCOME FROM OTHER SOUR CES IS ALSO CONFIRMED. 8. FURTHER THAT IT IS EVIDENT FROM THE DOCUMENTS PL ACED ON RECORD INCLUDING SUBMISSIONS MADE BY THE ASSESSEE THAT THERE WAS TEM PORARY LULL IN THE BUSINESS OF THE ASSESSEE AND IT WAS NOT A COMPLETE CESSATION OF BUS INESS ACTIVITY FACT OF WHICH WAS NOT CONSIDERED BY THE AUTHORITIES BELOW IN ITS PROPER P ROSPECTIVE. THE ASSESSING OFFICER DISALLOWED THE EXPENSES INCURRED BY THE ASSESSEE FO R DISCONTINUATION OF ITS BUSINESS WHICH DESERVES TO BE ALLOWED; IN FACT THE PROFIT AN D LOSS OF THE SUBSEQUENT YEARS SHOWS THAT THERE WERE CONSIDERABLE MATERIALS CONSUMED BY THE ASSESSEE COMPANY IN THE SAID TRADING OF COTTON BUSINESS. THE GROSS RECEIPT OF TH E ASSESSEE BECAME HIGH DURING THE SUBSEQUENT YEARS WHICH ESTABLISHES THE FACT OF THER E BEING TEMPORARY LULL IN THE BUSINESS ACTIVITY OF THE ASSESSEE DURING THE YEAR UNDER CONS IDERATION. MORE SO, THE REASON WHICH WAS SHOWN BY THE ASSESSEE WHILE REPLYING THE SHOW-C AUSE ISSUED BY THE ASSESSING OFFICER FOR SUCH LULL IN THE BUSINESS SEEMS TO BE JUSTIFIED WHICH WAS AGAIN NOT ATTENDED BY THE LEARNED CIT(A). TAKING INTO CONSIDERATION THE ENTIR E FACTS OF THE MATTER AND THE RECORDS - 7 - ITA NO.2612/AHD/2016 S.B. COTTON PVT. LTD. VS. ITO ASST.YEAR 2012-13 PLACED BEFORE US, WE ARE OF THE CONSIDERED VIEW THA T THERE WAS A TEMPORARY SUSPENSION AND/OR LULL IN THE BUSINESS OF THE ASSESSEE AND THU S THE ASSESSEE IS ENTITLED TO THE CLAIM OF DEDUCTION U/S 37(1) OF THE ACT, WHICH WAS INCURRED BY THE ASSESSEE AS NARRATED HEREIN BEFORE AS ALSO THE DEPRECIATION U/S 32 OF THE ACT. WE FIND NO REASON FOR DISALLOWING THE SAME AND THEREFORE WE DELETE SUCH ADDITION MADE BY THE AUTHORITIES BELOW FOR THE REASON AS DISCUSSED ABOVE. 9. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. THIS ORDER PRONOUNCED IN OPEN COURT ON 17/12/2018 SD/- SD/- ( WASEEM AHMED ) ( MS. MADHUMITA ROY ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD; DATED 17/12/2018 PRITI YADAV, SR.PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. () / THE CIT(A)-7, AHMEDABAD. 5. , ! ' , #$%% / DR, ITAT, AHMEDABAD 6. &' () / GUARD FILE. / BY ORDER, //TRUE COPY// / ( DY./ASSTT.REGISTRAR) !, #$ / ITAT, AHMEDABAD