M/S. TRIUMPH INTERNATIONAL FINANCE INDIA LTD, MUMBAI V. THE ACIT CEN CIR-40, MUMBAI

ITA 76/MUM/2009

• Counselvise Citation: 7619914 RSA 2009
• Duration Of Justice: 3 year(s) 3 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-04-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 20-12-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 05-01-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR P DANIEL
• Keywords: Business income; Depreciation; Business expenditure; Speculation loss; Cancellation of registration
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI P.M.JAGTAP (A.M) & SHRI N.V.VASUDEVAN( J.M) ITA NO. 76/MUM/2009(A.Y.2005-06) TRIUMPH INTERNATIONAL FINANCE INDIA LTD., OXFORD CENTRE, 10,SHROFF LANE, COLABA CAUSEWAY, MUMBAI 400 005. PAN:AAACE 0308A (APPELLANT) VS. THE ACIT, CEN. CIR.40, AAYKAR BHAVAN, MK ROAD, MUMBAI - 20. (RESPONDENT) APPELLANT BY : SHRI RAJEEV KHANDELWAL RESPONDENT BY : DR. P.DANIEL DATE OF HEARING : 19/04/2012 DATE OF PRONOUNCEMENT : 2 5/04/2012 ORDER PER N.V.VASUDEVAN, J.M THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE OR DER DATED 10/10/2008 OF CIT(A) CENTRAL-VII, RELATING TO A.Y 2 005-06. 2. GROUND NO.1 WAS NOT PRESSED. THEREFORE, THE SA ME IS DISMISSED AS NOT PRESSED. 3. GROUND NO.2 RAISED BY THE ASSESSEE READS AS FOL LOWS: THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE A SSESSING OFFICER IN MAKING AN ADDITION OF A SUM OF RS. 10,37,11,957/- B EING AMOUNT CREDITED TO CAPITAL RESERVE ON ACCOUNT OF WAIVER A LLOWED BY CENTURION BANK OF PRINCIPAL AMOUNT. THE APPELLANT CONTEND THAT THE CIT(A) OUGHT NOT TO HAVE UPHELD THE ACTION OF THE ASSESSING OFFICER IN MAKING THE IMPUG NED ADDITION IN AS MUCH AS THE SAID AMOUNT IS EXTINGUISHMENT OF LIABIL ITY OF PRINCIPAL AMOUNT AND HENCE, NOT LIABLE TO BE TAXED UNDER SECT ION 41 OF THE ACT. AS SUCH, THE IMPUGNED ADDITION NEEDS TO BE DELETED. ITA NO. 76/MUM/2009(A.Y.2005-06) 2 4. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF TRADING IN SHARES AND SECURITIES. IN THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTICED THAT IN THE BALANCE SHEET THERE WAS AN INCR EASE IN CAPITAL RESERVE BY RS. 14,45,48,419/-. THE AO CALLED UPON THE ASSESSE E TO FILE DETAILS OF THE INCREASE IN CAPITAL RESERVE IN THE BALANCE SHEET. THEREUPON THE ASSESSEE FURNISHED DETAILS. IT WAS EXPLAINED BY THE ASSESSE E THAT THERE WAS AN OUTSTANDING LOAN PAYABLE TO CENTURION BANK LTD. AND A ONE-TIME SETTLEMENT WAS ARRIVED AT BETWEEN THE ASSESSEE, THE DETAILS OF WHICH WERE AS FOLLOWS: CENTURION BANK LIMITED: LOAN AMOUNT PAYABLE AS ON 31.03.2001 13,83,22 ,640 (INCLUDING INT. OF RS.69,35,419/- FOR MARCH, 2001 QUARTER) ADD: AMOUNT DEBITED 1. BANK INTEREST F.Y. 2001-02 1,67,82,574 F.Y. 2001-02(PROVISIONS) 1,6 3,69,303 F.Y.2002-03(PROVISION) 1, 73,57,050 F.Y. 2003-04(PROVISION) 2, 02,61,611 (NOT CLAIMED IN INCOME-TAX) F.Y.2004-05(PROVISION) 50,65,403 7,58,35,941 (NOT CLAIMED IN INCOME -TAX) 2. DEMAT CHARGES 528 3. BANK CHARGES (2001-02) 1,000 4. TDS ON FD INTEREST 3,26,811 5. BANK GUARANTEE INVOKED 2,06,12,258 9,67,76 ,538 23,50,99,178 LESS: AMOUNT CREDITED BY BANK: 1. INTEREST ON FIXED DEPOSITS 3,37,155 2. SALE PROCEEDS ON SHARES INVOKED 8,14,68,605 8,18,05,76 0 (F.Y.2002-03) BALANCE 15,32,93,419 LESS: AMOUNT PAID ON ONE TIME SETTLEMENT 87,45 ,000 AMOUNT CREDITED TO CAPITAL RESERVE 14,45,48,419 THE ASSESSEE CLAIMED THAT THE AMOUNT CREDITED TO TH E CAPITAL RESERVE VIZ., RS 14,45,48,419 IS ON ACCOUNT OF WAIVER ALLOWED BY THE BANK ON PRINCIPAL AMOUNT AND HENCE CREDITED TO CAPITAL RESERVE. THE A SSESSEE SUBMITTED THAT SINCE THE EXTINGUISHMENT IS OF LIABILITY OF PRINCIP AL AMOUNT, THE SAME IS NOT ITA NO. 76/MUM/2009(A.Y.2005-06) 3 LIABLE TO BE TAXED UNDER THE ACT BEING ON CAPITAL R ECEIPT NOT CHARGEABLE TO TAX. 5. THE AO DID NOT ACCEPT THE ASSESSEES CONTENTION . HE HELD THAT UP TO 31/3/2002 THE TOTAL AMOUNT PAYABLE BY THE ASSESSEE TO THE CENTURION BANK WAS RS.23,50,99,1781/-. THE ASSESSEE DEFAULTED IN REPAYMENT OF THE LOAN IN TIME HENCE, THE CENTURION BANK FILED A SUIT BEFORE THE HONORABLE DEBT RECOVERY TRIBUNAL(2), MUMBAI. THEREAFTER, THE BANK AFTER REALIZING SECURITIES REDUCED THE OUTSTANDING LIABILITIES BY RS.8,18,05,7 60/- AGAINST THE ORIGINAL DEMAND OF RS. 23,50,99,178/-. THE BALANCE OUTSTANDI NG WAS RS. 15,32,93,419 AND THE ASSESSEE PAID A SUM OF RS.87, 45,000 AS FULL AND FINAL SETTLEMENT. THUS THE REMAINING AMOUNT OF RS 14,45, 48,419/- WAS WRITTEN OFF. THE AO ACKNOWLEDGED THE FACT THAT THE ORDER OF THE HONORABLE DEBT RECOVERY TRIBUNAL (2), MUMBAI HAS NOT CLEARLY SPECI FIED THE NATURE OF THE AMOUNT WHICH WAS WAIVED BY THE BANK. HE HOWEVER CO NCLUDED THAT DUE TO HONBLE DRT(2) ORDER THE ASSESSEES LIABILITY OF RS . 14,45,48,419/- WAS WRITTEN OFF WHICH INCLUDED PRINCIPAL AMOUNT OF RS.4 ,08,36,462/- AND INTEREST AND OTHER CHARGES OF RS.I0,37,11,957/-. THE BASIS O N WHICH THE AO HAS CONCLUDED AS ABOVE IS NOT SPELT OUT. THEREAFTER TH E AO HAS OBSERVED THAT THE ASSESSEE HAS ALREADY DEBITED INTEREST AND OTHER CHA RGES IN ITS PROFIT AND LOSS ACCOUNT IN RELEVANT ASSESSMENT YEAR. BY REASON OF THE WAIVER BY THE BANK THE ASSESSEE HAS BENEFITED BY WAY OF WRITE OFF OF I NTEREST AND OTHER CHARGES OF RS. 10,37,11,957/- BY ORDER OF THE HONBLE DRT(2 ). THEREAFTER THE AO REFERRED TO THE PROVISIONS OF SEC.41(1) OF THE INCO ME TAX ACT, 1961 (THE ACT): 41. PROFITS CHARGEABLE TO TAX.--(1) WHERE AN ALLOW ANCE OR DEDUCTION HAS BEEN MADE IN THE ASSESSMENT FOR ANY YEAR IN RES PECT OF LOSS, EXPENDITURE OR TRADING LIABILITY INCURRED BY THE AS SESSEE (HEREINAFTER REFERRED TO AS THE FIRST-MENTIONED PERSON) AND SUBS EQUENTLY DURING ANY PREVIOUS YEAR,-- (A) THE FIRST-MENTIONED PERSON HAS OBTAINED, WHETHE R IN CASH OR IN ANY OTHER MANNER WHATSOEVER, ANY AMOUNT IN RESPE CT OF SUCH LOSS OR EXPENDITURE OR SOME BENEFIT IN RESPECT OF S UCH TRADING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF, THE AMOUNT OBTAINED BY SUCH PERSON OR THE VALUE OF BENEFIT ACC RUING TO HIM ITA NO. 76/MUM/2009(A.Y.2005-06) 4 SHALL BE DEEMED TO BE PROFITS AND GAINS OF BUSINESS OR PROFESSION AND ACCORDINGLY CHARGEABLE TO INCOME-TAX AS THE INC OME OF THAT PREVIOUS YEAR, WHETHER THE BUSINESS OR PROFESSION I N RESPECT OF WHICH THE ALLOWANCE OR DEDUCTION HAS BEEN MADE IS I N EXISTENCE IN THAT YEAR OR NOT THE AO THEREFORE HELD THAT LIABILITY TO THE EXTENT OF RS.14,45,48,419 WAS A LIABILITY WHICH HAD BEEN CLAIMED AS DEDUCTION BY TH E ASSESSEE IN THE PAST AND BY VIRTUE OF THE WAIVER BY THE BANK, THE ASSESS EE HAS DERIVED BENEFIT TO THAT EXTENT AND THE SAID SUM HAS TO BE BROUGHT TO T AX AS BUSINESS INCOME AND ACCORDINGLY ADDED THE SAID SUM TO THE TOTAL INC OME. 6. BEFORE CIT(A), THE ASSESSEE SUBMITTED THAT THE A MOUNT OF WAIVER OF RS. 14,45,48,419/- ALLOWED BY THE BANK WAS ON PRINCIPAL ACCOUNT AND HENCE, NOT LIABLE TO BE TAXED UNDER SECTION 41(1) OF THE A CT. WITHOUT PREJUDICE, IT WAS SUBMITTED THAT FOLLOWING DEBITS BY THE BANK HAV E NOT BEEN CLAIMED BY THE ASSESSEE WHILE COMPUTING ITS INCOME IN THE PAST WHILE COMPUTING ITS TOTAL INCOME FOR THE PURPOSE OF THE ACT AND HENCE N OT ALLOWED BY THE ASSESSING OFFICER IN THOSE YEARS AND THEREFORE TO T HAT EXTENT THE ADDITION MADE U/S.41(1) OF THE ACT SHOULD BE DELETED AS THE MAIN CONDITION FOR INVOKING SEC.41(1) OF THE ACT VIZ., THE ALLOWANCE O R DEDUCTION HAS BEEN MADE IN THE ASSESSMENT FOR ANY YEAR IN RESPECT OF LOSS, EXPENDITURE OR TRADING LIABILITY INCURRED BY THE ASSESSE. THE DETAILS FUR NISHED BY THE ASSESSEE IN THIS REGARD WERE AS FOLLOWS: S.NO. AMOUNT PARTICULARS ACCOUNT YEAR ASSESSMENT YEAR 1. 2,02,61,611 INTEREST 2003- 04 2004-05 2. 50,65,403 INTEREST 2004 -05 2005-06 3. 528 DEMAT CHARGES 4. 1000 BANK CHARGES 200 1-0 2 2002-03 5. 3,26,811 TDS ON FD INTEREST 6. 2,06,12,258 BANK GUARANTEE 4,62,67,611 ITA NO. 76/MUM/2009(A.Y.2005-06) 5 7. THE CIT(A) HELD THAT THE AO HAS CATEGORICALLY H ELD THAT OUT OF TOTAL AMOUNT OF RS. 14,45,48,419/- THAT WAS WRITTEN OFF I NCLUDED PRINCIPAL AMOUNT OF RS.4,08,36,462/- AND INTEREST AND OTHER C HARGES OF RS.10,37,11,957/-. THE CIT(A) FURTHER HELD THAT I N SO FAR AS THE INTEREST IS CONCERNED, IT WAS NOT DISPUTED BY THE ASSESSEE THAT THE SAME WAS DEBITED TO THE PROFIT AND LOSS ACCOUNT OF THE PREVIOUS YEARS. HE THEREFORE HELD THAT ONCE THE LIABILITY ALLOWED AS DEDUCTION IN THE PAST HAS BEEN WAIVED, IT IS A CASE OF CESSATION OF LIABILITY WHICH IS CLEARLY HIT BY THE PROVISIONS OF SECTION 41(1) OF THE ACT. HE ALSO HELD THAT IN SO FAR AS THE PRINCIP AL AMOUNT WAIVED IS CONCERNED, THE SAME WAS CAPITAL IN NATURE AND NOT T AXABLE. ACCORDINGLY, THE ADDITION WAS RESTRICTED TO RS.10,37,11,957/-. 8. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESSE E HAS RAISED GROUND NO.2 BEFORE THE TRIBUNAL. 9. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED BEFOR E US THAT THE ENTIRE AMOUNT OF RS. 14,45,48,419/- IS THE PRINCIPAL AMOUN T WAIVED AND, THEREFORE, THE PROVISIONS OF SECTION 41(1) OF THE INCOME TAX A CT, 1961(THE ACT) ARE NOT APPLICABLE. IN THIS REGARD RELIANCE WAS PLACED ON THE DECISION OF THE ITAT, MUMBAI IN ITA NO.6875/M/08 A.Y 2005-06 IN THE CASE OF N.H. SECURITIES LTD. VS. ACIT, WHICH IS A DECISION RENDERED IN ANOT HER GROUP COMPANY OF THE ASSESSEE ON IDENTICAL FACTS, WHEREIN THE TRIBUNAL W HILE UPHOLDING IN PRINCIPAL THE PROVISIONS OF SECTION 41(1) OF THE AC T CANNOT APPLY WHERE THERE IS A WAIVER OF PRINCIPAL AMOUNT DUE TO THE BANK BU T CAN APPLY ONLY IN RESPECT OF THE INTEREST LIABILITY WAIVED BY THE BAN K, REMANDED THE ISSUE BACK TO THE AO FOR IDENTIFYING THE INTEREST WAIVED AND T HE PRINCIPAL AMOUNT WAIVED AND THEREAFTER APPLY THE PROVISIONS OF SECTION 41(1 ) OF THE ACT IN SO FAR AS IT RELATES TO INTEREST WAIVED ALONE. 10. ON THE OTHER HAND, LD. D.R SUBMITTED THAT IN RE SPECT OF WAIVER OF INTEREST THE AMOUNT HAS TO BE TAXED. ITA NO. 76/MUM/2009(A.Y.2005-06) 6 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WHIL E WE AGREE IN PRINCIPAL THAT ON THE WAIVER OF THE PRINCIPAL AMOUNT DUE TO T HE BANK AND THE BENEFIT THAT ACCRUES TO ASSESSEE ON WAIVER OF SUCH WAIVER P ROVISIONS UNDER SECTION 41(1) CANNOT BE APPLIED, WE ARE OF THE VIEW THAT IN THE PRESENT CASE THE ORDERS OF THE REVENUE AUTHORITIES ARE NOT CLEAR AS TO HOW THE AMOUNT OF PRINCIPAL WAIVED BY THE BANK WAS ARRIVED AT A SUM O F RS. 4,08,36,462/-. ONE HAS TO LOOK AT THE STATEMENT OF THE BANK TO IDE NTIFY WHAT IS THE PRINCIPAL AMOUNT WAIVED AND THE INTEREST AMOUNT WAIVED AND TH E TERMS OF THE LOAN IN RESPECT OF WHICH THE LIABILITY IN QUESTION AROSE. IT HAS ALSO TO BE VERIFIED AS TO WHAT IS THE INTEREST EXPENDITURE THAT WAS CLAIME D BY THE ASSESSEE AS DEDUCTION IN THE PAST WHILE COMPUTING ITS TAXABLE I NCOME AND WHAT WAS THE AMOUNT THAT WAS ACTUALLY ALLOWED AS DEDUCTION IN TH E PAST ASSESSMENTS. NEITHER THE ORDER OF THE AO NOR THE THAT OF THE CIT (A) IS CLEAR ON THIS ASPECT. WE, THEREFORE, HOLD THAT IN PRINCIPLE THE PROVISION S OF SECTION 41(1) OF THE ACT WILL NOT BE APPLICABLE TO WAIVER OF PRINCIPAL AMOUN T. WE DIRECT THE AO TO EXAMINE THE ISSUE WITH REGARD TO THE ACTUAL QUANTUM OF PRINCIPAL WAIVED AND THE QUANTUM OF INTEREST THAT WAS WAIVED BY THE BANK AND RESTRICT THE ADDITION TO BE MADE UNDER SECTION 41(1) OF THE ACT TO THE EXTENT THAT THE WAIVER RELATES TO THE INTEREST LIABILITY OF THE AS SESSEE WHICH HAD BEEN CLAIMED AS DEDUCTION BY THE ASSESSEE WHILE COMPUTIN G ITS INCOME IN THE PAST. GROUND NO.2 IS THUS ALLOWED FOR STATISTICAL PURPOSES. 12. GROUND NO.3 RAISED BY THE ASSESSEE READS AS UND ER: 3. THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN ALLOWING DEPRECIATION ON ELECTRICAL FITTINGS @ 15% INSTEAD OF 25% AS CLAIMED BY THE APPELLANTS THE APPELLANTS CONTEND THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) OUGHT TO HAVE ALLOW ED DEPRECIATION AS CLAIMED BY THE APPELLANTS. ITA NO. 76/MUM/2009(A.Y.2005-06) 7 13. THE ASSESSEE HAD CLAIMED DEPRECIATION ON ELECTR ICAL INSTALLATION AT 25% TREATING THEM AS FORMING PART OF THE BLOCK OF ASSET S I.E. PLANT AND MACHINERY (RULE 5 OF THE IT RULES, 1962, BLOCK-III). THE ASS ESSEE POINTED OUT THAT PRIOR TO ASSESSMENT YEAR 2002-03 THERE WAS NO SEPARATE BL OCK OR CATEGORY WHEREIN THE SAID ELECTRICAL INSTALLATION COULD BE CLASSIFIE D. WITH EFFECT FROM ASSESSMENT YEAR 2003-04 CONSEQUENT TO THE AMENDMENT IN THE LAW ELECTRICAL FITTINGS WERE TREATED AS PART OF THE BLOCK OF ASSET S, FURNITURE AND FITTINGS ON WHICH DEPRECIATION IS ALLOWABLE ONLY AT 15%. THE A O, THEREFORE, ALLOWED DEPRECIATION AT 15% AS AGAINST 25% CLAIMED BY THE A SSESSEE. 14. BEFORE CIT(A) THE ASSESSEE POINTED OUT THAT EL ECTRICAL INSTALLATION IN RESPECT OF WHICH DEPRECIATION WAS CLAIMED BY THE AS SESSEE ALREADY FORMED PART OF THE BLOCK OF ASSETS, PLANT AND MACHINERY AS THEY WERE IN EXISTENCE PRIOR TO A.Y 2003-04. THE ASSESSEE POINTED OUT THA T THE CLASSIFICATION OF ELECTRICAL INSTALLATION FROM PLANT AND MACHINERY TO FURNITURE AND FITTINGS WAS EFFECTIVELY ONLY FROM AY 03-04. THE ASSESSEE ARGUE D THAT ONCE AN ITEM OF DEPRECIABLE ASSET ENTERS A PARTICULAR BLOCK THEN TH EY LOOSE THEIR IDENTITY AND CANNOT BE RECLASSIFIED IN ANOTHER BLOCK OF ASSETS A ND, THEREFORE, IT IS ONLY IN RESPECT OF ELECTRICAL INSTALLATION WHICH ENTERS THE BLOCK OF FURNITURE AND FITTINGS PURCHASED IN A.Y 2003-04 AND THEREAFTER TH AT THE DEPRECIATION CAN BE RESTRICTED TO 15%. THE ASSESSEE THUS CLAIMED TH AT THE DEPRECIATION IT CLAIMED AT 25% SHOULD BE ALLOWED. ON THIS ISSUE TH E CIT(A) DID NOT GIVE ANY REASON OR DEAL WITH THE AFORESAID ARGUMENT BUT CON FIRMED THE ORDER OF THE AO OBSERVING THAT THE ASSESSEE DID NOT GIVEN ANY CO GENT EXPLANATION. 15. THE SAME ARGUMENTS THAT WERE ADVANCED BEFORE C IT(A) WERE REITERATED BEFORE US. THE LEARNED DR RELIED ON THE ORDER OF T HE AO. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN OUR VIEW THE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE IS ACCEPTABLE. THE ELECTRIC AL INSTALLATION ONCE THEY FORM PART OF THE BLOCK OF ASSETS, PLANT AND MACHINE RY PRIOR TO A.Y 2003-04, DEPRECIATION HAS TO BE ALLOWED ON THE WRITTEN DOWN VALUE OF THE BLOCK. WE ITA NO. 76/MUM/2009(A.Y.2005-06) 8 ARE OF THE VIEW THAT ONCE A PARTICULAR DEPRECIABLE ASSET ENTERS THE BLOCK IT LOSSES ITS IDENTITY AND IT IS NOT POSSIBLE TO APPLY THE NEW RATES OF DEPRECIATION ON THE WRITTEN DOWN VALUE OF THE ELECT RICAL INSTALLATION BY CARVING OUT ITS WDV FROM THE BLOCK OF ASSETS, PLANT AND MACHINERY. WE, THEREFORE, AGREE WITH THE SUBMISSIONS OF THE ASSESS EE AND DIRECT THE AO TO ALLOW DEPRECIATION AS CLAIMED BY THE ASSESSEE. 16. GROUND NO.4 WAS NOT PRESSED AND THE SAME IS DIS MISSED AS NOT PRESSED. 17. GROUND NO.5 RAISED BY THE ASSESSEE READS AS FOL LOWS: 5. THE CIT(A) ERRED IN ENHANCING THE INCOME OF THE APPELLANTS BY RS.37,99,796/- BY NOT ALLOWING EXPENSES CLAIMED BY THE APPELLANTS ON THE GROUND THAT THE APPELLANTS HAVE NOT CARRIED ON ANY BUSINESS ACTIVITY DURING THE YEAR UNDER REFERENCE AND THEREB Y NOT ALLOWING CARRY FORWARD OF LOSS OF RS 37,99,796/-. THE APPELLANTS CONTEND THAT ON THE FACTS AND CIRCUM STANCES OF THE CASE AND IN LAW, THE CIT(A) OUGHT NOT TO HAVE DISAL LOWED THE EXPENSES CLAIMED BY THE APPELLANTS INASMUCH AS THE APPELLANT S HAVE INCURRED THE IMPUGNED EXPENSES IN PURSUIT OF BUSINESS. CONSE QUENTLY, THE APPELLANTS CLAIM THAT THE APPELLANTS HAVE INCURRED LOSS WHICH OUGHT TO BE ALLOWED TO BE CARRIED FORWARD. 18. THE BUSINESS OF ASSESSEE WAS TRADING IN SHARES AND SECURITIES. THERE WAS NO SALE AND PURCHASE OF SHARES FOR THE YEAR. HO WEVER THE ASSESSEE HAD SHOWN DECREASE IN VALUE OF CLOSING STOCK OF SHARES TO THE TUNE OF RS 37,99,796/-. IN VIEW OF EXPLANATION BELOW SECTION 73, THE AO HELD THAT THE ASSESSEE IS DEEMED TO HAVE BEEN CARRYING ON A SPECU LATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSISTS OF PURCHASE A ND SALE OF SHARES. HE THEREFORE TREATED THE LOSS ON ACCOUNT OF DIMINUTION IN THE VALUE OF SHARES OF RS.37,99,796/- AS A SPECULATION LOSS AND REFUSED TO ALLOW THE SET OFF OF SUCH LOSS AGAINST BUSINESS INCOME. THE AO ALLOWED THE LO SS TO BE CARRIED FORWARD ITA NO. 76/MUM/2009(A.Y.2005-06) 9 FOR BEING SET OFF AGAINST SPECULATION INCOME IN THE SUCCEEDING ASSESSMENT YEARS IN ACCORDANCE WITH LAW. 19. WHEN THIS MATTER WAS CHALLENGED BY THE ASSESSEE BEFORE CIT(A) THE ASSESSEE SUBMITTED THAT THE LOSS IN QUESTION SHOULD BE TREATED AS BUSINESS LOSS AND NOT SPECULATION LOSS AND SUCH LOSS SHOULD BE ALLOWED TO BE CARRIED FORWARD. THE CIT(A) WAS OF THE VIEW THAT THE LOSE IN QUESTION WAS SPECULATION LOSE. HE WAS FURTHER OF THE VIEW THAT THE AO OUGHT TO HAVE ALLOWED THIS LOSS TO BE CARRIED FORWARD BECAUSE THE ASSESSEES REGISTRATION AS SHARE BROKER WAS CANCELLED BY SEBI AND THERE WAS NO PURCHASE AND SALE OF SHARES BY THE ASSESSEE FROM THE PREVIOUS YEAR. IN EXERCISE OF HIS POWERS OF ENHANCEMENT HE CONCLUDED THAT THE AO OUGHT NOT TO H AVE ALLOWED CARRY FORWARD OF THE LOSS FOR BEING SET OFF IN FUTURE. H E HELD THAT THERE BEING NO BUSINESS ACTIVITY IN SHARES AND SECURITIES FROM THE YEAR 2001 ON ACCOUNT OF CANCELLATION OF REGISTRATION AS SHARE BROKER, LOSS ARISING FROM MERE VALUATION OF THE OPENING STOCK OF SHARES WOULD NOT LEAD TO TH E CONCLUSION THAT THE ASSESSEE WAS CARRYING ON ANY SUCH ACTIVITY. HE HEL D THAT THE ASSESSEE HAS NEITHER DEALT WITH IN SHARES ETC NOR DONE ANY OTHER BUSINESS. IN SUCH A SITUATION, THE LOSS IN SHARES WHICH HAS BEEN DISALL OWED BY THE ASSESSING OFFICER AS PER THE COMPUTATION OF INCOME, COULD NOT BE IN THE SAME BREATH ALLOWED TO BE CARRIED FORWARD AS SPECULATION BUSINE SS LOSS. TO THIS EXTENT HE HELD THAT THE ACTION OF THE ASSESSING OFFICER WAS N OT CORRECT. HE HELD THAT AS AN APPELLATE AUTHORITY HAVING CO-TERMINUS POWERS AS OF THE ASSESSING OFFICER HE HAD POWER TO DIRECT THE AO TO WITHDRAW ALLOWING CARRYING FORWARD OF THE LOSS IN QUESTION. ACCORDINGLY THE AO WAS DIRECTED TO WITHDRAW CARRY FORWARD OF LOSS IN QUESTION CARRY FORWARD TO SUBSEQUENT ASS ESSMENT YEARS. 20. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESS EE HAS RAISED GROUND NO.5 BEFORE THE TRIBUNAL. ITA NO. 76/MUM/2009(A.Y.2005-06) 10 21. AT THE TIME OF HEARING BEFORE US IT WAS AGREED BY THE PARTIES THAT SIMILAR ISSUE ARISING UNDER IDENTICAL FACTS AND CIR CUMSTACES, WAS CONSIDERED BY THE TRIBUNAL IN THE CASE OF NH SECURITIES VS. AC IT, ITA NO.6875/MUM/08 ( ANOTHER GROUP COMPANY OF THE ASSESSEE) AND THIS T RIBUNAL HELD AS FOLLOWS: 2. GROUND NO. 1 RAISED BY THE ASSESSEE READS AS UN DER:- 1. THE CIT(A) ERRED IN ENHANCING THE INCOME OF THE APPELLANTS BY RS. 31,47,188/- BY NOT ALLOWING EXPEN SES CLAIMED BY THE APPELLANTS ON THE GROUND THAT THE APPELLANTS HAVE NOT CARRIED OUT ANY BUSINESS ACTIVI TY DURING THE YEAR UNDER REFERENCE AND THEREBY NOT ALL OWING CARRY FORWARD OF LOSS OF RS. 31,47,188/-. THE APPELLANTS CONTEND THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) OU GHT NOT TO HAVE ENHANCED THE INCOME OF THE APPELLANTS AND O UGHT TO HAVE ALLOWED THE CARRY FORWARD OF THE BUSINESS L OSS OF RS. 31,47,188/- INASMUCH AS THE APPELLANTS HAVE CAR RIED ON BUSINESS DURING THE YEAR. 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO TREATED THE BUSINESS OF RS. 31,47,188/- AS SPECULAT ION LOSS AND ALLOWED TO BE CARRIED FORWARD AS SPECULATION IN VIEW OF THE EXPLANATION BELOW SECTION 73 OF THE ACT. NO SUCH SE T-OFF WAS ALLOWED ON THE INCOME FROM OTHER SOURCES. DURING TH E COURSE OF APPELLATE PROCEEDINGS, THE LEARNED CIT(A) HAD OB SERVED THAT BUSINESS LOSS HAD BEEN DETERMINED BY THE AO AT RS. 31,47,188/-, WHICH HAD BEEN TREATED AS SPECULATIVE LOSS AND HAD BEEN ALLOWED TO BE CARRIED FORWARD IN VIEW OF T HE EXPLANATION BELOW TO SECTION. 73 OF THE ACT. HOWEVE R, IT WAS NOTICED FROM THE AUDITED ACCOUNTS THAT NO BUSINESS ACTIVITY WAS CARRIED OUT BY THE ASSESSEE DURING THE YEAR UND ER CONSIDERATION AND A LOSS OF RS. 80,000/- WAS SHOWN UNDER THE HEAD SHARES AND SECURITIES ON ACCOUNT OF VALUATIO N OF CLOSING STOCK WHICH HAD BEEN TREATED AS NON-GENUINE BY THE AO. THE CIT(A) FURTHER OBSERVED THAT THE ASSESSEE HAS NOT C ARRIED ANY BUSINESS ACTIVITY IN SHARES AND SECURITIES FROM THE YEAR 2001 ON ACCOUNT OF CANCELLATION OF REGISTRATION AS SHARE BROKER, LOSS ARISING FROM MERE VALUATION OF THE OPENING STOCK OF SHARES WOULD NOT LEAD TO THE CONCLUSION THAT THE ASSESSEE WAS CARRYING ON ANY SUCH ACTIVITY. THE CIT(A) ALSO OBSE RVED THAT THE WORD BUSINESS CONNOTES SOME REAL, SUBSTANTIAL AND ITA NO. 76/MUM/2009(A.Y.2005-06) 11 SYSTEMATIC OR ORGANIZED COURSE OF ACTIVITY OR CONDU CT WITH A SET OF PURPOSES. THE CIT(A) HELD THAT FOR THE PURPOSE O F CLAIMING DEDUCTION U/S 37 OF THE ACT, THE EXPENDITURE MUST B E INCURRED FOR THE PURPOSES OF BUSINESS WHICH WAS IN EXISTENCE DURING THE YEAR AND THE PROFIT OF WHICH ARE UNDER ASSESSMENT A ND, IF DURING THE YEAR NO BUSINESS WAS IN EXISTENCE EITHER BECAUSE IT WAS DISCONTINUED OR FOR SOME OTHER REASON, THE QUES TION OF COMPUTATION OF INCOME DOES NOT ARISE AT ALL. THE LE ARNED CIT(A) RELYING ON VARIOUS CASE LAWS, DIRECTED THE AO TO WI THDRAW SUCH LOSS CARRIED FORWARD TO SUBSEQUENT ASSESSMENT YEARS . HE, ACCORDINGLY, HELD THAT THERE WOULD BE ENHANCEMENT O F INCOME TO THE EXTENT OF RS. 31,47,188/-, WHICH HAS BEEN WR ONGLY ALLOWED TO BE CARRIED FORWARD BY THE AO. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESSEE IS IN APPEAL BEFOR E US. 4. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE WAS IN THE BUSINESS OF SHARE TRAD ING ACTIVITY AND THE ASSESSEE WAS UNABLE TO CARRY FORWARD THE BU SINESS ACTIVITIES BECAUSE OF THE SEBI ORDER AND THE SAME W AS CHALLENGED BEFORE THE HONBLE HIGH COURT AND ALSO B EFORE THE HONBLE SUPREME COURT. STOPPAGE OF THE BUSINESS IS ONLY TEMPORARY AND NOT PERMANENT AND EVEN THE ORDER PASS ED BY THE SEBI IS ONLY A TEMPORARY ORDER, THEREFORE, IT C ANNOT BE SAID THAT THE ASSESSEE IS NOT IN THE BUSINESS ACTIVITY. THE LEARNED COUNSEL FURTHER SUBMITTED THAT SIMILAR ISSUE HAS BE EN CONSIDERED BY THE MUMBAI BENCH OF ITAT IN THE ASSES SEES SISTER CONCERN CASE, VIZ., KNP SECURITIES P. LTD. I N ITA NOS. 5008 & 5009/MUM/07 FOR AYS 2003-04 & 2004-05 VIDE O RDER DATED 29 TH MAY, 2009. THE SAID DECISION WAS FOLLOWED BY THE ITAT, MUMBAI BENCH IN ANOTHER SISTER CONCERN CASE O F THE ASSESSEE, NAMELY, TRIUMPH SECURITIES IN ITA NO. 105 3 & 2111/MUM/08 FOR AY 2001-02 & 2002-03, ORDER DATED 31/12/2010. 5. ON THE OTHER HAND, THE LEARNED DR SUBMITTED THAT FINALLY THE HONBLE HIGH COURT AND SUPREME COURT CONFIRMED THE ORDER PASSED BY THE SEBI AND HE SUPPORTED THE ORDER PASSED BY THE CIT(A) IN SUPPORT OF REVENUES CASE. 6. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE RECO RD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. T HE CIT(A) PASSED ENHANCEMENT ORDER ON THE GROUND THAT THE ASS ESSEE HAS NOT CARRIED OUT ANY BUSINESS DURING THE YEAR AN D ALLOWABILITY OF BUSINESS EXPENSES U/S 37 THE ASSESS EE HAS TO CARRY OUT THE BUSINESS ACTIVITY AND DIRECTED THE AO TO ENHANCE THE ASSESSMENT. UNDER SIMILAR FACTS AND CIRCUMSTANC ES, THE ITA NO. 76/MUM/2009(A.Y.2005-06) 12 ITAT IN THE CASE OF TRIUMPH SECURITIES (SUPRA) FOLL OWING THE DECISION IN THE CASE OF KNP SECURITIES P. LTD. (SUP RA), HELD AS UNDER:- 17. AFTER HEARING BOTH THE PARTIES, WE FIND IDENTI CAL ISSUE HAD COME UP BEFORE THE TRIBUNAL IN THE CASE O F KNP SECURITIES P LTD (SUPRA) WHEREIN THE ASSESSING OFFI CER HAD DISALLOWED VARIOUS EXPENSES CLAIMED BY THE ASSESSEE IN ITS P&L ACCOUNT ON THE GROUND THAT THE ASSESSEE HAS NOT CARRIED OUT ANY BUSINESS ACTIVITY SINCE SEBI MADE RESTRICTION VIDE ORDER DATED 11.4.2001. IN APPEAL, THE CIT(A) UPHELD THE ACTION OF THE ASSESSING OFFICER A ND ON FURTHER APPEAL, THE TRIBUNAL VIDE ORDER DATED 29.5. 2009 ALLOWED THE VARIOUS EXPENSES CLAIMED BY THE ASSESSE E. THE RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL R EADS AS UNDER: 5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDERED THEM CAREFULLY. WE HAVE ALSO PERUSED THE MATERIAL ON RECORD ALONG WITH VARIOUS CASE LAWS RELIED BY BOTH THE PARTIES. AFTER CONSIDERING THE RELEVANT MATERIAL IT IS SEEN THAT THE ASSESSEE WAS DOING BUSINESS OF SHARE TRADING AND SECURITY ETC. VARIOUS BUSINESS EXPENSES INCURRED FOR THE PURPOSE OF ITS BUSINESS ACTIVITIES WERE HELD AS ALLOWABLE I N PAST. IN THE YEAR UNDER CONSIDERATION, THE LD AO NEGATIVED THE CLAIM OF THE ASSESSEE FOR THE REASON THAT THERE IS NO BUSINESS ACTIVITY DURING THE YEAR UNDER CONSIDERATION AS SEBI HAS IMPOSED RESTRICTION VIDE ORDER DATED 11.4.2001. COPY OF THE ORDER ISSUE D BY SEBI IS PLACED AT PAGES 82 TO 84 OF THE PAPER BOOK. IT IS MENTIONED IN THIS ORDER THAT THE ASSESS EE IS BARRED FROM UNDERTAKING ANY FRESH BUSINESS AS STOCK BROKER TILL FURTHER ORDER AS ON ACCOUNT OF INDICATIONS OF THE PRIMA FACIE INVOLVEMENT OF MR KETAN PAREKH IN MANIPULATING CERTAIN SCRIPS OF VARIOUS COMPANIES. IT HAS BEEN NOTICED THAT M/S V N PAREKH SECURITIES LTD AND M/S KNP SECURITIES LTD ARE ALSO THE ENTITIES CONTROLLED BY AND CONNECTED WITH MR KETAN PAREKH OR MR KARTIK PAREKH. THEREFORE, IN VIEW OF THE POWERS CONFERRED UNDER TH E PROVISIONS OF SUB SECTION (3) OF SEC. 4 R.W.S 11 AN D 11B OF THE SEBI ACT, 1902, THE ASSESSEE WAS BARRED FROM UNDERTAKING ANY FRESH BUSINESS AS STOCK BROKERS TILL FURTHER ORDERS AS STATED ABOVE. THEREAFTER, SEBI PASSED ANOTHER ORDER ON 21ST JUNE 2001 STATING THAT IN VIEW OF THE ORDER OF SEBI DATE D 4.4.2001 AND 10.4.2001 DEBARRING THEM FROM ITA NO. 76/MUM/2009(A.Y.2005-06) 13 UNDERTAKING ANY FRESH BUSINESS AS A STOCK BROKER AND MERCHANT BANKERS TILL FURTHER ORDERS SHOULD BE CONTINUED. THIS ACTION OF THE SEBI HAS BEEN CHALLENGED BY THE ASSESSEE BEFORE THE APPROPRIATE AUTHORITIES. COPY OF THE PETITION FILED BEFORE THE SECURITIES APPELLATE TRIBUNAL IS PLACED AT PAGE 94 OF THE PAPER BOOK. IN VIEW OF THESE FACTS AND CIRCUMSTANCES, THE ASSESSEE WAS NOT ALLOWED TO DO ITS BUSINESS ACTIVITY IN SHARE ON THE STOCK EXCHANG E FLOOR. 5.1 NOT DOING BUSINESS ACTIVITY WAS NOT ON ACCOUNT OF ASSESSEES WILL BUT ON ACCOUNT OF FORCED CIRCUMSTANCES; THEREFORE, IT CANNOT BE SAID THAT TH E ASSESSEE HAS CLOSED/DISCONTINUED ITS BUSINESS ACTIVITY ITS OWN. THE ESTABLISHMENTS OF THE ASSESSE E WERE INTACT AND THEY WERE TO BE MAINTAINED. STAFF MEMBERS WERE KEPT AND SALARIES WERE PAID TO THEM. LOANS TAKEN FROM VARIOUS BANKS AND OTHERS FOR THE PURPOSE OF BUSINESS ACTIVITY IN PAST WERE OUTSTANDING DURING THE YEAR UNDER CONSIDERATION; THEREFORE, ANY INTEREST ACCRUED WAS TO BE PAID DURING THE YEAR UNDER CONSIDERATION OR WAS PAYABLE. THE ASSESSEE IS HAVING VALID BSE CARD WHICH COULD NOT BE USED FOR THE REASON THAT SEBI HAS PASSED AN ORDER BARRING THE ASSESSEE NOT TO DO ANY BUSINESS ACTIVITY. THEREFORE, IT ALSO CANNOT BE SAID THAT TH E ASSESSEE COULD NOT USE THE BSE CARD ITS OWN WHICH WAS READY TO USE. IN THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEES BUSINESS DOES NOT COME TO AN END OR DISCONTINUED. 5.2 THE MEANING OF DISCONTINUATION IS EXPLAINED IN THE LAW LEXICON WHERE IT IMPLIES A VOLUNTARY ACT AND ABANDONMENT OF POSSESSION FOLLOWED BY THE ACTUAL POSSESSION OF ANOTHER, IT IMPLIES THAT THE PERSON DISCONTINUING HAS GIVEN UP THE LEND AND LEF T IT TO THE POSSESSED BY ANYONE CHOOSING TO COME IN A S HELD IN THE CASE OF QADIR BUX VS RAMCHAND 1917 AIR 289 AT PAGE 295. IT IS FURTHER EXPLAINED AT THE SAM E PAGE AT 563 OF THE LAW LEXICON THAT DISCONTINUE; T O CAUSE TO CEASE OR TO PUT A STOP. 5.3 IN THE PRESENT CASE NEITHER THE BUSINESS IS DISCONTINUED ON ACCOUNT OF VOLUNTARY ACT OF THE ASSESSEE NOR THE SAME HAS PUT TO STOP ITS OWN. THE ITA NO. 76/MUM/2009(A.Y.2005-06) 14 BUSINESS COULD NOT BE DONE FOR THE REASON THAT SEBI HAS BARRED THE ASSESSEE NOT TO DO ANY BUSINESS ACTIVITY TILL FURTHER ORDERS. THE ASSESSEE WAS BARR ED TILL FURTHER ORDERS CLEARLY MEAN THAT THE ASSESSEE WAS NOT BARRED PERMANENTLY. THE PERMANENT ORDER ISSUED IN THE YEAR 2007 AND FROM THE YEAR OF 2007, THE ASSESSEE CANNOT DO ANY BUSINESS ACTIVITY; THEREFORE, AT THE MOST IT CAN BE SAID THAT NO XPEN SES CAN BE ALLOWED FROM THAT YEAR. HOWEVER, FOR THE EARLIER YEAR, IN OUR CONSIDERED VIEW, THE EXPENSES INCURRED BY THE ASSESSEE FOR THE PURPOSE OF ITS BUSINESS ACTIVITY ARE ALLOWABLE AS THE ESTABLISHMEN T WAS NOT SCRAPED AND THE ASSESSEE WAS STILL HOPEFUL TO START ITS BUSINESS ACTIVITY. 6 IN THE CASE OF CIT VS VELLORE ELECTRIC CORPORATIO N LTD REPORTED IN 243 ITR 529, THE HONBLE MADRAS HIGH COURT HAS HELD THAT: IT COULD NOT BE SAID THAT THERE WAS A PERMANENT CLOSURE, AS THE VALIDITY OF THE ACT WAS YET TO BE FINALLY SETTLED BY THE SUPREME COURT. IN THE EVENT OF THE ACT BEING STRUCK DOWN, THE ASSESSEE COULD RESUME BUSINESS. THE FACT THAT IT HAD CONTINUED TO MAINTAIN AN ESTABLISHMENT WAS INDICATION OF ITS INTENTION TO RESUME BUSINESS, IF AN OPPORTUNITY FOR IT AROSE BY REASON OF THE SUPREME COURT HOLDING IN ITS FAVOUR. THE EXPENSES INCURRED BY IT WHILE AWAITING THE DECISION OF THE SUPREME COURT COULD NOT ALTOGETHER BE REGARDED AS UNCONNECTED WITH THE BUSINESS THAT IT HAD BEEN CARRYING ON BY SUPPLY OF ELECTRICITY AND THAT BUSINESS WAS INTERRUPTED ONLY BY REASON OF THE ACT. THE POSSIBLE RESUMPTION OF THE BUSINESS WAS DEPENDENT ON THE OUTCOME OF THE APPEALS PENDING BEFORE THE SUPREME COURT. THE AMOUNTS CLAIMED WERE ALSO NOT VERY SUBSTANTIAL. THE TRIBUNAL HAD TAKEN A BROAD VIEW OF THE MATTER AND HAD HELD IN FAVOUR OF THE ASSESSEE. THERE WAS NO GROUND TO DIFFER 6.1 THE FACTS BEFORE THE HONBLE HIGH COURT WERE THAT THE ASSESSEE WAS A PRIVATE ELECTRIC COMPANY. I TS UNDERTAKING VESTED WITH THE STATE GOVERNMENT BY REASON OF THE ENACTMENT OF THE TAMIL NADU ELECTRICI TY ITA NO. 76/MUM/2009(A.Y.2005-06) 15 SUPPLY UNDERTAKINGS (ACQUISITION) ACT, 1973. AFTER AN UNSUCCESSFUL ATTEMPT TO CHALLENGE THE VALIDITY O F THAT ACT IN THE HIGH COURT, THE ASSESSEE HAD FILED APPEALS BEFORE THE SUPREME COURT WHICH WERE PENDING DURING THE RELEVANT YEARS I.E. AYS 1975-76 TO 1979-80. THE AO HELD THAT THE ASSESSEE WAS NOT CARRYING ON ANY BUSINESS AND LIMITED THE SALARY PAI D TO THE EMPLOYEES OF THE ASSESSEE TO 10% AND THE AUDIT FEE WAS LIMITED TO 15%. THAT WAS AFFIRMED BY THE FIRST APPELLATE AUTHORITY. HOWEVER, THE TRIBUNA L HELD THAT THE ASSESSEE WAS CARRYING ON BUSINESS AND WAS ENTITLED TO THE DEDUCTIONS CLAIMED BY THE ASSESSEE. ON REFERENCE, THE HONBLE MADRAS HIGH COURT AFFIRMED THE VIEW TAKEN BY THE TRIBUNAL. 6.2 THE RATIO OF THE DECISION OF THE HONBLE MADRAS HIGH COURT IS SQUARELY APPLICABLE ON THE FACTS OF T HE PRESENT CASE AS IN THE PRESENT CASE ALSO THE ASSESSEE WAS RESTRICTED BY THE ORDER OF THE SEBI NO T TO DO ANY BUSINESS ACTIVITY, HOWEVER, ESTABLISHMENT OF THE ASSESSEE WAS MAINTAINED AND VARIOUS EXPENSES WERE INCURRED WHICH WERE NECESSARY AND THEY WERE CONNECTED WITH THE BUSINESS ACTIVITY OF T HE ASSESSEE. 7. IN THE CASE OF SREE MEENAKSHI MILLS LTD, IN 63 I TR 207, THE APEX COURT HAS ALLOWED VARIOUS EXPENSES ON ACCOUNT OF EXPENDITURE FOR PROSECUTING CIVIL PROCEEDINGS. IN THIS CASE, THE ASSESSEE COMPANY WHICH CARRIED ON THE BUSINESS OF COTTON SPINNING AN D WEAVING, FINDING ITS OWN HANDLOOMS IN ITS FACTORY PREMISES INADEQUATE, DISTRIBUTED YARN PRODUCED BY I T TO WEAVERS OUTSIDE THE FACTORY. UNDER CLAUSE 18B OF THE COTTON CLOTH AND YAN (CONTROL) ORDER 1945, THE TEXTILE COMMISSIONER WAS AUTHORISED TO DIRECT ANY MANUFACTURE OR DEALER OR ANY CLASS OF MANUFACTURERS OR DEALERS, INTER-ALIA, NOT TO SELL OR DELIVER ANY YARN OR CLOTH OF SPECIFIED DESCRIPTION EXCEPT TO SUCH PERSON OR PERSONS AND SUBJECT TO SUCH CONDITIONS AS HE MIGHT SPECIFY. ACCORDINGLY, THE ORDER PASSED BY THE TEXTILE COMMISSIONER DIRECTING THE COMPANY NOT TO SELL OR DELIVER YARN MANUFACTURED BY IT EXCEPT T O SUCH PERSON OR PERSONS AS HE MIGHT SPECIFY. HOWEVER, THE COMPANY CONTINUED TO DELIVER YARN TO WEAVERS OUTSIDE FACTORY. THE ACTION OF THE COMMISSIONER WAS CHALLENGED BEFORE THE APPELLATE ITA NO. 76/MUM/2009(A.Y.2005-06) 16 AUTHORITY AND THE SAME WAS REJECTED BY THE HIGH COURT AS WELL AS THE SUPREME COURT. ON APPELLATE PROCEEDINGS, THE EXPENSES INCURRED BY THE ASSESSEE WERE CLAIMED AS BUSINESS EXPENDITURE AND THEY WERE NOT ALLOWED BY THE AO BY OBSERVING THAT THESE EXPENSES WERE NOT FOR THE PURPOSE OF BUSINESS AND WERE NOT INCURRED DURING THE YEAR UNDER CONSIDERATION. MATTER REACHED UP TO THE STAGE OF TH E HONBLE SUPREME COURT WHO HAS ALLOWED THE EXPENDITURE INCURRED BY THE COMPANY AS BUSINESS EXPENDITURE BY HOLDING AS UNDER: THAT THE OBJECT OF THE PETITION WAS T SECURE A DECLARATION THAT THE ORDER DATED FEB 20TH 1946, IN SO FAR AS IT SOUGHT TO PUT RESTRICTIONS UPON THE RIGHT OF THE COMPANY TO CARRY ON ITS BUSINESS IN THE MANNER IN WHICH IT WAS ACCUSTOMED TO DO WAS UNAUTHORISED, AND TO PREVENT ENFORCEMENT OF THAT ORDER. THEREBY, THE COMPANY WAS SEEKING TO OBTAIN AN ORDER FROM THE COURT ENABLING THE BUSINESS TO BE CARRIED ON WITHOUT INTERFERENCE. THE AMOUNTS EXPENDED BY THE COMPANY ON THAT BEHALF WERE EXPENDITURE LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS BUSINESS AND WERE DEDUCTIBLE U/S 10(2)(XV). IT WAS FURTHER HELD THAT; THE QUESTION OF ADMISSIBILITY U/S 10(2)(XV) HAD TO BE DECIDED NOT ON WHAT WAS FOUND OR OBSERVED BY THE HIGH COURT IN APPEAL FROM THE ORDER IN THE PROCEEDINGS U/S 45 OF THE SPECIFIC RELIEF ACT OR BY THE PRIVY COUNCIL BUT UPON THE FINDINGS OF FACT RECORDED BY THE TRIBUNAL. EXPENDITURE INCURRED TO RESIST IN A CIVIL PROCEEDINGS THE ENFORCEMENT OF A MEASURE, LEGISLATIVE OR EXECUTIVE, WHICH IMPOSES RESTRICTIONS ON THE CARRYING ON OF A BUSINESS, OR TO OBTAIN A DECLARATION THAT THE MEASURE IS INVALID, WOULD, IF OTHER CONDITIONS ARE SATISFIED, BE ADMISSIBLE AS A DEDUCTION U/S 10(2)(XV) 7.1 THE RATIO OF THE DECISION OF THE APEX COURT ALSO GOES IN FAVOUR OF THE ASSESSEE AS THE LITIGATION EXPENSES INCURRED IN RESPECT TO ITS BUSINESS WERE HELD AS BUSINESS EXPENDITURE. ITA NO. 76/MUM/2009(A.Y.2005-06) 17 7.2 IN THE PRESENT CASE ALSO ALL THE EXPENSES INCURRED ARE CONNECTED WITH THE BUSINESS OF THE ASSESSEE ONLY; THEREFORE, THE EXPENSES CLAIMED BY THE ASSESSEE ARE ALLOWABLE. 8. IN THE CASE OF M/S MARINE LABOUR SUPPLYING CO, DECIDED IN ITA NO.6048 & 6049/MUM/07 VIDE ORDER DATED 2.12.2008, THE TRIBUNAL BY FOLLOWING THE DECISION IN THE CASE OF RUIA SHELTERS LTD IN 10 SOT 157 (MUM) AND IN THE CASE OF CHUNILAL &CO IN 4 SOT 309(MUM(TM) HELD THAT IF FOR THE REASON DUE TO LULLNESS OF BUSINESS NO BUSINESS CAN BE DONE FOR AYS 2002-03 TO 2005-06, THE ASSESSEE IS ENTITLED TO DEDUCTION IN RESPECT OF ADMINISTRATIVE AND OTHER EXPENSES WHICH ARE REQUIRED TO BE INCURRED FOR KEEPING THE BUSINESS ALIVE. 9. WE HAVE ALSO TAKEN INTO CONSIDERATION VARIOUS CASE LAWS ON WHICH RELIANCE HAS BEEN PLACED BY THE LD DR AND FOUND THAT THEY ARE DISTINGUISHABLE ON FACTS. 10. IN THE CASE OF CHINAI AND CO P LTD IN 206 ITR 616, THE HONBLE BOMBAY HIGH COURT HAS HELD THAT THE ASSESSEE COMPANY COULD NOT BE ENTITLED FOR ANY DEDUCTION OF EXPENSES CLAIMED BY IT AS BUSINESS EXPENDITURE U/S 37 AS THE ASSESSEE COMPANY HAS STOPPED CARRYING ON ITS BUSINESS AT THE END OF DECEMBER, 1969. THE MERE FACT THAT IT CONTINUED TO HOLD ITS INVESTMENTS WOULD NOT BE SUFFICIENT FOR THE PURPOSE OF ESTABLISHING THAT IT CONTINUED TO CARRY ON BUSINESS. 10.1 IN THE PRESENT CASE, THE ASSESSEE HAS NOT STOPPED THE BUSINESS ACTIVITY ITS OWN BUT IT WAS FORCED BY SEBI NOT TO DO ANY BUSINESS ACTIVITY. THEREFORE, THE RATIO OF THIS DECISION OF THE HONBLE BOMBAY HIGH COURT IS NOT APPLICABLE ON THE FACTS OF THE PRESENT CASE. 11. SIMILARLY, THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF NATHALAL ITA NO. 76/MUM/2009(A.Y.2005-06) 18 ASHARAM IN 194 ITR 110 IS ALSO NOT APPLICABLE ON THE FACTS OF THE PRESENT CASE AS THE COMPANY PAID COMPENSATION TO ITS EMPLOYEES UNDER THE PROVISIONS OF SEC. 25 FFF OF INDUSTRIAL DISPUTES ACT 1947 ON ACCOUNT OF RETRENCHMENT WHICH WERE HELD AS NOT RELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE. 11.1 WE HAVE ALSO TAKEN INTO CONSIDERATION VARIOUS OTHER CASE LAWS RELIED UPON BY THE LD DR AND FOUND THAT THEY ARE DISTINGUISHABLE ON FACTS. 12. IN THE PRESENT CASE, NO SUCH FACTS ARE INVOLVED AS ALL THE EXPENSES INCURRED WERE IN CONNECTION WITH THE BUSINESS ACTIVITY ONLY AND FOR KEEPING THE BUSINESS ALIVE, TO MAINTAIN ITS BUSINESS ESTABLISHMENT AND TO MEET THAT THE OBLIGATION OF INTEREST ON LOAN ETC TAKEN FOR ITS BUSINESS ACTIVITY; THEREFORE, WE HOLD THAT VARIOUS EXPENSES INCURRED BY THE ASSESSEE ARE ALLOWABLE AS DEDUCTION. HOWEVER, ADMISSIBILITY OF THE EXPENDITURE WAS NOT EXAMINED BY THE AO FOR THE REASON THAT HE HAS DISALLOWED THE EXPENDITURE ON THE GROUND THAT THEY ARE NOT ALLOWABLE AS THE ASSESSEE HAS NOT DONE ANY BUSINESS ACTIVITY. THEREFORE, FOR THE PURPOSE OF EXAMINING THE ADMISSIBILITY/GENUINENESS OF THESE EXPENSES, THE MATER IS SENT TO THE FILE OF THE AO. THE ASSESSEE HAS CONTENDED THAT DEPRECIATION AND INTEREST HAVE BEEN ALLOWED BY THE TRIBUNAL AS ALLOWABLE WHILE PASSING ORDER FOR AY 2000-01. THE AO WILL TAKE INTO CONSIDER THE ORDER OF THE TRIBUNAL AND IF IT IS FOUND THAT FACTS ARE SIMILAR THEN OF COURSE, IN VIEW OF THE DECISION OF THE TRIBUNAL, THE CLAIM OF THE ASSESSEE ON ACCOUNT OF DEPRECIATION AND INTEREST HAS TO BE ALLOWED. 17.1 SINCE THE FACTS OF THE IMPUGNED APPEAL ARE IDENTICAL TO THE FACTS IN THE CASE OF THE SISTER CO NCERN OF THE ASSESSEE I.E KNP SECURITIES P LTD ; THEREFOR E, RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL , WE HOLD THAT THE ASSESSEE IS ENTITLED TO CLAIM VARI OUS EXPENSES DEBITED IN THE P&L ACCOUNT. WE HOLD AND ITA NO. 76/MUM/2009(A.Y.2005-06) 19 DIRECT ACCORDINGLY. THE GROUND RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 7. SINCE THE ISSUE UNDER CONSIDERATION IS IDENTICAL TO THAT OF THE CASE DECIDED BY THE CO-ORDINATE IN THE CASE OF TRIUMPH SECURITIES LTD. (SUPRA), WE RESPECTFULLY FOLLOW THE SAME AND IN THE LIGHT OF THAT THIS GROUND OF THE ASSESSEE IS AL LOWED. 22. IN SHORT THE REASONING OF THE TRIBUNAL IS THAT THE ASSESSEE COULD NOT DO BUSINESS BECAUSE OF THE BAN IMPOSED ON ITS TRADING BY SEBI WHICH HE WAS CHALLENGING AND THE BUSINESS COULD NOT BE CARRIED O N FOR REASONS BEYOND THE ASSESSEES CONTROL. THE SAID REASONS WOULD SQUAREL Y APPLY IN THE PRESENT CASE ALSO WHERE THE FACTS ARE IDENTICAL AS ADMITTED BY THE PARTIES BEFORE US. WE THEREFORE FOLLOWING THE ORDER OF THE CO-ORDINATE BENCH HOLD THAT THE ASSESSEE IS ENTITLED TO CARRY FORWARD THE LOSS FOR SET OFF IN SUBSEQUENT ASSESSMENT YEARS AS ALLOWED BY THE AO. FOR THE REA SONS GIVEN ABOVE THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 23. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS P ARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 25 TH DAY OF APRIL 2012 SD/- SD/- (P.M.JAGTAP ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 25 TH APRIL 2012 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RE BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO. 76/MUM/2009(A.Y.2005-06) 20 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 19/04/2012 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 20/04/2012 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER