NATUROL BIOCHEMICALS AND FOODS LIMITED(NOW KNOWN AS KALEESUWARI REFINERY AND INDUSTRY PVT LTD ),HYDERABAD vs. ASST. COMMISSIONER OF INCOME TAX, CIRCLE-16(1), HYDERABAD

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES “B”: HYDERABAD (THROUGH VIRTUAL CONFERENCE) BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

ITA No. 760/H/2018 Assessment Year: 2014-15 Natural Biochemicals and Vs. Asst. Commissioner of Foods Ltd. (now known as Income-tax, Kaleesuwari Refinery and Circle – 16(1), Industry Pvt. Ltd.), Hyderabad. Hyderabad. PAN – AABCN 7337H (Appellant) (Respondent) Assessee by: Shri PSRVV Surya Rao Revenue by: Shri YVST Sai Date of hearing: 27/09/2021 Date of pronouncement: 08/10/2021

O R D E R PER L.P. SAHU, A.M.: This appeal filed by the Assessee is directed against CIT(A) - 4, Hyderabad’s order dated 20/02/2018 for AY 2014-15 involving proceedings u/s 143(3) of the Income Tax Act, 1961 ; in short “the Act.

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3.1 During the course of assessment proceedings, the Assessing Officer observed that, there is no business activity from the year 2010 onwards and since there was no business activity carried out during the year, it was proposed to disallow the depreciation of Rs. 6,13,14,399/- claimed by the assessee company. In this regard, the assessee submitted that it had actually started using the plant and machinery and other assets for its business from A.Y. 2009-10. However, due to adverse business condition it became sick and suspended operations temporarily and during the year under consideration it succeeded in raising funds and started refurbishing the plant and machinery. The submissions of the assessee company were considered by the Assessing Officer. As per Sec. 32(1), the depreciation

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is allowed only if the asset is used for the purpose of business or profession at least for sometime during the year previous year. Even use during the part of the year would be sufficient to enable the assessee claim depreciation for the whole year. In the present case, the Assessing Officer observed that the assessee company became sick and suspended its business activities for several years and has also made a reference to BIFR. During the year under consideration, no business activity was carried out by the assessee company. Since none of the assets were used at any time during the previous year for the purposes of business of the assessee company, the depreciation of Rs. 6,13,14,399/- claimed by the assessee company was disallowed.

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2013-14. He, therefore, contended that denying the claim of depreciation in the impugned AY is not correct as facts in in the impugned AY are similar to that of AY 2013-14. The AR of the assessee relied on the following cases in support of assessee’s case: 1. DCIT Vs. Coromandel Bio Tech Industries Ld., [2012] 20 Taxmann.com 520 (Hyd – ITAT) 2. Babul Products (P) Ltd. VS. ACIT, [2017] 87 Taxmann.com 79 (Ahd – ITAT 3. CIT Vs. Yamaha Motor India (P) Ltd. [2009] 183 Taxman 291 (Delhi – HC) 4. CIT Vs. Integrated Technologies Ltd. [2011] ITA No. 530/2011 (Delhi – HC) 7. The ld. DR, on the other hand, besides relying on the orders of revenue authorities, submitted that during the year under consideration, the assessee has not done any business activity and there is no revenue and, therefore, the assessee is not eligible to claim depreciation on assets as the assets have to be put to use to claim depreciation. He also drew our attention at P.B. page No. 55 on the directors report at Financial highlights and performance of the company and submitted that the company had stopped its business operation in 2010 and there is no activity in the company, therefore, the company is not eligible for claiming depreciation.

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the assessee that when the AO allowed the assessee’s claim of depreciation in AY 2013-14, he could have allowed in the impugned AY by taking into consideration the judicial consistency. We observe from the paper books filed by the assessee that the company has stopped its production/ trading activities since 2010 but still in existence. Since in the eyes of law, the company is an artificial jurisdictional entity, it has to maintain its existence unless it gets dissolved under the companies Act. The Fixed Assets are still lying in the control of the assessee and we observe from the paper book that the company is trying to revive its business and gone for one time settlement, it shows that the business was temporarily shut down due to heavy losses. The case of the assessee was assessed u/s 143(3) for the A.Y. 2013-14 vide order dated 15.02.2016 and the same facts were existence in the impugned AY, which has been accepted by the Assessing officer. In our considered opinion, the use of individual asset for the purpose of business may be examined only in the first year when the asset was purchased and put to use but not in the subsequent years, when use of block of assets is to be examined, existence of individual asset in block of assets itself amounts to use for the purpose of business. Once an asset is included in the block of assets, it remains in block for its entire line. In this connection, we refer to the judgment of the Hon’ble Delhi High Court in the case of 4. CIT Vs. Integrated Technologies Ltd (supra), on which

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reliance placed by the assessee, wherein the Hon’ble High Court has observed as under:

“It was contended by the assessee that even though there was no sale or purchase or any manufacturing activity carried on in the relevant previous year, the business was still a going concern and in order to keep it alive and fulfill several legal and statutory formalities, some expenditure has to be incurred. It was also submitted by the assessee that it had approached the BIFR under Section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985, that the application was being processed and soon the manufacturing and sale activities will start and therefore in these circumstances it cannot be said that the business of the assessee had ceased to exist. It was pointed out that there was only a temporary lull and the business would revive shortly. With particular reference to the claim of depreciation of Rs.2,16,41,897/-, it was contended that the plant and machinery were kept ready for use once the business revived and such passive use also amounted to use of the asset within the meaning of Section 32 of the Act. It was therefore contended that the claim of depreciation ought to be allowed. In support of the claim for allowance of depreciation, several authorities were relied upon by the assessee, including the judgment of this Court in Capital Bus Service Pvt. Ltd. Vs. CIT (1980) 123 ITR 404. 5. The CIT(Appeals) examined the contentions in detail and recorded the following findings : a) The assessee was engaged in the manufacture of printed circuit boards and for the assessment years 2000-01, 2001-02, 2002-03 and 2003-04 it had turnover amounting to Rs.0.3 crores, Rs.0.55 crores, Rs.1.87 crores and Rs.0.68 crores respectively. In these years there were net losses as per the accounts and the

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accumulated losses as on 31.3.2003 came to Rs.13.44 crores. b) Since the accumulated loss exceeded the paid-up capital and free reserves of Rs.10.76 crores, the BIFR had registered the assessee's case as case No.165/2004. In this application to the BIFR the assessee had pointed out that though the annual capacity for manufacture of printed circuit boards was 54,000 sq.mts, the assessee could manufacture only 568 sq.mts and 5409 sq.mts in the earlier years. c) The reason for the assessee becoming sick was the cancellation of orders from international customers subsequent to the terror attacks in USA, and the assessee's inability to accept orders for domestic markets because it was a hundred per cent export oriented unit and also insufficient working capital. d) Although there was no production up to 31.3.2007, in the application for admission of its case before the BIFR the assessee had stated that since the second quarter of 2002, the world business scenario has improved and the company has started receiving substantial orders. From these facts the CIT(Appeals) concluded that though the assessee had an intention to restart the manufacturing operations, no such operations were actually undertaken and in that view of the matter it cannot be said that the plant and machinery or other assets were used for the purpose of the assessee's business. In support of his view the CIT(Appeals) referred to several judgments of the Calcutta, Madhya Pradesh, Rajasthan and Bombay High Courts. Thus, the disallowance of depreciation was upheld. 6. In respect of the other expenses disallowed by the Assessing Officer, the CIT(Appeals) dealt with them in some detail and ultimately directed the Assessing Officer to allow the administrative expenses, personnel expenses and financial expenses as deductions.

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Surprisingly, while dealing with these expenses, he took the view that there is no material on record to show that the assessee had completely abandoned its business and that on the basis of the facts given in the assessee's application dated 29.11.2002 to the BIFR and the minutes of the joint meeting with BIFR held on 2.2.2007 it cannot be said that the assessee had completely abandoned or closed its business forever. It was in this view of the matter that the administrative expenses, personnel expenses and the financial expenses were directed to be allowed. Revenue accepted the said findings and no appeal/cross objections were preferred. 7. The assessee filed a further appeal before the Tribunal and questioned the decision of the CIT(Appeals) regarding allowance of depreciation. The Tribunal, relying upon three judgments of this Court held that the assessee was entitled to the allowance of depreciation on plant and machinery on the footing that they were kept ready for use in the business once it got revived and that amounted to passive use of the assets, which would meet the requirements of Section 32. These judgments are : (1) Capital Bus Service (supra) (2) CIT Vs. Refrigeration and Allied Industries Ltd. (2001) 247 ITR 12. (3) CIT Vs. Panacea Biotech Ltd. (2009) 183 Taxman 212 The Tribunal also found that the claim of passive use of the assets was supported by the efforts made by the assessee to restart the business. According to the Tribunal, the assessee had purchased new plant and machinery in the relevant previous year, had incurred expenses of Rs.1.23 lakhs on account of repairs and maintenance and also purchased consumable stores for Rs.27,131/-. In addition to these expenses, it was noted by the Tribunal that the assessee had incurred expenses of Rs.14.04 lakhs on account of salary, allowances and

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staff welfare expenses as against Rs.5.14 lakhs incurred in the preceding year. It was observed by the Tribunal that the CIT (Appeals) has allowed deduction of these expenses namely salary, allowance and staff welfare expenses as also the repairs and maintenance and expenses on consumable stores. This, according to the Tribunal, also supported the assessee's plea that it was making all efforts to revive the business and was keeping the plant and machinery and other assets ready for use. Moreover, the revenue had not filed any appeal to the Tribunal questioning the decision of the CIT (Appeals) allowing deduction on account of various expenses such as salary and allowance, staff welfare, repairs and maintenance etc. The Tribunal has also dealt with the argument of the department that since the assessee was claiming write off of the stock of raw material, work-in- progress and finished goods it could not be said that the assessee was keeping its plant and machinery and other assets ready for use. According to the Tribunal the write off of these stocks was claimed for the simple reason that after lapse of considerable time, these stocks became useless and unfit for any manufacturing activity and write off of such stocks did not mean that the assessee had no intention to revive the business. 8. In the aforesaid view of the matter, the Tribunal held that the plant and machinery and other assets on which depreciation was claimed was kept ready for use and accordingly the depreciation was allowable under Section 32. The revenue challenges the order of the Tribunal and seeks to raise the following questions as substantial questions of law : A) Whether the Income Tax Appellate Tribunal was correct in holding that the assessee could get benefit of depreciation under Section 32 of the Act on the basis of "passive use" of the assets? B) Whether the Income Tax Appellate Tribunal ought to have appreciated that in the facts and circumstances of

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the present case there was no question of "passive use" of the assets? C) Whether the Income Tax Appellate Tribunal erred in ignoring the clear language of Section 32? In our opinion, no substantial question of law arises from the decision of the Tribunal. It has been found as a fact by the Tribunal that the assessee had not closed its business and had every intention to revive the same. The basis for this finding is the fact that the assessee had kept its establishment alive by paying salary and other allowances to the staff and had also acquired plant and machinery in the relevant previous year and had further incurred repair expenditure on its existing plant and machinery. These findings have not been challenged by the revenue as perverse. In fact, the allowance of the salary payments, staff welfare and repairs and maintenance expenditure by the CIT (Appeals) was not challenged by the revenue by filing any appeal on those points before the Tribunal and this aspect has been referred to by the Tribunal in para 9 of its order. Thus, the revenue had impliedly accepted the fact that the business was kept alive in the hope of revival and there was only a temporary lull in the business activities. If the assessee had purchased new plant and machinery and had also incurred repair expenditure of Rs.1.23 lakhs in respect of the existing machinery, it is a fair and reasonable inference to draw that the assessee wants to keep the business alive and revive the same at the earliest opportunity. The assessee has also stated before the BIFR that after the change in the business scenario globally, the company is expecting to receive substantial orders for its products. Thus, the finding of the Tribunal that the business of the assessee was not closed is fully supported by facts on record which have not been challenged by the revenue. The other question as to whether the plant and machinery should have been actually put to use in order to be entitled to depreciation under Section 32 and that mere passive

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use, in the sense that they were kept ready for use as and when the business was revived, would be sufficient compliance with Section 32 should not detain us since it has already been decided in the affirmative by at least three judgments of this Court. 9. The Tribunal has referred to the judgments in Capital Bus Service (supra), CIT Vs. Refrigeration and Allied Industries Ltd. (supra) & CIT Vs. Panacea Biotech Ltd. (supra) and has applied the ratio laid down therein to the facts of the present case. The ratio in brief is that it is not necessary that the plant and machinery owned by the assessee should be actually put to use in the relevant accounting year to justify the claim of depreciation and that even if the plant and machinery or other asset is kept ready for use in the assessee's business, the assessee would be entitled to depreciation. The only condition is that the business should not have been closed down once for all and that the assessee should demonstrate that the hopes of the business being revived are alive and real. It is however not a matter that can turn entirely on the assessee's hopes alone. There should be evidence or material to show that the assessee took efforts to keep the business alive in the hope of reviving the same. Maintaining the office and establishment, complying with the statutory formalities, not disposing of the plant and machinery, incurring expenses on the repair of plant and machinery etc., are some of the indications of nurturing the hopes of reviving the business. The above are only illustrative instances and are by no means exhaustive and the question as to whether the assets were kept ready for use in the business is largely to be decided on the facts and circumstances of each case. In our opinion, the Tribunal has not committed any error in applying the ratio laid down in the judgments of this Court to the facts of the present case in order to uphold the assessee's claim for depreciation.

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Pronounced in the open court on 8th October, 2021.

Sd/- Sd/- (S.S. GODARA) (L. P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated: 8th October, 2021.

kv

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Copy to : 1 Natural Biochemicals and Foods Ltd. (now known as Kaleesuwari Refinery and Industry Pvt. Ltd.), A. Ramachandra Rao & co., CAs., 1st Floor, 3-6-69/A/11, Street No. 1, Himayatnagar, Hyderabad – 500 029 ACIT, Circle – 16(1), Hyderabad. 2 3 CIT(A) -4, Hyderabad 4 Pr. CIT – 4, Hyderabad ITAT, DR, Hyderabad. 5 Guard File. 6