FANCY BUILDERS PRIVATE LIMITED,MUMBAI vs. ITO, 5(1)(4), MUMBAI

ITA No. 5171/Mum/2019 Assessment year: 2012-13 Page 1 of 6 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI SMC BENCH, MUMBAI [Coram: Pramod Kumar (Vice President), and Sandeep S Karhail (Judicial Member)] ITA No. 5171/Mum/2019 Assessment year: 2012-13 Fancy Builders Pvt. Ltd., .…………………………Appellant Shalimar House, 335, Grant Road, Mumbai 400 007[PAN: AAACF5437B] Vs. Income Tax Officer 5(1)(4) Mumbai ……………...…………Respondent Appearances by: Neelam Jadhav for the appellant Sudha Ramchandran for the respondent Date of concluding the hearing : 18/04/2022 Date of pronouncing the order : 15/07/2022 O R D E R Per Pramod Kumar VP 1. By way of this appeal, the assessee-appellant has challenged the correctness of the order dated 14th June 2019, in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2012-13. 2. Grievances raised by the appellant are as follows: I. The Ld. CIT(A) erred in confirming the disallowance of Rs. 20,93,522/ on account of following expenses holding that " the same as in the nature of "cost of inventories" which need to be capitalized." Sr. No Expenses Amount Rs. 1 Salary of the manager at site. 61,955 9 Professional charges paid to Advocate 4,53,060 ShoebMemon for legal matters. 11 Repair and maintenance incurred for 66,400 repairs of compound walls. 12 Security charges incurred for plot of land. 6,88,578 13 Maintenance 2,35,000 14 Purchase and labor charges mainly 5,88,529 incurred for repairs of compound wall, gate etc to our plot of land. Total 20,93,522

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II. The Ld. CIT (A) erred in confirming the disallowance of Rs.20,93,522/ without appreciating that the same are incurred wholly and exclusively for the business of the Appellant company and as Appellant is a corporate entity all expenses are necessary for running the business of the company and the said expenses are revenue in nature and hence, the business expenses claimed by the Appellant company may be allowed. Hence the disallowance on account of business expenses totaling to Rs 20,93,522/- confirmed by the CIT(A) may be deleted. III. The Learned CIT(A) erred in directing A.O. to verify nature of following expenses whether they constitutes Costs of inventories or are in the nature of general administration and selling & distribution costs:

Sr. No Expenses Amount Rs. 4 Bandra office expenses pertain to 1,61,400 administrative expenses 7 SB expenses incurred for our legal staff, 4,44,589 administrative staff, salary and office petty cash expenses 8 Repair and maintenance incurred for 66,400 repairs of compound walls. Total 6,73,243 IV. The Ld. CIT (A) erred in directing verification of nature of expenses of Rs.6,73,243/-, without appreciating that the same are incurred wholly and exclusively for the business of the Appellant company and as Appellant is a corporate entity all expenses are necessary for running the business of the company and the said expenses are revenue in nature and hence, the business expenses claimed by the Appellant company may be allowed. V. The Appellant craves leave to add, amend, delete, alter, substitute, any or all the above grounds of appeal. 3. Briefly stated, the relevant material facts are like this. The assessee before us is a company engaged in the business of development and construction activities. While admittedly assessee had constructed an eighteen story building project at Versova in the past, as in the relevant previous year the assessee has mainly derived income from the rent. The Assessing Officer was of the view that the assessee “has not carried out any business during the year, but claimed business loss on account of various expenditures at Rs. 28,51,339/- and adjusted such loss against the income from house property”. It was in this backdrop that the Assessing Officer required the assessee to show cause as to why these expenses not be disallowed. The submissions made by the assessee, in support of deduction for these expenses, were rejected by the Assessing Officer. The Assessing Officer disallowed these expenses and observed as follows:- 6.1 It is seen from the assessee's submission that the assessee failed to prove with supporting document that during the year it has carried out any commercial activity or any business was in existence during the year. As the assessee failed to prove that the business was in existence during the year there is no question of allowing any business expenditure. 6.2 It is seen that as per assessee's own explanation almost all expenses claimed are related to plot of land. The professional fees RS. 444859/- & advocated fees RS. 453060/- are related to title of land, the purchase & labour charges Rs. 588529/- are related to plot of land, security charges Rs. 235000/- are related to land. Likewise almost all other expenses are related to plot of

ITA No. 5171/Mum/2019 Assessment year: 2012-13 Page 3 of 6 land. In view of this the assessee should have capitalized all the expenses claimed and therefore the expenses claimed cannot be allowed as revenue expenditure. 6.3 In view of the above the expenses claimed Rs. 28,51,339/ is disallowed and consequently no business loss allowed to be adjusted against the rental income. 4. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without complete success. The Learned CIT(A) gave partial relief by observing as follows:- 6.3.9 It is observed from the details of the expenses amount of Rs. 28,51,339/- incurred by the appellant and after verification of facts that the following expenses are clearly in the nature of “cost of inventories” which need to be capitalized: Sr. No Expenses Amount Rs. 1 Salary of the manager at site. 61,955 9 Professional charges paid to Advocate 4,53,060 ShoebMemon for legal matters. 11 Repair and maintenance incurred for 66,400 repairs of compound walls. 12 Security charges incurred for plot of land. 6,88,578 13 Maintenance 2,35,000 14 Purchase and labor charges mainly 5,88,529 incurred for repairs of compound wall, gate etc to our plot of land. Total 20,93,522 Hence, disallowance of the above expenses is upheld 6.3.10 The following expenses are in the nature of general administration and selling & distribution costs: Sr. No Expenses Amount Rs. 2 Accounting charges 20,000 3 Audit fees 19,663 5 Electricity 2,450 6 Conveyance 2,969 10 ROC fees 550 15 Bank charges 6,693 16 Depreciation 32,249

Hence, above expenses are allowed as business expenditure and directed to be deleted. 6.3.11 The following expenses need further verification. It needs to be verified whether they constitutes Costs of inventories or are in the nature of general administration and selling & distribution costs:

Sr. No Expenses Amount Rs. 4 Bandra office expenses pertain to 1,61,400 administrative expenses 7 SB expenses incurred for our legal staff, 4,44,589 administrative staff, salary and office

ITA No. 5171/Mum/2019 Assessment year: 2012-13 Page 4 of 6 petty cash expenses 8 Insurance charges 66,984 The AO is directed to excluded the above expenses from the costs of a inventories after verifications. 5. The assessee is not satisfied and is in further appeal before us. 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case and the applicable legal position. 7. We find that there is no dispute that the expenses with respect to the plot of land were in the nature of a business asset. The project work has not begun as yet but that does not belittle the fact that the expenses in question are incurred wholly and exclusively for the purposes of business. None of the expenses in question have anything to do with expenses which are inadmissible, and the only reason assigned for the disallowance is that these expenses, being relatable to a project, are required to be capitalized. As at the relevant point of time, there was no project and the asset in question was simply a business asset, and the expenses in question were incurred to project those business assets. An expenses incurred to protect a business asset is clearly an expenses incurred wholly and exclusively for the purpose of business and is deductible, in computation of business income, as such. The mere fact that no construction project was in progress during the relevant previous year does not affect the said deductibility, because, a project being functional or not, as long as the assessee continues to be in the business, the expenses will be deductibility nevertheless. Even not carrying out any business activity during the relevant previous year would not affect the deductibility of expenses. As we hold so, we may usefully refer to the following observation from a co-ordinate bench decision in the case of DCIT vs. Dwarka Cements Works Ltd [(2005) 59 TTJ 208 (Mum):- 6. We find that the whole cause of action of disallowance of loss carried forward arose in the background of Assessing Officer‟s noting that "the cement plant was not working during this year" which at best was Assessing Officer‟s finding about an activity of business not being func- tional in the relevant previous year and, in our opinion, takes an unsustain-ably narrow view of the scope of cessation of a business. The Assessing Officer has declined the set off of losses only on the basis that the manufacturing activity in assessee‟s plant was not carried out in the relevant previous year. In our considered view, a cement plant not working during the year per se cannot even lead to the conclusion that the business of cement manufacturing was discontinued, leave aside the question of closure of „assessee‟s business‟ which may, on the given facts, encompass more than „manufacturing of cement‟. In the case of L. VE. Vairavan Chettiarv. CIT [1969] 72 ITR 114 (Mad.), Their Lordships of Hon‟ble Madras High Court were in seisin of a situation where the assessee had obtained an import licence for doing arecanut business but due to adverse conditions in market, he temporarily suspended the arecanut business for the assessment year in question. Nevertheless, he was maintaining the establishment and was waiting for improved market conditions in arecanut. It was thus an admitted position that no activities were carried out so far as this part of the business was concerned. On these facts, Their Lordships took note of the position that "There is nothing on record to show that he completely abandoned or closed the business forever. On the other hand, his books of account revealed that he was meeting the establishment charges and interest payments as detailed in the accounts in the year of accounts". It was then observed that the question whether the business is being carried on must depend in each case on its own facts and not on any general theory of law. Their Lordships then referred to, with approval, Lord Summer‟s observation in IRC v. South Behar Railway Co. Ltd. [1925] 12 Tax Cases 657 that business is not confined to being busy; in many businesses long intervals of inactivity occur. . . . "The concern is still a going concern though a very quite

ITA No. 5171/Mum/2019 Assessment year: 2012-13 Page 5 of 6 one." After elaborate survey of judicial precedents on the issue, Their Lordships concluded, in the light of, as noted above, the factual position that "there is nothing on record to show that he completely abandoned or closed the business forever. On the other hand, his books of account revealed that he was meeting the establishment charges and interest payments as detailed in the accounts in the year of account," that the loss in arecanut business, in which admittedly no activity was carried out during the relevant previous year, was to be set off against assessee‟s business income in the year. As the ratio of the aforesaid judgment is summed up in the ITR headnotes at p. 115 of the report, "As the assessee was maintaining the establishment and waiting for the improved market conditions in arecanuts and there was nothing to show that he completely abandoned or closed the business forever, the business must be deemed to be continuing". In the light of this legal position, it would follow that unless there is some material on record to show that the assessee has completely abandoned the cement manufacturing activity, even if that can be treated as a distinct business by itself, merely because no manufac- turing of cement in the relevant previous year cannot be reason enough to come to the conclusion that the losses incurred by the assessee in that business in the earlier years are not entitled to be set off against the assessee‟s business income in the present year. We have also taken note of the fact that, as evident from observations in paras 2.4 and 2.5 of assessment order for the assessment year 1995-96, that the assessee made efforts to resume the manufacturing activity of cement by arranging a survey by Saboo Engineers (P.) Ltd. and entering into a memorandum of understanding with Nihon Cement Co. Ltd., Japan, copies of which were also filed before us in the paper book. It could not thus be said, as was the case before the Hon‟ble Madras High Court, that the assessee had "completely abandoned or closed the business forever". In our considered view there is no material to suggest that the cement manufacturing operations of the assessee- company were in a stage more than that of suspension. Applying the test laid down by Hon‟ble Madras High Court in L. VE. Vairavan Chettiar‟s case (supra), and in the light of the above factual position, the set off of losses incurred by the assessee could not have been declined on the ground that the same business of the assessee was not continuing in the relevant previous year. We thus see no need to address ourselves to assessee‟s contention before us that, on one hand, the Assessing Officer has allowed the expenditure in maintenance and up- keep of cement plant as deduction from business, and, on the other hand, treated the business as closed down in the relevant previous year. On the facts of the present case, we are in agreement with learned CIT(A)‟s finding that the business of the assessee cannot be said to have been closed down and it must be deemed to be continuing. The very foundation of the revenue‟s stand is, therefore, unsustainable in law. 7. The law is by now fairly well-settled that "the expression „business or profession‟ in section 72(1)(i), proviso refers to all the activities comprised in the business and not any particular activity". Therefore, what is material is whether the business, and not necessarily the activity, in which the loss was incurred, was in existence in the relevant previous year or not. However, before we address ourselves to the question whether, on the given facts, the revenue has rightly taken a stand that the business in which loss was incurred by the assessee was no longer in existence, it is desirable to take a look at the broad legal position. We find that in terms of section 72(1)(i) of the Act, where a non-speculation business loss is carried forward by the assessee, "it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that year....provided that the business or profession for which the loss was originally computed continued to be carried on by him in the previous year relevant for that assessment year". It is thus clear (that) any non-speculation business loss brought forward by the assessee can be set off against any business income of the assessee, which essentially implies that it can be set off against any income from businesses even other than the business in which the loss was originally incurred; the question of activity in which loss is carried forward is of course much narrower an issue. However, the restriction placed by the proviso to section 72(1)(i), which is extracted above, lays down the condition that the business in which loss was actually incurred must be continued to be carried on by the assessee in the relevant previous year also. In effect, whether the loss brought forward is set off against the assessee‟s income from the same business or any other business, the only material condition is that the business in which the loss was

ITA No. 5171/Mum/2019 Assessment year: 2012-13 Page 6 of 6 actually incurred must not have been closed down. The law requires that in order to set off the past losses, the business where loss was suffered should continue during the set off. There is no legal requirement that a loosing „activity‟, which has distinct legal connotations from the expression „business‟, must be continued by the assessee but it is sufficient that the business, in which the loss was incurred, should continue to have exis-tence in order to claim the set off. 8. In view of the above discussions, and bearing in mind entirety of the case, we uphold the plea of the assessee, and direct the Assessing Officer to delete the impugned disallowance. As we do so, we may also add that there has been no dispute at all about the bonafides and genuineness of the expenditure in question. The impugned disallowances thus stand deleted. The assessee gets the relief accordingly. 9. In the result, the appeal is allowed in the terms indicated above. Pronounced in the open court today on the 15th day of July 2022.

Sd/- Sd/- Sandeep S Karhail Pramod Kumar (Judicial Member) (Vice President) Mumbai, dated the 15th day of July, 2022

Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) DR (6) Guard File

By order etc True Copy

Assistant Registrar/ Sr PS Income Tax Appellate Tribunal Mumbai benches, Mumbai