MR. SHANMUGAM RAVI,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME TAX, ASSESSEMENT CIRCLE-2(1), BENGALURU

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

2. (a) The authorities below erred in disallowing the business loss of Rs.11,28,766/- by stating that the appellant is not engaged in any business during the year under consideration on the facts & circumstances of the case. (b) The authorities below ought to have appreciated that even though the business was discontinued, the appellant had to incur expenditure such as professional fees, consultancy charges towards pending income tax Mr. Shanmugam Ravi, Bangalore Page 2 of 16 litigations, labour law compliances, bank charges etc., pertaining to erstwhile business which was neither extravagant nor excessive and therefore the business loss of Rs. 11,28,766/- needs to be allowed under the facts and circumstances of the case.

(b) The authorities below failed to appreciate that the interest income of Rs.4,87,50,072/- earned in India by a Non-Resident may be taxed in India subject to a maximum rate of 10% of the gross amount as per Article 11 of DTAA between India and New Zealand under the facts and circumstances of the case. 4. (a) The action of the authorities below in ignoring the tax rates adopted by the appellant as per DTAA between India - New Zealand on the dividend income ofRs.4,11,026/- and adopting the slab rates applicable to a Resident Individual is bad in law. (b) The authorities below failed to appreciate that the dividend income of Rs.4,11,026/- earned in India by a Non-Resident may be taxed in India subject to a maximum rate of 15% of the gross amount as per Article 10 of DTAA between India and New Zealand under the facts and circumstances of the case.

7. (a) The action of the learned assessing officer in levying the surcharge at 37% of the taxes payable on income excluding the capital gains taxable under section I I IA and 112A of the Act is bad in law under the facts and circumstances of the case.

(b) The learned assessing officer failed to appreciate that the income other than the income taxable under the provisions of DTAA does not exceed I Crore and thus the rate of surcharge ought to be have been restricted to 10% under the facts and circumstances of the case.

3. The ground No.2(a) & (b) for our consideration is with regard to disallowance of business loss of Rs.11,28,766/-. In this regard, the ld. A.R. submitted that the assessee was engaged in the business of rendering outsourced housekeeping services in the name and style of ‘The Peoples Choice’. This business was transferred to M/s. Quess Corporation Ltd. on 06.02.2017. During the year under consideration, the assessee had incurred an expenditure of Rs.11,29,290/- towards professional charges, consultancy charges and other expenditure such as ESI arrears and bank charges. 3.1 He submitted that it is pertinent to note that as per the provisions of Rule 6F(5) of the Income Tax Rules, 1962, r.w.s. 44AA of the Act, the assessee was required to maintain the books of account and other documents specified in sub-rule (2) and sub-rule (3) for a specified number of years. Further, considering the nature, size and complexity of the assessee’s erstwhile business, he was required to retain the accountants from erstwhile business to address the statutory requirements. Therefore, the assessee retained Mr. Shanmugam Ravi, Bangalore Page 4 of 16 2 accountants namely Ms. Naziya Afzal and Ms. Suriya Sulthana for maintenance of statutory records like books of accounts, invoices, bills, agreements etc. The copy of the invoices pertaining to professional fees are made part of the Paper Book filed on 16.08.2023. 3.2 He further submitted that during the financial year 2020-21, notices under section 142(1) of the Act for the assessment year 2018- 19 were issued by the Income Tax Department and consequently, order under section 143(3) of the Act was passed. In the assessment order under section 143(3) of the Act for assessment year 2018-19, substantial additions were made and the matter is pending before the Hon’ble Karnataka High Court. Similarly, appeals for other assessment years were pending before various forums. 3.3 In view of the above, he submitted that the assessee was in need of constant support from the accountants in order to respond to the notices issued and to co-ordinate with learned counsels, and hence, the assessee retained certain accountants. Further, the assessee was served with ESI Notice and consequently, the consultants have helped the assessee in addressing to the notices and have also assisted in depositing the ESI arrears. It is the contention of the assessee that as long as the compliances/ litigations pertaining to erstwhile business are unresolved, the business activity related to the erstwhile business shall be deemed to be continuing and therefore, expenditure has to be allowed under section 37 of the Act. 3.4 In this regard, the ld. A.R. placed reliance on the following decisions in support of the contention canvassed:  CIT vs. Ganga Properties Ltd., 199 ITR 94 (Cal.)  Nakodar Bus Service (P.) Ltd. vs. CIT, 179 ITR 506 (P&H)

3.5 In view of the above, he submitted that even though the business was transferred, there were various litigations pertaining to Mr. Shanmugam Ravi, Bangalore Page 5 of 16 income tax and labour laws which remained unresolved. In order to handle these issues, the assessee had to maintain staff and consultants. Therefore, business loss having arisen due to expenditure incurred towards professional charges, consultancy charges and other expenditure such as ESI arrears and bank charges during the financial year 2020-21 could not be disallowed.

5.1 We gone through the decision relied by the ld. A.R. in the case of Ganga Properties Ltd. cited (supra). The facts of the said case are that for the assessment year 1972-73, while computing the ‘Income from other sources’ the ITO disallowed expenses which included office rent, salary, contribution to provident fund, rates and taxes, audit fee, printing and stationery charges filing fees, and staff welfare Mr. Shanmugam Ravi, Bangalore Page 6 of 16 expenses. The Tribunal, held that none of the expenses claimed by the assessee could be said to be for any purposes other than those wholly and exclusively required for its activities to earn income and, therefore, it allowed the expenditure claimed as deduction by the assessee. The Hon’ble Court in this case held that “A limited company even if it does not carry on business, even if it derives income from other sources, has to maintain its establishment for complying with statutory obligation so long as it is in operation and its name is not struck off the register or unless the company is dissolved. So long as the company is in operation, it has to maintain the status as a company and it has to discharge certain legal obligations and for that purpose it is necessary to appoint clerical staff and secretary or accountant and incur incidental expenses. In this background, the conclusion of the Tribunal that the expenses incurred were wholly ad exclusively for the activities to earn income was a reasonable conclusion. The Tribunal was, thus, justified in allowing the expenditure claimed by the assessee as deduction.” 5.2 The ld. A.R. also relied on the judgement of Punjab & Haryana High Court in the case of Nakodar Bus Service (P) Ltd. Vs. CIT reported in 179 ITR 506 (P&H) wherein the facts of the case are that the assessee-company was carrying on a transport business which it was constrained to discontinue in 1948. The work done by it, thereafter, consisted of looking after and maintaining its assets, the sale of plots of land owned by it and income from rent and interest. For the assessment year 1977-78 it claimed deduction under section 57(iii) in respect of the salary paid to its employee. The ITO disallowed the assessee's claim on the ground that it was being claimed in respect of earning of interest income but the employee had no role to play in earning this income. On appeal, the Tribunal upheld the order of the ITO. On this issue, the Hon’ble Court held that “In view of the decision in the case of CIT v. Rampur Timber & Turnery co. [1981] 129 ITR 58 (All.) it was held that the expenditure incurred in retaining the Mr. Shanmugam Ravi, Bangalore Page 7 of 16 status of the company, namely miscellaneous expenses, salary, legal expenses, travelling expenses and the like would be expenditure wholly and exclusively for the purpose of making or earning income, in the instant case the assessee was entitled to &duction under section 57(iii) in respect of the salary paid to its employee. The Tribunal was not justified in disallowing the assessee's claim.” 5.3 Contrary to this, the ld. D.R. relied on the judgement of Hon’ble Supreme Court in the case of CIT Vs. Gemini Cashew Sales Corporation cited (supra), wherein held as under: “Two persons, 'W' and 'R', carried on business cashewnuts as partners in a firm. The partnership was dissolved on the death of 'R', and the business was taken over and continued by 'W on his own account. The services of the employees were not interrupted and there was no alteration in the terms of employment of the employees of the establishment. In proceedings for assessment of tax it was urged on by the assessee-firm that an amount of Rs. 1,41,506 taken into account under the head 'Gratuity payable to workers of the business" in settling the accounts of the firm till dissolution of firm, was a permissible outgoing. The ITO rejected the claim and the AAC confirmed that order. The Tribunal held that by the transfer of the undertaking to 'W', there was no interruption in the employment of the workmen of the establishment, and 'W' had not expressly agreed to take over the liability for compensation payable under section 25FF of the Industrial Disputes Act, 1947, and since there was dissolution of the partnership, and the undertaking was transferred, the workmen became entitled to retrenchment compensation, which the firm was liable to pay. The Tribunal accordingly held that the firm was entitled to deduct the same in the computation of the income. On reference the High Court up held the order by the Tribunal.

HELD Liability to pay retrenchment compensation arises under section 25FF when there is a transfer of the ownership or management of an undertaking : it arises on the transfer of the undertaking and not before. Transfer of ownership or management 01 an undertaking in law operates, except in the conditions set out in the proviso, as retrenchment of the workmen. But until there is a transfer of the undertaking resulting in determination of employment, the workmen do not become entitled to retrenchment compensation. So long as the ownership of the business continues with the employer, the right of the workmen to claim compensation remains contingent. A workman may, before the transfer of ownership of the business, himself terminate the employment : he may die or he may become superannuated : in none of these cases the owner of the business is under any obligation to pay retrenchment compensation to the workman. The obligation to pay compensation becomes definite only when there is retrenchment by the employer, or when the ownership or management of the undertaking is, except in the cases contemplated Mr. Shanmugam Ravi, Bangalore Page 8 of 16 by the proviso, transferred to a new employer, and not till then. The right therefore arises from determination of employment, or from transfer of the undertaking: it has no existence before these events take place.

Broadly stated, the present value on commercial valuation of money to become due in future, under a definite obligation, will be a permissible outgoing or deduction in computing the taxable profits of a trader, even if in certain conditions the obligation may cease to exist because of forfeiture of the right. Where, however, the obligation of the trader is purely contingent, no question of estimating its present value may arise, for to be a permissible outgoing or allowance, there must in the year of account be a present obligation capable of commercial valuation. As already observed, the liability to pay retrenchment compensation arose for the first time after the closure of the business and not before. It arose not in the carrying on of the business, but on account of the transfer of the business. During the entire period that the business was continuing, there was no liability to pay retrenchment compensation. The liability which arose on transfer of the business was not of a revenue nature. Profits of a business involve comparison between the state of the business at two specific dates. Normally the liability which occurs after the last date, unless its source is in a pre-existing definite obligation, cannot be regarded as a pan of the outgoing of the business debitable in the profit and loss account. A deduction which is proper and necessary for ascertaining the balance of profits and gains of the business is undoubtedly properly allowable, but where a liability to make a payment arises not in the course of the business, not for the purpose of carrying on the business, but springs [rom the transfer of the business, it was not, a properly debitable item in its profit and loss account as a revenue outgoing. The claim of the firm to treat it as an item in the determination of the profits of the firm under section 10(1) of the Act 1922 cannot, therefore, be sustained. Under section 10(2)(xv) of the Act 1992 in the computation of taxable profits 'any expenditure laid out or expended wholly and exclusively [or the purpose of such business, profession or vocation', i.e., business, profession or vocation carried on by the assessee, is a permissible allowance. But to be a permissible allowance the expenditure must be for the purpose of carrying on the business. Where accounts are maintained on the mercantile system, if liability to make the payment has arisen during the time the business is carried on, it may appropriately be regarded as expenditure. But, where the liability is, during the whole of the period that the business is carried on, wholly contingent and does not raise any definite obligation during the time that the business is carried on, it cannot fall within the expression 'expenditure laid out or expended wholly and exclusively' for the purpose of the business. In view of aforesaid, the amount claimed as a permissible allowance by the assessee in its profit and loss account, could not be regarded as properly admissible either under section 10(1) or section 10(2)(xv) of the Act of 1922.”

Mr. Shanmugam Ravi, Bangalore Page 9 of 16 5.4 She further relied on the judgement of Hon’ble Madras High Court in the case of M. Seshadri Iyengar & Sons Vs. CIT cited (supra), wherein held as under: “During the accounting year relevant for the assessment year 1973-74, the assessee-firm decided to close down its business and entered into an agreement with its employees agreeing to pay them gratuity, retrenchment compensation and notice pay and it credited the amounts due to the workmen under the aforesaid accounts in their accounts and debited the same in its profit and loss account. However, the actual payment of gratuity, retrenchment compensation and notice pay was made only in the subsequent accounting year in April 1973, when the business was actually closed. For the assessment year 1973-74, the assessee's claim for deduction of the amounts paid towards gratuity, retrenchment compensation and notice pay was disallowed by the ITO on the ground that the said sum was not deductible under section 36(1)( v). On appeal, the AAC confirmed the ITO's order. On second appeal, the Tribunal held that the amount paid towards the gratuity liability was deductible, but the amounts paid towards retrenchment compensation and notice pay were not deductible, as the amounts paid towards retrenchment compensation and notice pay on the closure of the business of the assessee could not be held to be a business expenditure.

On reference, it was contended by the assessee that it closed down only a part of the business and not the whole of the business in the assessment year 1973-74 and that the whole business was closed only in the next year and that the retrenchment compensation claimed by the assessee related to that part of the business which had been closed in the year of account. HELD Except for a casual reference to the closure of part of the business in the statement of the case, none of the authorities below had referred to that fact. All the authorities below had proceeded on the basis that the assessee's business as a whole was closed in the next year. Therefore, one could not proceed on the basis that the assessee closed down a part of the business in the assessment year 1973-74 and the rest of the business was closed in the next assessment year 1974-75. It was true that in the statement of the case, the Tribunal referred to the fact that the assessee had closed down a part of the business during the year of account. But? that fact was not supported by materials which were available before the Tribunal at the time of the hearing of the appeal. It was not possible for the Court to rely on the statement made by the Tribunal for the first time in the statement of the case. It is well established that the Tribunal cannot support its order with reference to new materials which were not before it when it heard the appeal. If the Tribunal refers to such new materials or evidence, it would be the duty of this Court to ignore the same. The Tribunal should not attempt to find facts at the stage of reference or incorporate additional findings of fact in the statement of the case and all the necessary facts should be found by the Tribunal at the appellate stage. In this case, the whole order proceeded on the basis that the assessee closed down the business in the subsequent accounting year, and it was for the first time in the statement of Mr. Shanmugam Ravi, Bangalore Page 10 of 16 the case that the Tribunal had referred that the assessee-firm closed down a part of the business in the accounting year in question. For the reasons stated above, it was not possible to place any significance on the statement referred to by the Tribunal in the statement of the case that 'the assessee-firm closed only a part of the business in the accounting year relevant to the assessment year 1973-74. To be a permissible allowance, the expenditure must be for the purpose of carrying on the business and where the business is closed and as a result of the closure of the business the liability to pay retrenchment compensation has arisen, the liability to pay retrenchment compensation cannot be said to be a liability which arose at the time when the business was carried on and such a liability was wholly contingent when the business was being run and, therefore, the amounts paid or agreed to be paid towards retrenchment compensation cannot be termed as expenditure wholly or exclusively for the purpose of the business. Thus, even if the assessee had followed a mercantile system of accounting and the credit entries in favour of the workmen and the debit entries against the assessee-firm could be taken as the basis for the assessee's claim for exemption in respect of retrenchment compensation, that claim was liable to be rejected on the grounds that the liability to pay retrenchment compensation arose only in the next assessment year when the business was closed and the credit or the debit entries, as the case may be, could only be in respect of a contingent liability during the relevant assessment year and such a contingent liability could not be taken as business expenditure to be charged against the profit. It was held by the Supreme Court in CIT v. Gemini Cashew Sales Corpn. [1967] 65 ITR 643 that the liability to pay retrenchment compensation arises only after the closure of the business and not when the firm is actually carrying on business and as such the same cannot be allowed as a business expenditure. Even assuming that the closure of the business took place in the relevant assessment year, still, on the basis of the decision of the Supreme Court, in the case of Gemini Cashew Sales Corpn. (supra), the claim could not be allowed as the said expenditure could not be said to be a business expenditure, for, the liability to pay the retrenchment compensation arose after the closure of the business and not while running the business. Again, for the same reasons, the assessee was not entitled to the relief in respect of notice pay.

Accordingly, the amounts of retrenchment compensation and notice pay paid to workmen were not allowable as a deduction.”

5.5 In our opinion, no deduction could be allowed on account of incurring of various impugned expenditure when the assessee did not carry on any business in the relevant assessment year and there is no likelihood of revival of business. 5.6 Further, we note that if the expenditure incurred to upkeep the business of the assessee, the said expenditure could be allowed. However, in the present case, there was no likelihood of restarting Mr. Shanmugam Ravi, Bangalore Page 11 of 16 the said business and completely closed down earlier to so many years and now this expenditure cannot be allowed as a business expenditure. It was not incurred to keep its existing business. Thus, expenditure incurred during the period when no business was carried o was not admissible deduction. For this purpose we place reliance on the judgement of Hon’ble Supreme Court in the case of L.M. Chhabda and Sons Vs. 65 ITR 630, wherein held that “the claim of allowance of expenditure from an independent business, which was closed down was not allowable against other income of the assessee.” 5.7 Consideration of the present argument of the assessee’s counsel to allow any deduction relating to discontinued business would be a total contradiction and violation of the legal principle upon which section 29 of the Act stands. Among various conditions required for a loss or expenditure to be allowed, the foremost condition is that it should be in the course of business and it should be incidental to the business. On understanding this basic rule, the simplest interference to arrive at is that in the case of discontinued business, there is no question of loss or expenditure incurred in the course of business wholly and exclusively for the purpose of business as the business no longer is in existence. Being so, the revenue authorities have taken a correct view of the facts of the case and disallowed the same. We do not find any infirmity in the finding of the lower authorities and the same is confirmed. This ground of appeal of the assessee is dismissed.

6. With regard to next ground No.3(a) & (b) read with ground No.5(a) & (b): Tax rates on Interest income: 6.1 The ld. A.R. submitted that as the assessee stayed in New Zealand for 359 days during the year under consideration, he was a Resident of New Zealand and accordingly, his global income was taxable in New Zealand. Further, as per Article 11 of DTAA between India – New Zealand, the interest income earned by an assessee being Mr. Shanmugam Ravi, Bangalore Page 12 of 16 a resident of the other Contracting State may also be taxed in India subject to a maximum rate of 10%. 6.2 Accordingly, while filing the return of income, the assessee declared the interest income amounting to Rs.4,87,50,072/- in his return of income as per the above-mentioned DTAA. However, the learned assessing officer has stated that the assessee is not eligible to claim lower tax rates as per the DTAA and therefore, the interest income earned by assessee is taxable at slab rates as per the provisions of the Act. 6.3 He submitted that on perusal of the draft order of assessment, it is clearly evident that the basis on which the learned assessing officer has proposed to deny the beneficial rates of tax for the incomes earned by a Non-Resident assessee are as under: (i) Indian Citizenship of the assessee (ii) The sources of funds for investment and deposit related to the impugned interest and dividend income are of Indian origin.

6.4 He further submitted that on a plain reading of the provisions of section 90(2) of the Act and the relevant DTAA between India – New Zealand, neither the Act nor the DTAA prescribe such preconditions for availing the benefit of the lower tax rates. Further, as per the provisions of section 90(2) of the Act, if the Central Government of India has entered into an agreement with the Government of any other country in which the assessee is Resident, the income earned in India shall be taxable as per Indian tax laws or as per DTAA whichever is more beneficial to the assessee. 6.5 In this regard he placed reliance on the decision of Andhra Pradesh High Court in the case of CIT vs. Visakhapatnam Port Trust reported in 144 ITR 146, which was affirmed by the Supreme Court in UOI vs. Azadi Bachao Andolan reported in 263 ITR 706.

Mr. Shanmugam Ravi, Bangalore Page 13 of 16 6.6 He also placed reliance on the parity of reasoning on the decision of Mumbai Tribunal in the case of Sunil V Motiani vs. ITO(IT) in 33 taxmann.com 252. 6.7 Further, he submitted that Article 11 of DTAA between India – New Zealand states that the interest income earned in India by a Resident of New Zealand may be taxed in New Zealand. However, such interest income may also be taxed in India according to Indian Tax Laws, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10% of the gross amount of the interest. Accordingly, the assessee had disclosed the interest income earned in India amounting to Rs.4,87,50,072/- in Indian income tax return by applying the rate of 10% as per DTAA since the provisions of DTAA were more beneficial to the assessee. However, the learned assessing officer rejected the rate of 10% by stating that the assessee is not eligible for claiming the benefits of DTAA as the assessee has not included any income earned in India in the income tax return filed in foreign jurisdiction which is not correct on the facts of the case.

6.8 He contended that as long as a person is a resident of contracting state which attracts residence type taxation, the status of being a Resident of the contracting state is independent of the actual levy of tax on that person by that state. Therefore, taxability in one country is not sine qua non for availing relief under the DTAA from taxability in another country. 6.9 He placed reliance on the decision of Mumbai Tribunal in the case of ADIT(IT) vs. Green Emirate Shipping & Travels reported in 100 ITD 203. 6.10 He also placed reliance on the parity of reasoning in the decision of Jurisdictional High Court in the case of CIT vs. R.M. Muthaiah reported in 202 ITR 508.

Mr. Shanmugam Ravi, Bangalore Page 14 of 16 6.11 Further, he submitted that the statement of the learned assessing officer that the assessee has not included his Indian income in his New Zealand’s return of income is incorrect for the reason that the assessee was a “Transitional Tax Resident” of New Zealand for the year under consideration and consequently, the overseas interest income earned by such Transitional Tax Resident was eligible for temporary tax exemption in New Zealand for a period of 4 years. Therefore, he submitted that the said interest income earned in India was not included in the income tax return filed in New Zealand and the fact may be noted. 6.12 He further submitted that the ld. DRP has observed that due to pandemic i.e, COVID-19, there were restrictions on international travel and the assessee could not come to India. Further the ld. DRP has opined that due to travel restrictions, the assessee had to prolong his stay in New Zealand and assessee was not having any intention to get employment or to explore business opportunities in that country. In this regard, it is submitted that the Hon’ble DRP failed to appreciate that the Income Tax Act nowhere specifies that the assessee has to stay in a foreign country for a specific reason to be eligible for claiming the benefit of DTAA under the facts and circumstances of the case.

Mr. Shanmugam Ravi, Bangalore Page 15 of 16 7.1 He submitted that without prejudice to the stand taken by AO, section 90(1)(b) of the Income Tax Act, 1961 was amended w.e.f 01.04.2021 and the assessee case squarely falls in the said category. Section 90(1)(b) of the act, put bar on such kind of tax avoidance/evasive practice adopted by taxpayers. For easy reference, he reproduced relevant part of the section 90(1)(b) of the Act, which is as below: 90. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,— (a) for the granting of relief in respect of— (i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in force in the country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the responding law in force in that country or specified territory, as the case may be, without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in the said agreement for the indirect benefit to residents-of any other country or territory), or …………………