RELIANCE SHARE & STOCK BROKERS P.LTD,MUMBAI vs. ASST CIT CIR 4(2), MUMBAI

03/08/2016 सुनवाई क� तार�ख / Date of Hearing 01/09/2016 आदेश क� तार�ख /Date of Order: आदेश / O R D E R The assessee is aggrieved by the impugned order dated 24/12/2014 of the Ld. First Appellate Authority, Mumbai. The only ground raised in the present appeal Reliance Share & Stock Brokers Private Limited pertains to confirming the disallowance of business loss of Rs.1,18,14975/-, claimed by the assessee in its return, holding that the assessee has not carried out any business activity during the year, therefore, the loss is not allowable.

2.1. On the other hand, Shri Abhishek Sharma, ld. DR, strongly defended the addition confirmed by the Ld. Commissioner of Income Tax (Appeal) by explaining that out of eleven years, the assessee has done business only Reliance Share & Stock Brokers Private Limited in four years and the in the remaining year, no business activity was carried out, thus, the expenses were wrongly claimed. It was also not explained as to how the expenses were incurred and neither in the assessment order nor in the impugned order, there is mention of any enquiry conducted by SEBI, thus, the expenses cannot be allowed.

2.2. I have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee company was engaged in the business of share broking. The assessee was holding membership cards of various stock exchanges in India. The assessee, for the relevant Assessment year, declared loss of Rs.1,06,82,120/-, which is summarized as under:-

Rupees Business Income Net loss as per profit and loss account (1,32,35,106)

Additions i. Expenditure on increase In share capital 6,00,000 11. Addition u/s.37 43,400 ii1. Depreciation as per profit and loss account 3,75,267 iv. Disallowance u/s.14A 24,31,968 (34,50,365) (97,84,471) Deductions I. Exempt incomes 6,45,750 if. Profit on sale of investments 11,32,855 ii1. Profit on sale of fixed assets 10,000 iv. Depreciation as per income tax 2,41,899 20,30,504 Net business loss (1,18,14,975) ============= Reliance Share & Stock Brokers Private Limited During assessment proceedings, the assessee was asked for the justification for the claim of business loss as no business activity was carried out by the assessee during the relevant period. Show-cause notice was issued to the assessee which was replied vide letter dated 31/01/2014. Finally, the ld. Assessing Officer did not accept the contention of the assessee and disallowed the claimed expenses.

2.3. On appeal before the ld. Commissioner of Income Tax (Appeals), identical plea was raised and finally the stand taken in the assessment order was affirmed, on identical lines, as has been mentioned in the assessment order. The relevant finding of the ld. Commissioner of Income Tax (Appeals) is reproduced hereunder for ready reference and analysis:-

In view of the above, it is apparent that the appellant has not carried out any business activity during the year and also not till 19.12.2014. (The AR admitted that business has not commenced till 19.12.2014 (vide ordersheet entry dtd.19.12.2014). Therefore, as the business activity has not been carried out by the appellant during the year, the disallowance of business loss of Rs.1,18,14,975/- is in order considering above and also for the reasons mentioned by the Assessing Officer in the assessment order. The Assessing Officer has rightly for the reasons mentioned by the Assessing Officer in the assessment order. The Assessing Officer has rightly disallowed the business loss of Rs.1,18,14,975/- and therefore, the disallowance made by the Assessing Officer is upheld. The ground of appeal is thus, dismissed.

2.4. The assessee is in appeal before this Tribunal. If the observation made in the assessment order, leading to Reliance Share & Stock Brokers Private Limited addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsels, if kept in juxtaposition and analyzed, I find that the Tribunal in the case of Tansy Investment Pvt. Ltd. Vs ACIT (ITA No.3722/Mum/2009, vide order dated 24/11/2010 held as under:- “1. The short issue that we are required to adjudicate in this appeal is whether or not the CIT(A) was justified in upholding the disallowance of expenditure of Rs 12,55,869, on the ground that there are no business activities during the year under consideration and that the assessee’s income of dividend, interest and other income being taxable under the head ‘income from other sources’. The assessment year involved in 2004-05 and the impugned assessment was framed under section 143(3) of the Income Tax Act, 1961.

2. The issue in appeal lies in a very narrow compass of material facts. During the course of the assessment proceedings, the Assessing Officer noticed that the while the assessee has shown income of Rs 29,44,729 against dividend, interest and other incomes which are taxable under the head ‘income from other sources’, the assessee has claimed an expenditure of Rs 12,55,869 which is in the nature of expenditure which can only be allowed deduction for business income. It was in this backdrop that the Assessing Officer disallowed the expenses of Rs 12,55,869. Aggrieved, assessee carried the matter in appeal before the CIT(A). It was submitted by the assessee that the assessee was an investment company and was assessed as such in past. Since the assessee was in the business of investment, the expenditure relating to its business was to be allowed as deduction in computation of business income. The main business of the assessee was claimed to be investment. It was also contended that to carry on business it had to have its own infrastructure, and, for this purposes, the assessee had incurred expenditure. It was also submitted that ‘ most of the expenses considered above ( i.e. salary, repairs and Reliance Share & Stock Brokers Private Limited maintenance, electricity and phone charges, auditors remuneration, depreciation, printing and stationery etc) were statutory in nature and had to be incurred even if no income could have arisen during the year’ and that, other than such expenses, the expenses were for ‘day to day maintenance of office’. It was thus contended that merely because income earned by the assessee was taxable under the head ‘income from other sources’, the deduction of expenses could not be declined. The CIT(A) was not really impressed by these arguments. He observed that “the appellant had not brought on record any material to suggest that the appellant is conducting investment activities throughout the year with a view to earn profit” and took note of the Assessing Officer’s finding that investments have not changed during the year. He also noted that though, as stated in the remand report, the assessee company was treated as investment company in past, it cannot be treated as investment company in view of his above observations. It was also noted that the expenditure in question could not be allowed as deduction under the head ‘income from other sources’. The CIT(A) thus upheld, and in fact further fortified, the impugned disallowance. The assessee is not satisfied with the order of the CIT(A) and is in appeal before us.

, the Assessing Officer is aggrieved that the CIT(A) was not justified in deleting the addition of Rs. 6,36,210 on account of expenses claimed during the year, when no business was conducted by the assessee during the relevant previous year.

3. The material facts of the case are like this. The assessee is a domestic company and, in the relevant previous year, it had income only from interest and dividend. In the course of scrutiny assessment proceedings, the Assessing Officer noticed that no business activities were carried out by the Reliance Share & Stock Brokers Private Limited assessee. He thus required the assessee to show cause as to “why not the expenses of the assessee be disallowed as there was no business activity during the year” and “the income earned be brought to tax”. The assessee submitted that the expenses incurred by the assessee are only on account of salaries and conveyance to staff which was required to run the office, and on account of payment of property tax of the building from which office is run. It was pointed out that there was no sale and purchase of shares in the relevant previous year as the stock market was unstable and market conditions were not stable. There is no dispute about the fact that in the earlier years, the assessee was engaged in business of buying and selling shares and its income from this activity was brought to tax under the head “Business income”. The Assessing Officer rejected the explanation of the assessee by observing that as admittedly there was no business activity during the relevant previous year, no expenses could be allowed. The loss claimed by the assessee was disallowed, and the business income was assessed at ‘nil’. Aggrieved, assessee carried the matter in appeal before the CIT(A). The CIT(A) held that the Assessing Officer has not doubted genuineness of the expenditure, that the expenditure was necessary for running the organisation, that it was neither extravagant nor excessive, and that, therefore, the Assessing Officer was not justified in disallowing the same. The Assessing Officer is aggrieved of the relief so given by the CIT(A) and is in appeal before us.

4. Smt. Iyer, learned Departmental Representative, submits that the CIT(A) was influenced by the factors which were not relevant to decide whether or not the expenses in question should be allowed as deduction in computation of business income. She submits that genuineness of expenditure, on which emphasis is placed by the CIT(A), is wholly irrelevant in coming to the conclusion that the expenditure is to be allowed even as there is no business activity during the relevant previous year. It is also pointed out that reasonableness of expenditure also has no bearing on this issue. It is further pointed out that the reasoning of the CIT(A) is vague and lacks specific and cogent reasons, germane to the context, for deleting the disallowance of expenses. Learned Departmental Representative relies upon Tribunals’ order in the case of Adasoft (India) (P.) Ltd. v. Dy. CIT [2006] 9 SOT 31 (Delhi) in support of the disallowance of expenditure when business is not in Reliance Share & Stock Brokers Private Limited existence. She relies upon the order of the Assessing Officer, justifies the same, and urges us to restore the order of the Assessing Officer. Dr. Gupta, learned counsel for the assessee, supports and justifies the order of the CIT(A). Dr. Gupta submits that the assessee is a company and the expenditure incurred by the assessee are minimal expenditure just to keep the company afloat. It is submitted that the assessee was not carrying out business activity due to adverse market conditions, but the assessee being an artificial juridical person, has to incur expenditure for maintaining its existence and for carrying out whatever little activities that the assessee is involved in. Our attention is invited to Hon’ble Calcutta High Court’s judgment in the case of CIT v. Ganga Properties Ltd. [1993] 199 ITR 941 wherein it is held that even when company has only earnings income from other sources, the expenditure incurred by the company for its continued existence and for retaining clerical staff, secretary and accountant and other incidental expenses, are allowable deduction. Dr. Gupta then takes us through the judgment of Hon’ble Punjab & Haryana High Court in the case of Nakodar Bus Service (P.) Ltd. v. CIT [1989] 179 ITR 5062 wherein it was held that even when the assessee’s business was discontinued, deduction in respect of salaries paid to employees was allowable deduction against interest income. The next judicial precedent he relies upon is a judgment of Hon’ble Allahabad High Court in the case of CIT v. Rampur Timbery & Turnery Co. Ltd. [1981] 129 ITR 583. In this case, it was held that the expenditure incurred by a company, for retaining its status as company and for its continued existence as such, is allowable deduction, even after discontinuation of business in certain circumstances. On the strength of these precedents, he justifies the conclusions arrived at by the CIT(A). His next tier of defense consists of the proposition that only because no business activity is carried on in the relevant previous year, and in the absence of any categorical finding to the effect that business has closed for good, the Assessing Officer cannot jump to the conclusion that the business has ceased. The distinction between closure of business and suspension of business activity is sought to be highlighted and the relevant judicial precedents cited. In rejoinder, Smt. Iyer accepts that there is no categorical finding about closure of business, but she adds that the lack of such a finding cannot mean that expenses are to be allowed even as there is no Reliance Share & Stock Brokers Private Limited business in existence. She reiterates her submissions and urges us to restore the disallowance made by the Assessing Officer.

5. Having given our careful consideration to the rival contentions and the material on record, we are inclined to uphold the conclusions arrived at by the CIT(A). As Dr. Gupta rightly contends, the assessee being an artificial juridical person, it needs to incur certain expenditure to keep itself afloat and have its continued existence. Unlike1 a natural person, a company can only operate through other natural persons—whether employees or others. It is not the case of the Assessing Officer that the expenditure of the assessee company are excessive or unreasonable vis-a-vis its legitimate business requirements. The Hon’ble High Courts have consistently held that in the case of the corporate assessees such expenses have to be allowed as deduction irrespective of whether or not the assessee is engaged in active business and even if assessee has only passive incomes. The CIT(A) was, therefore, justified in his conclusions. That is, however, not the only reason why the disallowance made by the Assessing Officer was unsustainable in law. We agree with Dr. Gupta’s second line of argument as well. We find that the whole cause of action of disallowance of expenses is in the background of Assessing Officer’s observation that the assessee did not carry out any business transactions which at best was Assessing Officer’s finding about an activity of business not being functional in the relevant previous year. In our opinion, not carrying on business activity in a particular period cannot be equate with closure of business as it takes an unsustainably narrow view of the scope of cessation of a business. In the case of LVE. Vairavan Chettiar v. CIT [1969] 72 WR 114, their Lordships of Hon’ble Madras High Court were in seisin of a situation where the assessee had obtained an import licence for doing areca nut business but due to adverse conditions in market, he temporarily suspended the areca nut business for the assessment year in question. Nevertheless, he was maintaining the establishment and was waiting for improved market conditions in areca nut. 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.

Reliance Share & Stock Brokers Private Limited 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 quiet 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 share dealing business, merely because there are no business transactions in the relevant previous year cannot be reason enough to come to the conclusion the business has come to an end. 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”. Unless the business is abandoned or closed and even if business is at a dormant stage waiting for proper market conditions to develop, the expenditure incurred in the course of such a business is to be allowed as deduction. For this reason also, the disallowance made by the Assessing Officer was not justified, and the CIT(A) rightly deleted the same.”

2.5. I find that while coming to a particular conclusion, in the aforesaid order, an elaborate discussion has been made by the Bench and further the decision of the Co-ordinate Bench in the case of Income Tax Officer vs Mokul Finance Pvt. Ltd. (110 TTJ 445) has been followed along with various decisions from Hon'ble High Courts. However, it is noticed that the assessee has not carried Reliance Share & Stock Brokers Private Limited out any business activity during the year and till 19/12/2014. This factual matrix was also admitted by the assessee that no business commenced till 19/12/2014. Even otherwise, no business income was appearing in the profit & loss account and the other income relates to capital gain and income from other sources. The assessee company was merely holding membership cards of various stock exchanges in India but did not commence any business activity by trading on these stock exchanges. The only plea of the assessee is that the assessee incurred certain expenditure which was required for maintaining infrastructure. However, fact remains that no business activity was carried out. The fundamental concept of matching principle of accounting is that offsets revenue against expenses on the basis of their cause and effect relationship. The matching principle of accounting states that, in measuring net for an accounting period, the cost incurred in that period should match against the revenue generated in the same period. It is also noted that the membership card of different exchanges were also surrendered by the assessee on various dates. The SEBI conducted enquiries against the assessee and the cards were suspended for four months vide order dated 11/12/2006 and penalty of Rs.50 lakhs was imposed and the same was paid by the assessee. The assessee, neither did any business activity nor generated any income and even closed the business. Since, no business activity was carried out by the assessee till 19/12/2014 (as admitted Reliance Share & Stock Brokers Private Limited by the assessee even before the Ld. Appellate Commissioner as mentioned in para 2.7 of the impugned order), therefore, the disallowance of business loss was rightly denied by the Assessing Officer and confirmed by the Ld. Commissioner of Income Tax (Appeal). The appeal of the assessee, is therefore, dismissed.

Finally, the appeal of the assessee is dismissed.

This order was pronounced in the open in the presence of ld. representative from both sides at the conclusion of the hearing on 03/08/2016.