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Income Tax Appellate Tribunal, DELHI BENCHES : “A” NEW DELHI
Before: SMT DIVA SINGH & SHRI PRASHANT MAHARISHI
PER SMT. DIVA SINGH, JUDICIAL MEMBER
The present appeal has been filed by the assessee assailing the correctness of the order dated 14.12.2015 of CIT(A) – 2, Gurgaon pertaining to 2011-12 assessment year on the following grounds :-
1. “That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in confirming disallowance of Rs. 5,72,702/- representing expenditure including depreciation incurred and claimed by the appellant company. 1.1. That the learned Commissioner of Income (Appeals) has factually and legally erred in concluding that it is not a case of temporary closure of business but a case of permanent closure and as such the learned Assessing Officer was fully justified in disallowing expenditure and depreciation claimed by the appellant company.
Micro Turners (P) Ltd. vs. JCIT 1.2 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that the distinction between "suspension" of existing business on account of adverse business environment and "cessation" of business and as such, disallowance sustained is absolutely misconceived. 1.3 That without prejudice and even otherwise, the learned Commissioner of Income Tax (Appeals) has failed to appreciate that the aforesaid expenditure has been incurred for maintaining and protecting the assets of the appellant company and to discharge statutory obligations of the appellant company and therefore, such an expenditure even otherwise was an admissible business expenditure. 2 That the learned Commissioner of Income Tax (Appeals) has erred both in law and on facts in sustaining disallowance of Rs. 1,80,0001- representing statutory deduction claimed u/s 24(a) of the Act. 2.1 That the finding of the learned Commissioner of Income Tax (Appeals) that on plot of land was leased overlooks the buildings constructed by the assessee and forming part of fixed assets declared in financial statement furnished alongwith return of income.”
The relevant facts of the case are that in the year under consideration the assessee declared an income of Rs. 1,83,300/-. The assessment was concluded at an income of Rs. 9,36,000/- in the scrutiny proceedings initiated after issuance of notice u/s 143(2) and 142(1) by an order u/s 143(3).
2.1. The AO in the scrutiny proceedings took note of the fact that the returned income has been arrived at after setting off business loss of Rs. 5,72,702/- against income of Rs. 7,56,000/- declared under the head “income from house property”.
Considering the fact that the business activity of “manufacturing and job work of precision turned components” had been discontinued after 31.3.2009 the claim of the assessee in setting off business loss was held to be not allowable. Consequently administrative & other expenses of Rs. 4,07,461/- and depreciation of Rs. 1,65,241/- amounting to Rs. 5,72,702/- was also disallowed.
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Micro Turners (P) Ltd. vs. JCIT 2.2 The AO also considering the fact that the rent receipts of the assessee from a specific shed measuring 20,800 sq. ft. of Village Jhadmajri, Barotiwala, Distt. Solan, Himachal Pradesh also included the rent of Rs. 7,56,000/- from property bearing Gat. No. 343/54/1/A measuring 6070 sq. meters situated at Village Mahalunge, within jurisdiction of Sub-Registrar Khed 2 (Chakan) Distt. Tal. Khed Pune, Maharashtra which as per the lease deed was described as a mere “plot of land” disallowed the deduction claimed u/s 24(a) of Rs. 1,80,000/- worked out @ 30% of the rent receipts of Rs. 6,00,000/-. As a result of these disallowances the income of the assessee was assessed at Rs. 9,36,002/-.
Aggrieved the assessee came in appeal before the CIT(A).
In the course of the hearing before the CIT(A), the assessee was required to furnish the date month and year in which the manufacturing activity was stopped and re-started. In response thereto the assessee stated as under :-
“4.4. with reference to your letter dated 3.12.2015, it is most respectfully submitted as under :- That the business operation was practically closed in the month of September-2007 and most of the labourers were discharged and gratuity/notice pay/retrenchment mount were paid in month of March- 2008, as is evident from coy of wages A/c attached herewith. The production operation in the factory of the appellant has not been restarted as yet as there is slow down in the automobile sector. However your appellant is trying to restart the production as early as possible. Sir, the appellant will be too willing to provide any further information which your good self shall require to dispose of the appeal.” 4.1. Apart from that reliance was placed upon, the following two decisions namely Hon’ble Punjab & Haryana High Court in the case of CIT vs. Nahar Exports Ltd.
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Micro Turners (P) Ltd. vs. JCIT reported at 213 CTR page 20 (P & H) and Hon’ble Madras High Court in the case of CIT vs. Chennai Petroleum Corporation reported at 262 CTR 664(Mad.).
4.2. Not convinced with the explanation offered the ground was rejected holding that where the business operations in the case of assessee were closed in the month of September, 2007 and have not restarted till date, it could not be said to be a case of temporary closure of business in a particular year but a case of permanent closure extending for the last 7 to 8 years. The case law relied upon was held to be distinguishable as temporary closure of business was established there. Accordingly the Assessing Officer was held to be correct in disallowing the expenses and the depreciation claimed by the assessee.
Qua the disallowance of Rs. 1,80,000/- the view taken by the AO was confirmed holding as under :-
“5.3. I have carefully considered the appellant’s submissions :- The only issue to be considered is whether the property bearing No. 343/54/1/A measuring 6070 sq. Meters situated at Village Mahalunge was a ‘plot of land’ or ‘building’. The only evidence regarding the status of property under construction as per record is a copy of the lease deed filed by the appellant. Perusal of this lease deed shows that it was not mentioned that there is any building construction on the land. In clause 1 of the lease deed it is clearly mentioned as under :- “The Lessor hereby agrees with the Lessee to lease the said plot of land .................” It is further seen that clause 2d of the lease deed reads as under :-
“The Lessee shall be allowed to make any permanent construction or alternations in the said plot as per his requirements without the previous consent of the lessor.” These provisions of the lease deed clearly show that the property under construction was only a plot not a constructed building. The appellant’s contention that there is mention of the word ‘Property’ in the lease agreement and this established that the said property is a building is without any basis. The word ‘Property’ is used with respect to both land as well as any 4 20x5
Micro Turners (P) Ltd. vs. JCIT constructed property. It does not establish by any means that the said property was constructed property. Keeping in view the facts of the case, no interference is called for with the decision of the AO. This ground of appeal is accordingly dismissed.”
6. Aggrieved by this the assessee is in appeal before the ITAT.
7. Both the parties have been heard. Whereas the Ld. AR submitted that there is nothing on record to conclude that the business of the assessee is completely shut down. It was his submission that in fact it is a case of temporary suspension of business. The lull in the business has occurred on account of temporary recession.
In the circumstances, the CIT(A) was not justified in concluding that the assessee had no intention to continue its business. It was his submission that the nature of expenses incurred would show they are for rent, salary and wages, audit fee, legal and professional charges and depreciation and they by their very description would show that the assessee in order to maintain its existence has incurred the expenditure. Accordingly, relying upon CIT vs Nahar Exports Ltd (2008) 296 ITR 419 [Punjab & Haryana] amongst others it was his submission that the expenses deserved to be allowed. Addressing the past history it was submitted that in all the earlier years the returned income has been accepted by an order under section 143(1). Only in 2008-09 assessment year the returned income was accepted by an order passed under section 143(3) accepting the declared loss of Rs.16,36,041/-.
Copy of this order dated 27/12/2010 it was submitted is available in the paper book page 14.
Addressing ground No. 2 in the present appeal it was submitted that no doubt the property has been described as a plot of land in para 1 of the lease deed.
However when the said para is read along with para 2 it would be clear from the 5 20x5
Micro Turners (P) Ltd. vs. JCIT reference made to the payment of electricity charges which the lessee was to pay as
per the reading on the MSEB meter which would pre-suppose that some construction would necessarily be there. Apart from that it was his submission that due to the limitations in the recital as the lease deed has not been worded very appropriately, he was not in a position to rely on any other evidence. However it was submitted it cannot be concluded that it was only a piece of land which was leased out.
The Ld. Sr. DR heavily relying upon the orders of the authorities below submitted that the grounds deserve to be dismissed. Addressing the paper book filed it was his submission that when the profit and loss account and the balance sheet for the year under consideration is considered at pages 2 and 3 along with details at pages 5 and 6 which has been filed by the assessee it would be seen that the assessee continues to hold the very same inventory for years on end. Similarly there is no change in the sundry debtors of the assessee over the years. In fact the details pertaining to sundry debtors for more than 6 months would show that they continue to remain static. Accordingly it was his stand that the additions made by way of these disallowances should be sustained.
We have heard the rival submissions and perused the material available on record. As far as the decisions on the issue are concerned we find that there is no dispute that whenever an assessee is able to establish that the expenses of rent staff and various other business expenses were incurred to keep its business alive they cannot be disallowed merely on the ground of temporary lull in business. Thus a temporary lull on account of the circumstances prevailing in the market cannot lead to the conclusion that the assessee has no intention to resume its business.
The law on this issue is well-settled. Similarly the decisions in the context of the 6 20x5
Micro Turners (P) Ltd. vs. JCIT assessee company being an artificial judicial person which necessarily needs to incur expenditure to keep itself alive also are well-settled as the expenses incurred to keep the existence of the assessee company alive also cannot be disallowed on the ground that temporarily there is a lull in the business as there may be periods when there are intervals of inactivity due to no fault of the assessee and thus the expenses incurred for the business during this period cannot be disallowed. Having so observed and noted we find that in the peculiar facts and circumstances of the case the assessee has pleaded recession in the market. No evidence in support of the said claim has been placed either before us or before the Tax Authorities. We further find that the assessee has rental income from Pune, Maharashtra and Solan, Himachal Pradesh. The lease deed entered into with the related concern Pune, Maharashtra described as a plot of land only is also an issue before us. Copy of the lease deed has been filed before us is placed at pages 22 to 25 of the paper book.
We find that the lease has been entered into between the assessee that is Micro Turner’s Pvt. Ltd. (formerly known as A K Turner’s Pvt.Ltd.) having it’s registered office at Hissar Road, Rohtak and Micro Turner’s (a partnership firm registered under the Partnership Act) also having its registered office at Hissar Road, Rohtak. We find there from that the plot of land has been leased for a period of 20 years from 01/01/2011 on the following terms and conditions:- a. “Lessee shall pay to Lessor Rs.50,000/- (Rs.Fifty thousand only) per month as Rent for use of the said property. b. Lessee shall pay electricity charges as per his use/MSEB Meter. c. Lessee shall pay all other local charges till expiry of lease period. d. The Lessee shall be allowed to make any permanent construction or alternations in the said plot as per his requirements without the previous consent of the Lessor. e. The Lessee will not assign, transfer, sublet or put parts of possession of any part thereof of the Land any time during the period of Lessee.
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Micro Turners (P) Ltd. vs. JCIT f. The Lessee shall permit the Lessor or his Agent to enter and inspect the plot after due notice.” (emphasis provided)
10.1. On consideration of the above, it is seen that apart from requiring the lessee to pay rent the lessee is furthered required to make payments towards electricity charges as per the meter reading and make any permanent construction and alterations. In the said plot as per its requirements the assessee as a lessor further expresses that it has no objections for inspection/verification of the bonded premises by the Central Excise and Customs officer at any time. Not only the fact that both the lessor and the lessee in regard to its Registered office function from the very same location. The lessor assessee being a Private Limited company and the lessee being a partnership firm also function from the very same premises as per the lease deed. In the peculiar facts and circumstances of the present case it is necessary to first address the facts which admittedly have not been properly addressed.
Principally if the assessee is able to show that the expenditure claimed qua Ground no.1 pertains to it alone and not to the related concern and is incurred to keep its existence alive the expenditure on verification has to be allowed. However, if the assessee’s expenditure also includes the expenditure of the related concern then to that existent it has to be disallowed. Further the nature of work by related concern may also be an area for consideration as if the very same nature of work is done then it cannot be said to be a case of recession or lull in the business as then by conscious acts the assessee itself is parting with work in favour of a related concern. Nothing has been placed before us to show what is the nature of work entered into by the related concern i.e. the partnership firm to whom a plot of land has been leased. Thus the issues arising in Ground No.1, we deem it appropriate to 8 20x5
Micro Turners (P) Ltd. vs. JCIT restore to the AO giving liberty to the assessee to lead evidence if any in support of its claim. Qua Ground No.2, we find in the absence of any evidence to the contrary the clear recitals in the lease deed relied upon consistently by the tax authorities do not call for any variation in the conclusion arrived at. Being satisfied by the reasoning and the conclusion, Ground No.-2 is dismissed.
10.2. Accordingly, Ground No.1 is allowed for statistical purposes and Ground No.2 is dismissed.
In the result the appeal of the assessee is partly allowed for statistical purposes. The order is pronounced in the open court on 04th of May, 2016.