KALPANA TRADING CORPORATION,MUMBAI vs. ITO 12(3)(1), MUMBAI

Since the facts and circumstances are identical in both the appeals, appeal for Assessment Year 2005-06 in is being taken as the lead case. This appeal by the assessee is directed against the order of CIT(A)-23, Mumbai dated

Although the assessee has raised multiple Grounds of appeal, but essentially the grievance is against the action of Income-tax authorities in holding that no business activity was carried out by the assessee, thereby denying the claim of loss determined on account of expenses claimed in the Profit & Loss account. To put it differently, the claim of the assessee is that the business loss determined at Rs. 24,35,949/- has erroneously not been considered by the Assessing Officer for set-off against other income of the year.

In appeal before the CIT(A), assessee pointed out that the assessee was doing the business of trading in shares though the business of trading in polyester yarn, fabrics, etc. was temporarily facing a lull. It was also pointed out that so far as investment in stock-in-trade of shares were concerned, it was made in the past years out of funds available with the assessee by way of Partners’ Capital, interest from deposits and interest bearing loans raised from time to time. In this manner, expenditure on interest was sought to be justified. With regard to the general administrative expenses claimed in the Profit & Loss account, it was pointed out that same were genuine. It was pointed out that though in the year under consideration there was no sale of shares, but for the immediately preceding Assessment Year assessee had sold shares of Rs.24,99,400/- out of its opening stock of shares. It was, therefore, sought to be pointed out that the finding of the Assessing Officer that there was no trading activity carried out by the assessee in the last 8 years was erroneous. The CIT(A), however, did not find any justification in the pleas of the assessee and has instead affirmed the action of the Assessing Officer.

Against the aforesaid, learned representative for the assessee submitted before us that the lower authorities have erred in not recognizing the business loss suffered by the assessee during the year under consideration. It was pointed out that it is a case where there is a temporary lull in the business and it cannot be understood to mean that the business has been discontinued. The learned representative pointed out that in Assessment Years 2007-08 and 2008-09, similar expenses incurred by the assessee have been allowed and business loss has been recognized. For this purposes, our attention has been invited to the assessment orders passed u/s 143(3) of the Act for the Assessment Year 2007-08 dated 21.12.2009 and for Assessment Year 2008-09 dated 24.12.2010, copies of which have been placed in the Paper Book. It was also pointed out that even in the preceding Assessment Year of 2002-03, the Assessing Officer has allowed the claim of expenses and determined loss from business in an assessment finalized u/s 143(3) of the Act dated 31.12.2004. It was, therefore, pointed out that though in the Assessment Year 2005-06 there are no sales undertaken, but it cannot be said that the business has been discontinued. With respect to the disallowance of expenditure on account of interest payments made to HDFC, Partners and other loans, the learned representative pointed out that a similar issue had come up before the Tribunal in Assessment Year 1998-99 and vide dated 15.3.2005, the claim of the assessee has been allowed. Even on this count, it was sought to be contended that there was no reason to disallow the expenditure on interest or even on general and other administrative expenses debited in the Profit & Loss account.

On the other hand, the ld. DR appearing for the Revenue has primarily reiterated the arguments taken by the lower authorities, which we have already adverted to in the earlier paragraphs and are not repeated for the sake of brevity.

We have carefully considered the rival submissions. The sum and substance of the case set-up by the Assessing Officer is that in the present year there are no sales undertaken by the assessee, which according to him show that no trading activities have taken place. Therefore, as per the Assessing Officer the expenses claimed in the Profit & Loss account on account of interest payments and other general and administrative expenditure are not to be allowed since there is no business activity. Per contra, the claim of the assessee is that it is only a temporary lull in business inasmuch as in the immediately preceding Assessment Year of 2004-05, assessee had made sale of shares of Rs.24,19,400/- in the course of the business of trading in shares. It has also been pointed out that in Assessment Year 2002- 03, in the assessment finalized u/s 143(3) of the Act, the Assessing Officer has determined and recognized the loss incurred in business. Similar is the situation in the assessment finalized for Assessment Years 2007-08 and 2008-09 u/s 143(3) of the Act. On such basis, it is sought to be pointed out that it is not a case of closure or discontinuation of business, but it is a case where there is a temporary lull in business and in such a situation, the expenditure debited by the assessee in its Profit & Loss account deserves to be allowed. It is further pointed out that the expenses are of routine nature by way of salaries, bonus, staff

Insofar as the payment of interest is concerned, the dispute raised is similar to what was considered by the Tribunal in assessee’s own case for Assessment Year 1998-99 (supra). On this aspect, assessee had pointed out before the lower authorities that since the past investments have been made in stock-in-trade of shares and such investments were made out of funds available from Partners Capital and other loan funds, on such loan funds assessee had incurred interest expenditure which has been disallowed. In Assessment Year 1998-99 similar claim for deduction of interest expenditure was disallowed by the Assessing Officer, which was allowed by the Tribunal vide order dated 15.3.2005 (supra). Following the said precedent, in the present year also, such a claim of the assessee deserves to be allowed. In fact, in Assessment Year 2002-03, as also in Assessment Years 2007-08 and 2008-09, interest expenditure incurred by the assessee has been 7 M/s. Kalpana Trading Corpn. & 6025/Mum/2010 allowed. Therefore, considering the aforesaid precedents, we find no reason to deny assessee’s claim for deduction on account of interest expenditure in the instant year.

In sum and substance, assessee’s claim for business loss of Rs.24,35,949/- deserves to be recognized and accordingly, the order of CIT(A) is set-aside and the Assessing Officer is directed to recompute the total income accordingly.

Thus, the assessee’s appeal for Assessment Year 2005-06 is allowed.

Insofar as assessee’s appeal for Assessment Year 2006-07 is concerned, it was a common point between the parties that the facts and circumstances are pari materia to those considered by us in assessee’s appeal for Assessment Year 2005-06, therefore, our decision in appeal of the assessee for Assessment Year 2005-06 shall apply mutatis mutandis in other Assessment Year also.

Resultantly, the captioned appeals of the assessee are allowed.