ACIT, NEW DELHI vs. M/S. HI- TECH ELECTROTHERICS & HYDROPOWER LTD., NEW DELHI

The facts in brief, as culled out from the order of the lower authorities, are that the return of income for the assessment year 2005-06 was filed on 25.10.2006 declaring los of Rs. 34,47,327/- which was revised subsequently on 31.03.2007 declaring loss of Rs. 34,71,886/-. The case was selected for scrutiny through CASS and statutory notice under Section 143(3) of the Income-tax Act, 1961 (for short “the Act”) was issued. The company was incorporated on 30.06.1995 and was engaged in the manufacturing of ferro alloys at its manufacturing unit located at Pallakkad, Kerala. The Assessing Officer observed that the assessee company did not carry out any business activity during the year. In response to the query raised by the Assessing Officer about reasons for claiming loss despite the fact that there was no business activity, not only during the year but also for the last more than eight years, the assessee submitted that it was doing manufacturing upto 31.03.2003 and purchase/sale was continued up to 31.03.2005 but in the year under consideration, the manufacturing activities were not carried out and no depreciation was claimed on the plant and machinery. However, the activities of following the legal disputes with various Government Departments continued during the year and for that purpose minimum expenses on salary and wages, repair and maintenance, telephone, vehicle, rent etc., were incurred. The Assessing Officer after considering the submission of the assessee allowed the legal and professional expenses , however, disallowed the remaining expenses of Rs. 24,64,325/- on the ground that the assessee did not carry out any business activity. Aggrieved, the assessee filed an appeal before the Commissioner of Income Tax(Appeals). Before the learned Commissioner of Income Tax(Appeals), the assessee submitted details of expenses debited in the profit and loss account and justification for the same. The assessee submitted that the Managing Director of the company Sh. A.K. Jain pursued the legal cases in connection with repayment of liabilities of the assessee company and protection of its fixed assets, legal cases with Kerala State Electricity Board in respect of rate of supply of electricity, dispute with ESI Department etc. Further, the assessee submitted that the minimum salary to other staff and security expenses etc. were only incurred. The assessee also submitted detail of the litigation with IFCI Ltd. and ESIC. In support of its contention, the assessee also relied on the various case laws. After discussing the submissions of the assessee, the learned Commissioner of Income Tax (Appeals) sustained the addition of Rs. 3,55,871/- and Rs. 51,779/- paid to the employees towards retrenchment, compensation in ex-gratia on closure of the business and he allowed the remaining addition of Rs 20,56,675/-. The relevant para of the order of the Commissioner of Income Tax (Appeals) is reproduced as under: “7. I have gone through the above submissions of appellant, facts and evidences on record and have also considered the case laws relied upon by the appellant. On going through the details and nature of the expenses mentioned in the submissions above and incurred by the appellant company for the year under appeal, it is clear that the company was not able to carry out any manufacturing operations during the year. It is seen that due to ongoing litigation with the Kerala State Electricity Board (provider of electricity), IFCI Ltd. (lender) and Employees State Insurance Corporation, it was not in a position to carry out such manufacturing activity. The appellant company was in the process of defending various legal cases in connection with re-payment of liabilities of the appellant company, protection of its fixed assets, fighting legal case for maintaining the business of the company and also for settling dispute with the ex-employees and trade unions. Therefore it cannot be held that the appellant company did not carry out any business during the year under appeal. The AD himself allowed deduction for legal and audit expenses for Rs.9,83,000/- on the grounds that these expenses are required to meet out the minimum requirements of the appellant company. I have gone through the details and justification of other expenses disallowed by the AD and as clarified by A.R vide letter dated 23.11.2011 and dated 17.11.2011, it is further found that the expenses disallowed by the Assessing Officer were those expenses which were necessary to carry on day to day activities and to defend the various legal proceedings against the appellant company. The expenses which have been disallowed are in the nature of salary and wages, repair & maintenance, telephone, vehicle running and maintenance, rent paid, miscellaneous expenses, conveyance and travelling, etc which are required to carry on and maintain the basic infrastructure of the appellant company and to carry on the day to day activities of the appellant company. However I found that a sum of Rs.3,55,871 and Rs. 51,779 was paid to employees towards retrenchment compensation and ex-gratia on closure of the business cannot be allowed as an expenditure as per ruling of Madras High Court in the case of M. Seshadri Iyengar & Sons Vs. CIT 152 ITR 734. Thus disallowance to the extent of Rs. 407650/- is upheld and the addition to the extent of Rs. 20,56,675. I held that they were necessary for running and maintaining the day to day activities of the appellant's business and hence the disallowance is not correct and therefore it is deleted.”

At the time of hearing before us the learned Sr. Departmental Representative relied on the order of the Assessing Officer and on the other hand, the learned Authorized Representative of the assessee submitted that the claim of the Assessing Officer that no business activity was carried out in the last eight years, was absolutely incorrect and he referred to the financial statements for the last eight years filed in the paper book showing manufacturing and purchases and sales. He further submitted that the year under consideration, the assessee could not manufacture because no electricity was supplied to the company by the Kerala State Electricity Board on the terms agreed. The learned Authorized Representative further submitted that in the year under consideration basic minimum expenses, which were required, were only incurred. He further pointed out that in the grounds of appeal

, the amount of disallowance sustained by the Commissioner of Income Tax (Appeals) was mentioned incorrectly at Rs. 24,64,325/- as against the correct amount of Rs. 20,56,675/-.