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Income Tax Appellate Tribunal, MUMBAI BENCHES “G”, MUMBAI
Before: Shri Saktijit Dey, & Shri Ashwani Taneja
आदेश / O R D E R Per Ashwani Taneja (Accountant Member):
This appeal has been filed by the Assessee against the order of Ld. Commissioner of Income Tax (Appeals)-II, Mumbai {(in short Ld. CIT(A)}, dated 28.10.2010 for the assessment year 2003-04, decided against the assessment order passed by the Assessing Officer (in short ‘AO’) u/s 143(3) of the Act, on the following grounds of appeal:
2 Bidco Studs Pvt. Ltd.
“1.The learned Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the action of the AO disallowing expenses Rs.43,41,050/-. 2.The CIT(A) further erred in this connection in holding that:- a) the perusal of the details filed by the Appellant clearly indicate that the Appellant has not carried on any business activity during the year under consideration; b) if no business activity is carried there is no question of allowing any expenditure; c) if income is no longer taxable under Section 28 because of discontinuation of business the Appellant cannot seek deduction of expenditure; and d) since long the Appellant has closed its business operations. 3.The Appellant craves leave to add to and/or amend and/or delete and/or modify and/or alter the aforesaid grounds of appeal as and when the occasion demands.
During the course of hearing, arguments were made by Shri Virag Shah (Ld Counsel) on behalf of the assesseecompany and Shri Harshad Vengurlekar, Departmental Representative (Ld. DR) on behalf of the Revenue.
Grounds No. 1 & 2: In these grounds, the common issue raised by the assessee company is with respect to disallowance made by the AO of various expenses aggregating to Rs. 43,41,050/- on the ground that the business of the assessee was not in continuation.
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It has been submitted by the Ld. Counsel that the expenses have been wrongly disallowed by the lower authorities. It is case of a company which is required to maintain its corporate status as per law, and therefore, some expenses have to be necessarily incurred for this purpose, since the name of the company was not struck off from the records of the ROC. It was further submitted that expenses on account of interest has been incurred because the assessee was bound to make payment to the lenders from whom finance was taken by the assessee company for the purpose of its business, and in case interest was not paid, then it would have jeopardized credibility of the company in the market. Therefore, under these circumstances, to save goodwill and image of the assessee company, it was committed to discharged liability on account of interest as well as principal. In case these liabilities were not discharged by the assessee, then it would have accelerated the process of filing of winding up petition on behalf of its creditors. It was submitted that under these circumstances, it cannot be said that these expenses were not incurred for the purpose of business of the assessee company, since maintaining the existence of the company in the eyes of law is also a business of the assessee. Reliance was placed on the judgment of Hon’ble Calcutta High Court in the case of CIT vs. Ganga Properties Ltd. 199 ITR 94 (Calcutta). In response to the query of the bench to show the these expenses from the copy of return, balance sheet and profit & loss account filed and along with return income, it was submitted that all these records got destroyed in the fire that took placed in the office
4 Bidco Studs Pvt. Ltd. premises of the assessee company on 18.11.2010. In support of this averment, Ld. Counsel placed before us copy of report filed with the police department.
On the other hand, Ld. DR supported the orders of the lower authorities. It was submitted by him that the operations of the assessee company were closed in 1996, and thereafter no activities were carried out by the assessee company up to assessment year 2003-04. With regards to routine expenses incurred by the assessee company, no serious objection was raised by the Ld. DR for the proposition that routine expenses incurred by a company to maintain its corporate status can be allowed as per law. But with regard to the expenses on account of interest, Ld. DR had strong objections towards the submissions of the Ld. Counsel. It was submitted that there was no clarity on the facts with regard to purpose and utilization of the loan in earlier years, on which liability of interest had been incurred. It was further submitted by him that no assessment was done u/s 143(3) prior to the impugned assessment and therefore, expenditure of interest has not been examined properly. He placed reliance on the judgment of Mumbai Bench ITAT in the case of Oriental Seritech Ltd. v. CIT 149 ITD 350, for the proposition that continuation of business is essential for allowbility of the expenses.
In reply, Ld. Counsel has distinguished the judgment of Oriental Seritech Ltd. (supra). Further, in support of assesee’s claim for interest, it was submitted by him that payment of 5 Bidco Studs Pvt. Ltd. interest is also mandatory for the survival of the assessee company in the legal frame work as well as in the business circle, and therefore, the amount of interest also deserves to be allowed on the same principle as other expenses are allowable. It was further submitted by him that company has not disposed its fixed asset even till date, thus showing its intention to resume its business. He also placed before us, copy of return filed by the assessee company for A.Y. 2003-04 to show that some activities were done and income earned from these activities have been shown in the return filed by the assessee company. On the basis of this, it was submitted by the Ld. Counsel that in view all these facts, it cannot be said that there was death of the assessee company in its business.
We have gone through the submissions made, orders of lower authorities, material placed before us for our consideration and judgments relied upon before us by both the sides. The brief facts are that the assessee company was engaged in the business of manufacturing of high tension studs, nuts, bolts, and allied goods. It had filed its return of income for the A.Y. 2003.2004 on 28.11.2003 declaring total loss of Rs.43,41,050/-. The assessing officer disallowed the claim of loss on the ground that the business of the assessee company was discontinued. Subsequently an appeal was filed before Ld. CIT (A) and he confirmed the order of the assessing officer.
6 Bidco Studs Pvt. Ltd. 7.1. Being aggrieved again, an appeal was preferred before tribunal.
7.2. It is noted that the AO has disallowed following expenses.
Interest on O.D. Rs.39,93,938/- Electricity Charges Rs.2,64,229/- Rates & Taxes Rs.64,968/- ROC filling fees Rs.2,500/- Total Rs.43,41,050/- 7.3. It has been submitted by the assessee before the lower authorities as well as before us that these expenses are allowable, inter-alia, for the following reasons: i) None of the expenditure is either of personal nature or of capital nature. ii) The entire expenditure has been incurred during the previous year only and none of them is either of earlier year or of subsequent year. iii) The entire expenses have been incurred wholly and exclusively for the purpose of business. iv) The entire expenditure has been incurred in order to maintain the plant, machinery as well as the building of the assessee company pending it final disposal. Each one of them is bare minimum expenses to upkeep the maintenance of the assets of the company to keep them in working position in order to fetch maximum market price. But for incurring such expenses it is not possible to do so.
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7.4. It has been further submitted before us by the Ld. Counsel that the AO failed to appreciate that discontinuation of business income does not amount to closure or winding up of the company, and that it has been erroneously equated with closing of entire affairs of the company. The expenses incurred are of a nature which has to be incurred whether there is any business activity or not. Hence either the said expenditure is required to be capitalized or allowed as a business loss. In both the cases, ultimately it has to be set off against the revenue receipts arising on account of sale of such assets by applying the principle of matching concept.
7.5. It is noted by us from the facts before us, which were not disputed by Ld DR, that for the purpose of doing its business, assessee had borrowed huge amounts form nationalized bank like ICICI and Punjab National Bank. Due to heavy losses, the assessee company was compelled to close down it business operations as per the directions of the Honourable Bombay High Court and the possession of the company’s premises was handed over to the court receiver till 1996. The assessee company got back the possession of the premises in 1996 along with plant and machinery and stock of goods. According to the assessee company, the plant and machinery was highly damaged and the stock of goods, due to heavy metal content, was also heavily junked. Since it was very difficult to continue the business, the assessee company started selling the stocks as well as plant and machinery. However, due to heavy losses
8 Bidco Studs Pvt. Ltd. in the past, the company had to run its business by resorting to borrowings, to finance the losses incurred. In order to maintain, apart from the plant and machinery, building and certain other assets, expenses were incurred to maintain its status. But the AO did not allow these expenses on the ground that business of the assessee was no more in existence and since there was no business, there was no question of any expenses.
7.6. On carefully analyzing the facts of this case, we find that the assessee had incurred these expenses to maintain it existence in the eyes of law, and/or in the business environment in which it was working. It is compulsory for a company to maintain its legal, corporate and business status, and therefore in our considered view expenses with regard to Electricity Charges (Rs.2,64,229/-) Rates & Taxes (Rs.64,968/-) and ROC filling fees (Rs.2,500/-) are allowable per se, and therefore, the AO is directed to delete the disallowance with respect to these expenses.
7.7. With respect to disallowance on account of interest on O.D. (Rs.39,93,938/-), it is noted by us that, as rightly contended by Ld. DR also, certain crucial facts are not on record before us. Even balance sheet and profit and loss account has not been filed. The only explanation submitted on behalf of the assessee is that due to fire, these records were burnt. We believe that copy of final accounts and some other primary records also should be available in the file of the department. Therefore, we find it appropriate to send this 9 Bidco Studs Pvt. Ltd. matter back to the file of AO, who shall consult his own record, and shall also give adequate opportunity of hearing to the assessee to submit requisite details and documents as may be considered appropriate by the assessee and as may be required by the AO, as per law. The AO shall find out basic facts with regard to purpose of the loan and its utilization in the earlier year on which interest has been claimed by the assessee. It is noted by us that no disallowance on account of interest has been made by the AO in any of the earlier years. Thus, prima facie, no case has been made out so far by the revenue for disallowance of the interest on the ground of its genuineness or non-business purposes. In our considered view, if it is found by the AO that interest is genuine and the loan on which interest has been claimed, was utilized for the purpose of the business of the assessee, then interest cannot be disallowed merely for the reason that the assessee has stopped to earn any business income. The assessee had made commitment to its creditors/lenders for repayment of the loan along with interest. The assessee company is legally bound to honour its commitment. The financial commitment of the assessee company was not only legal but commercial, moral as well as social also, for its survival in the business world. Under these circumstances, we find that as per law, the amount of interest cannot be disallowed so long as the assessee company is continuing to exist. With these directions and guidelines, we send this issue back to the file of the AO, who shall gather requisite facts and adjudicate this issue afresh, keeping in view the principles enunciated above.
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In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 18th November, 2015.