1989-VIL-549-KER-DT

Equivalent Citation: [1992] 195 ITR 904, 98 CTR 287

KERALA HIGH COURT

Date: 02.08.1989

COMMISSIONER OF INCOME-TAX

Vs

TM CHACKO AND PARTNERS

BENCH

Judge(s)  : K. A. NAYAR., K. S. PARIPOORNAN

JUDGMENT

The judgment of the court was delivered by

K. A. NAYAR J.-Income-tax Reference No. 358 of 1985, is at the instance of the assessee and I. T. R. No. 359 of 1985, is at the instance of the Revenue. The matter arises out of the order of the Appellate Tribunal dated April 29, 1983, in I. T. A. No. 174 (Coch) of 1981. The assessee was carrying on business as abkari contractors participating in abkari auctions. Because of the abkari arrears due from the assessee, the assessee could not carry on the business after 1971-72 and until 1978-79. But, during the previous year relevant to the assessment year 1976-77, the assessee received a sum of Rs. 1,19,146 as remuneration from Messrs. Crossfield Trades for services rendered to that firm. During the accounting year, the assessee paid a sum of Rs. 86,207 being interest for the belated payment of abkari arrears and claimed the same as expenditure. The Income-tax Officer disallowed the claim for expenditure holding that no deduction could be claimed as abkari business expenditure as the business has been discontinued by the assessee. The Income-tax Officer also held that even if the assessee's business was held to be in existence during the relevant accounting year, the interest payment related to the payment for infraction of law and partook of the character of damages and, therefore, deduction could not be allowed.

On appeal, the Commissioner of Income-tax (Appeals) concurred with the Income-tax Officer and held that the assessee had not carried on abkari business during the relevant accounting year and, therefore, the interest claim was rightly disallowed. On further appeal before the Tribunal, the Tribunal, after concurring with the authorities that the assessee had not carried on the business of abkari contractors during the previous year but was functioning only as an employee of Messrs. Crossfield Trades, granted relief holding that the absence of active trade in abkari business during the previous year and in the earlier years amounted only to a lull in the business activity of the assessee and not a discontinuance of the assessee's business.

Aggrieved by the decision of the Appellate Tribunal in I. T. A. No. 174/(Coch) of 1981, both the assessee and the Revenue approached the Tribunal and, thereafter, this court and, as directed by this court, the Income-tax Appellate Tribunal, Cochin Bench, referred the following questions of law arising out of the order of the Tribunal dated April 29, 1983 in I. T. A. No. 174(Coch) of 1981, for the assessment year 1976-77:

Question referred at the instance of the assessee :

"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in their finding that the applicant was an employee of Crossfield Trades ?"

Questions referred at the instance of the Revenue:

"1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the absence of active trade in abkari during the previous year and in the earlier years amounted only to a lull in the business activity of the assessee and not a discontinuance of the assessee's business ?

2. Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction of interest on the related payment (beyond the 20th) of abkari dues ?"

We heard counsel. Under section 37 of the Income-tax Act, 1961, any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". In order to claim an expense as deduction under this section, the expenditure should be incurred for the purpose of the business carried on by the assessee. The assessee was prohibited from bidding in auctions and carrying on business as abkari contractors during the previous year in question. The relevant provision of rule 5(iv) of the Kerala Abkari Shops (Disposal in Auction) Rules, 1974, reads as under :

"No defaulter of abkari arrears shall be allowed to participate in the auction unless he produces from the Excise Inspector concerned certificate to the effect that he has remitted before the date of auction 20% of the arrears pending as on the date of the auction notification."

The Income-tax Officer has ascertained, after enquiry with the Excise Department that the assessee has not participated in any auction during the period relevant to the assessment year 1976-77. The Income-tax Officer also found that there was a legal bar against the assessee from participating in the auction and the assessee did not actually participate in the auction and, therefore, the assessee has not continued the abkari business during the year relevant to the assessment year 1976-77 and subsequent years. The Commissioner of Income-tax (Appeals) also held as a finding of fact that the assessee-firm has not participated in the auctions and did not carry on any abkari business during the course of the year. The Tribunal also noted that the assessee continued the abkari business only up to 197l-72 and thereafter resumed activity only during the years 1978-79 and 1979-80. On account of the prohibition contained in the Kerala Abkari Shops (Disposal in Auction) Rules, the assessee could not carry on business and the assessee obtained remuneration as an employee of Messrs. Crossfield Trades during the accounting year relevant to the assessment year. That is the finding of the Tribunal. Therefore, it is obvious that the abkari business has not been carried on by the assessee. The interest paid on kist arrears, viz., an amount of Rs. 86,207, is claimed by the assessee as a business expenditure. In Inderchand Hari Ram v. CIT [1953] 23 ITR 437 (All), a like claim for deduction of expenditure incurred in maintaining staff of the business which ceased to exist came for consideration. While rejecting the claim, the Allahabad High Court held that (at page 443) :

"In considering, however, whether the expenditure can be deducted as business expenditure one must remember that sub-section (2)(xv) is a part of section 10 and at the time of the computation of the income of a business, though that income may be nil, the expenses incurred wholly and exclusively for the purposes of that business may be a permissible deduction, but in order to be deductible under this clause the expenditure must be incurred for the purpose of the business which was in existence in the accounting year and the profits of which are under assessment. If during the relevant period there was, in fact, no business either because it was discontinued or for some other reason it had ceased to exist, the question of computation of its income after deducting the expenses cannot arise. In the case before us, by reason of the Sugar Control Order and the notification issued thereunder, the assessee could not do any selling agency business in sugar. By merely maintaining an office at Kanpur it cannot be said that he was carrying on business the expenses of which he was entitled to deduct. There being, therefore, no business, there could be no question of computation of its income and no question of any deduction of expenses incurred wholly or exclusively for such business arises."

Under section 28 of the Act, the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year shall be chargeable to income-tax and the income so chargeable shall be computed in accordance with sections 30 to 43. Section 37 provides for the deduction of revenue expenditure. In order to get deduction under this section, the amount should be expended for the purpose of the business. The finding of the authorities is to the effect that the abkari business has not been carried on by the assessee during the previous several years. The business expenditure has to be related to a business which is taxed or taxable before it can be deducted and, therefore, there is no scope for deduction of the interest paid by the assessee in this case. There is no justification, and there was no material at all before the Tribunal, to come to the conclusion that there was only a lull in the business activity of the assessee and there was no discontinuity of the assessee's business. The authorities as well as the Tribunal came to the conclusion that, on account of the prohibition in law, the assessee could not carry on the abkari business and during the previous year the assessee obtained remuneration as an employee from Messrs. Crossfield Trades. Thereafter, it was not open to the Appellate Tribunal to come to the conclusion that the assessee "must be considered to have carried on its business in a passive sense during the previous year" for the assessment year. We, therefore, hold that the Tribunal erred in law in holding that, during the previous year, the absence of active trade amounted to a lull in the business activity and not a discontinuance in the business.

The contention of the assessee before the Income-tax Officer was that it was carrying on abkari business. This contention was found against by the Income-tax Officer. But, while disposing of the contention of the assessee, the Income-tax Officer further held that even if it is assumed that the assessee was carrying on business in the previous year, the interest in question cannot be allowed as interest relating to the period 10th and 20th of each month alone is allowed and the interest payment subsequent to the 20th day of every month cannot be allowed. He relied on the assessee's own case in CIT v. T. M. Chacko and Partners [1978] 115 ITR 40 (Ker) for holding that any interest payment after the 20th day of each month will be considered as the payment of damages and such payment cannot be allowed as a deduction. Referring to this aspect, the Tribunal held that interest payable on the arrears of kist would be an allowable deduction even if the period of default is more than the normal period allowed under the Excise Rules. It is in that context that question No. 2 was formulated, viz., whether the assessee is entitled to claim deduction of interest on the related payment (beyond the 20th) of abkari dues. This question has relevancy only if we hold that the assessee continued the abkari business during the previous year.

The question posed on behalf of the assessee is whether, on the facts and in the circumstances of the case, the Tribunal was correct in their finding that the applicant was an employee of Crossfield Trades ? The Income-tax Officer found that, during the relevant year, the assessee received a sum of Rs. 1,19,146 as remuneration from Messrs. Crossfield Trades. The Appellate Tribunal found that it was clear from the terms that the assessee was only an employee of Messrs. Crossfield Trades and was not managing the business of Messrs. Crossfield Trades in an independent capacity as an agent. So, from the terms of the contract, the Tribunal found that the assessee was appointed as an employee of Messrs. Crossfield Trades. The assessee challenges this finding. But the terms of the appointment of the firm (the assessee) or of the constitution of the assessee-firm or of Crossfield Trades have not been annexed to the statement of the case. From the facts placed before the Tribunal, the Tribunal came to the conclusion that the assessee-firm was an employee of Messrs. Crossfield Trades. No material is placed before us to come to the conclusion that the fact so found is erroneous. A feeble attempt has been made by counsel on behalf of the assessee to argue that the assessee had other business such as agency business and, therefore, the remuneration received by the assessee was business income in the hands of the assessee and, therefore, the assessee could claim interest on kist arrears as business expenditure. We are not able to appreciate this argument as no such case was developed before the Income-tax Officer, Commissioner of Incometax (Appeals) or even before the Tribunal. Relevant partnership deed also has not been made part of the records. Therefore, we are not in a position to appreciate this argument. The assessee's case always had been that it continued to carry on abkari business.

In the circumstances, we answer question No. 1 raised in the reference at the instance of the assessee in the affirmative, that is, in favour of the Revenue and against the assessee. Question No. 1 raised in the reference at the instance of the Revenue is answered in the negative against the assessee and in favour of the Revenue. In view of our answer to question No. 1, we feel that our answer to question No. 2 raised at the instance of Revenue can have only academic interest. Therefore, we refuse to answer the question.

A copy of this judgment under the seal of this court and the signature of the Registrar shall be sent to the Income-tax Appellate Tribunal, Cochin Bench.

 

 

 

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