1992-VIL-542-CAL-DT

Equivalent Citation: [1994] 205 ITR 88

CALCUTTA HIGH COURT

Date: 10.04.1992

LAKSHMI NARAYAN BOARD MILLS PRIVATE LIMITED

Vs

COMMISSIONER OF INCOME-TAX

BENCH

Judge(s)  : SHYAMAL KUMAR SEN., AJIT KUMAR SENGUPTA 

JUDGMENT

SHYAMAL KUMAR SEN J.-On an application of the assessee under section 256(1) of the Income-tax Act, 1961, the Tribunal has referred to this court the following question :

" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in confirming the disallowance of carry forward of loss and running expenses to the assessee ?"

The assessee, however, challenged the Tribunal's order by one more question on the ground of perversity which the Tribunal declined to refer.

In pursuance of an order under section 256(2), the Tribunal drew up a statement of case and referred the said additional question separately. The question is as under :

"2. Whether, on the facts and in the circumstances of the case, the findings of the Tribunal that-

(i) it cannot be said that the assessee has any intention to restart the business ; and

(ii) it cannot be said that the assessee was in a position to carry on business are perverse and/or contrary to the materials on record ?"

The assessment year involved is 1982-83. The facts as they appear from the statement of case, inter alia, are that the assessee was incorporated in 1960 and carried on board mill business up to 1971. In April, 1971, the assessee found certain difficulties and, consequently, on April 13, 1971, the factory was leased out to Messrs. Shree Sankar Paper and Board Mills on monthly rent The lease rent received from the lessee was assessed as business income of the assessee up to the assessment year 1978-79. The lease was given for a period of nine years and six months from October 1, 1971, and the lease was to expire on March 31, 1981. The lease rent received by the assessee for the assessment year 1979-80 was taken by the Income-tax Officer as income from "Other sources". However, on appeal, the Commissioner of Income-tax (Appeals) directed that the same should be assessed as income from "Business" and the same position continued up to the assessment year 1981-82. In the assessment year 1982-83, the lease expired and consequently a notice was given by the assessee to the lessee to hand over possession of the mill to the assessee. The lessee disputed the same and consequently a civil suit was filed in the Alipore court which is stated to be still pending. The Income-tax Officer found that the assessee did not have any business and consequently the Income-tax Officer assessed the income from fixed deposits as income from "Other sources" and took the business income as "Nil". Consequently, the assessee was not allowed either the benefit of carry forward of loss or the running expenses of the business.

The assessee preferred an appeal before the Commissioner of Income-tax. The Commissioner, however, did not interfere with the order of the Income-tax Officer and rejected the contention of the assessee against the said order of the Commissioner. An appeal was preferred to the Tribunal. The Tribunal, by its order dated October 12, 1989, passed, inter alia, the following order :

"6. The claim of the assessee on the facts and circumstances of the case has rightly been disallowed by the Commissioner of Income-tax (Appeals). The assessee was carrying on board mill business directly up to the assessment year 1971-72 and thereafter the mill was given on lease for nine years and six months and the lease was to expire on March 31, 1981. The assessee gave a notice to the lessee to hand over the possession but the same was not done and consequently a civil suit is pending in the Alipore Court. In the course of arguments, it was clarified that the suit is still pending and it has not been decided. Therefore, it is clear that though the lease expired and, according to the terms of the lease, the assessee would have got possession of the mill, the mill is not in the possession of the assessee and the mill is still under the possession of the lessee. In the said circumstances, it cannot be said that there was a temporary suspension and that the assessee had all intentions to restart the mill which was once leased out to the lessee for a period of nine years and six months. When the mill itself is not in the possession of the assessee and the matter is sub judice in the court, it cannot be said that the assessee has any intention to restart the business. It is not possible for the assessee in any event to restart business when the mill is not under its possession. The assessee has placed reliance on L. Ve. Vairavan Chettiar v. CIT [1969] 72 ITR 114 (Mad) and the same has rightly been distinguished by the Departmental Representative. Firstly, in the said case, the assessee was having another business also. Further, the mill was under the possession of the assessee. In the present case, the assessee had only one business and that business was leased out and the mill is under the possession of the lessee. Therefore, it cannot be said that the assessee was in a position to carry on the business.

On the said facts, the finding given by the Commissioner of Income-tax (Appeals) is correct."

It has been submitted by Mr. Dutt, learned advocate for the assessee, that the business of the assessee remained under suspension only for the time being and the assessee-company was never closed. Expenditure was incurred for holding its board meeting and the annual general meeting and remuneration of the directors and other staff were also paid. The assessee also wanted to restart the business. In fact, after the expiry of the lease, the assessee issued a notice of ejectment and instituted the suit before the civil court for recovery of possession of its factory premises so that the business may be carried on again.

Under such circumstances, the assessee submitted that the Tribunal was not correct in not allowing carry forward of loss. In support of this contention, learned advocate relied upon the following decisions :

L. Ve. Vairavan Chettiar v. CIT [1969] 72 ITR 114 (Mad) and Hindustan Chemical Works Ltd. v. CIT [1980] 124 ITR 561 (Bom).

We have considered the submissions of the parties and the decisions cited from the Bar. In the case of L. Ve. Vairavan Chettiar v. CIT [1969] 72 ITR 114 (Mad), the question whether a business was being carried on or was discontinued was held to depend in each case on its own facts: It is not necessary that a business to be in existence should have worked all the time. There may be long intervals of inactivity and a concern may still be a going concern though it may for some time be quiet and dormant.

The assessee was having two businesses, one in arecanut and the other, a rice Mill. It maintained separate accounts for the two businesses connected through a current account. They were inter-related and inter connected with unity of control and common funds. The assessee temporarily suspended his arecanut business in the year of account relevant to the assessment year on account of unfavourable trade conditions and claimed a net loss of Rs. 14,059 in the assessment. The Income-tax Officer allowed a loss of Rs. 13,559 on this account. The Appellate Assistant Commissioner and the Tribunal held that the arecanut business was not carried on in the accounting year and in the two succeeding years and, consequently, there was no profit or loss to be computed in respect of that business and disallowed the loss of Rs. 13,559.

It was held that the disallowance of the amount of loss claimed by the assessee to have been incurred in his arecanut business during the year of account relevant to the assessment year was not valid in law.

As the assessee was maintaining an establishment and was waiting for improvement of market conditions in arecanuts and there was nothing to show that he had completely abandoned or closed the business for ever, the business had to be deemed to be continuing.

In the case of Hindustan Chemical Works Ltd. v. CIT [1980] 124 ITR 561 (Bom), the facts, inter alia, were that the assessee-company originally carried on the business of manufacture of certain chemicals, particularly bichromates and their by products. The business of the company had commenced from October, 1946, but the company stopped manufacturing chemicals in 1955 due to acute financial stringency. The assets of the company had been mortgaged to the Industrial Finance Corporation of India and, with the consent of the Industrial Finance Corporation of India, the premises of the company were leased out to C. P. Ltd., and I. C. Ltd., in 1957 and 1958. The assessee retained a portion of the premises for its own use and it kept its plant and machinery after they were dismantled from the premises which were let out to C. P. Ltd. an I.C. Ltd., The assessee got a loan from DHT on mortgage of land and building in the year ending August 31, 1961, and the liabilities of the Industrial Finance Corporation of India were discharged. It was not till August 31, 1967, that the assessee was able to establish a plant in Bhilai. The directors' report for 1953-54 to 1966-67 showed that the company had run into losses year after year ; on May 11, 1955, the loss was shown as Rs. 1,54,486.14.6. This increased to Rs. 2,34,382 on August 31, 1955. For the assessment years 1959-60 to 1962-63, the Income-tax Officer disallowed the claim of the assessee for certain expenditure and depreciation and for allowance of unabsorbed depreciation of the earlier years on the ground that the assessee did not carry on any business in the years of account. The Appellate Assistant Commissioner upheld the decision of the Income-tax Officer. The Tribunal took the view that the property which had been leased out ceased to be assets of the business and that the income from the properties leased out was properly chargeable only under the head "Income from property". Notwithstanding the fact that it did not carry on any business in the years of account, the Tribunal held that the expenditure incurred by the assessee referable to the assessee's holding on to those assets was allowable and directed the Income-tax Officer to consider on the merits and disallow only such part of the expenditure which was not referable to the holding of the assets. With regard to depreciation, the Tribunal held that depreciation could not be allowed and unabsorbed depreciation carried forward could also not be set off against any income of these years.

(i) On a reference, it was held by the Division Bench of the Bombay High Court that the inference drawn by the Tribunal that the company had completely stopped its business and had gone out of business and that the only source of income for the company was income from property was justified. The company had not, during the years in question, carried on any business so as to enable it to claim either depreciation or a right to set off unabsorbed depreciation carried forward.

(ii) That the properties were used for purposes of earning income by letting them out and the income earned by the company on account of rent could be treated only as income from property and not as income from business or other sources.

(iii) That the expenditure incurred by the assessee such as office salaries, machinery dismantling charges, rents, rates, taxes and insurance, postage, telegrams, telephones, etc., which were referable to the assessee's holding on to the assets were allowable.

In our opinion, the facts in the instant case do not match with those in either of the cases relied upon by learned counsel appearing for the assessee. The central or the ultimate question in the case is whether the Tribunal could, on the facts as stated by it, come to the finding that the assessee has no intention to restart the business.

The significant factual aspects that emerge are as under:

(a) The assessee had let out its commercial assets, the entire productive unit, for an interval of nine years and six months on monthly rent as a means to overcome its financial crisis.

(b) The Revenue accepted the letting out of the mill as an alternative means of commercial exploitation of the mills and assessed the rental income from the mill as income under the head "Business" throughout the course of the lease.

(c) The Revenue impliedly accepted that for all this period of nine years and six months, the assessee had been harbouring an intention to restart the business.

(d) The intention is projected unmistakably from the fact that the assessee has taken steps for the eviction of the lessee holding on after the expiration of the term of the lease.

According to the Tribunal, the assessee not being in possession of the mill even after the expiry of the lease and the matter being sub judice in the court, it cannot be said that the assessee has any intention to restart the business. The inference is anomalous. The holding on to the property is the act of the lessee, not of the assessee, the lessor. The assessee has taken action for ejectment of the lessee who, after the expiry of the lease, has no locus standi and is a trespasser.

The illegal act of trespass by the lessee does not alter the fact that the lease was for a temporary period and does not and cannot affect the intention of the assessee to restart the business. The ongoing litigation, far from weakening the assessee's declaration of its intention to reassume the business, strengthens it.

We are constrained to say that the Tribunal's inference is opposed to the facts as stated by it. The question that remains is whether the passivity to which the assessee has been forced can be treated as discontinuation of the business. It is well-settled that there may be periods of lull and inactivity. In many cases, the intervals of inactivity may be of long duration. Circumstances may happen where the assessee may not be able to execute a single business transaction for months, even years, yet it may be deemed to carry on its business if, during such interval of lull and inactivity, it performs its internal functions, viz., retains its registered office, holds its meetings year after year, pays directors' fees and incurs other expenses.

When the Revenue admitted the period of letting out as the continuation of the business, it was obviously on the ground that the assessee has an intention to restart. It accepted that it is not a case where the ratio in New Savan Sugar and Gur Refining CD. Ltd. v. CIT [1969] 74 ITR 7 (SC), shall operate. The Supreme Court in the said case has laid down that when the assessee lets out the property with the intention to close down the business, the property which was an erstwhile commercial asset would cease to be so and the income from letting would not be business income.

In the instant case, the Tribunal has not brought out any fact to show that the assessee has decided to close the business and its inference that the assessee has no intention to carry on the business stands negatived by the very facts stated by it.

In our view, the Tribunal's inference that the assessee has no intention to restart the business is based on no evidence and is rather contrary to the facts found by it and is, therefore, perverse.

The Tribunal has evidently hastened to the conclusion as to the impossibility of recommencing the business. The Tribunal came to the conclusion that the assessee could not foreseeably be in a position to carry on the business without there being any material. Such a conclusion is not based on the facts stated by the Tribunal. If the fact that the assessee on expiry of the lease of the mill has sued the lessee for holding on remains uncontested, there can be no reason to forecast that it would be an impossibility for the assessee to re-enter into the mill for recommissioning its business of manufacturing.

The paper book contains the copy of the plaint in the subject suit being Title Suit No. 42 of 1982 filed in the Second Court of the Subordinate judge at Alipore. On perusal it appears that the suit is for ejectment of the lessee as well as mesne profits for holding on.

Therefore, the Tribunal's finding that the assessee either did not intend to nor could it be in a position to restart the business is based on no evidence. We accordingly answer the second question referred under section 256(2) in the affirmative and in favour of the assessee and against the Revenue.

Consequentially, the first question is answered in the negative and in favour of the assessee. The Tribunal is, however, directed to examine if any part of the running business expenses are disallowable otherwise.

There will be no order as to costs.

AJIT K. SENGUPTA J.-I agree.

 

 

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.