2005-VIL-377-ITAT-ART
Income Tax Appellate Tribunal AMRITSAR
IT APPEAL NO. 303 (ASR.) OF 2002
Date: 08.07.2005
SHINGAR LAMPS LTD.
Vs
ADDITIONAL COMMISSIONER OF INCOME-TAX, SPECIAL RANGE, JALANDHAR
For the Appellant : Sudhir Sehgal
For the Respondent : S.C. Pahwa
BENCH
JOGINDER PALL, ACCOUNTANT MEMBER AND BHAVNESH SAINI, JUDICIAL MEMBER
JUDGMENT
Per Bhavnesh Saini, J.M. –
This appeal by the assessee is directed against the order of the CIT(A), Jalandhar dated 29-8-2002 for the assessment year 1998-99 on the following grounds :-
"1.That the worthy CIT(A) has erred in upholding the following additions made by the Assessing Officer :-
(a)Sum of Rs. 9,60,661 out of addition of Rs. 10,60,661 by disallowing the expenses by holding that the assessee did not have any business activities.
(b)Addition of Rs. 7,46,200 in respect of depreciation claimed by the appellant.
(c)Addition of Rs. 2,94,900 in respect of so called unexplained cash credits.
(d)Disallowance of earlier years losses claimed by the assessee and which was not allowed by treating the business income of Rs. 23,56,415 as income from other sources.
2.That the worthy CIT(A) has also erred in holding that the version of the Assessing Officer that business income of Rs. 23,56,415 was income from other sources.
3.That addition made as per para 1 above and in upholding the fact of para No. 2 above that business income of Rs. 23,56,415 was income from other sources is against the facts and circumstances of the case.
4.That interest under sections 234B and 234C has wrongly been charged."
2. We have heard the learned representatives of both the parties and gone through the observations of the authorities below and details submitted in the paper book by the counsel for the assessee.
3. At the outset, the learned counsel for the assessee did not press ground No. 1(c) with regard to the addition of Rs. 2,94,900 in respect of unexplained cash credits. This ground is, therefore, dismissed.
4. Briefly the facts on the remaining grounds are that the assessee filed return of income declaring loss of Rs. 56,870. The assessee is in the business of manufacture and sale of fluorescent tubes and bulbs. However, it has shown sales of only Rs. 30,900 in the current year as against sales of Rs. 11.39 lakhs in the last year. All the sales made in the current year are out of the opening stock. Besides this, the assessee has also shown miscellaneous income of Rs. 23.56 lakhs which included commission income of Rs. 16,56,615 and income of Rs. 7 lakhs on account of sale of trees (Safedas). In the Profit & Loss Account, the assessee has claimed expenses of Rs. 10,60,661 under the following heads :-
S. No. |
Details |
Amount |
(1) |
Purchases and Direct expenses |
8,67,754 |
(2) |
Admn. Expenses |
1,83,238 |
(3) |
Financial expenses |
1,554 |
(4) |
Selling & Distribution expenses |
8,115 |
|
Total |
10,60,661 |
5. The Assessing Officer noted that no expenses have been claimed on account of purchase, packing material, wages, freight and cartage, etc. The assessee was directed to file details of the sales made to different parties. The assessee filed the details as well as filed copy of the sale invoices to different parties in a sum of Rs. 30,900. The Assessing Officer further observed that all the sales made by the assessee are of defective material. Further none of the sales invoices mention the quantities sold, the rate at which the sale has been made. Further details of the parties to whom the sales have been made were not filed. The Assessing Officer issued show-cause notice to the assessee as to why the expenses debited to the profit and loss account in a sum of Rs. 10,60,661 be not disallowed since no business activity apart from the minor sale of Rs. 30,900 was conducted during the year. The assessee submitted before the Assessing Officer as well as filed copies of the bills for electricity expenses of Rs. 8,64,445 and expenditure that these were the minimum charges of the Electricity Board. All details were filed before the Assessing Officer with regard to the minimum charges of the Electricity Board. The remaining expense charges to the profit and loss account are mentioned in the auditor report filed in the paper book. The contention of the assessee was, however, not accepted as the assessee during the financial year carried out the sales of Rs. 30,900 only and that the assessee has not conducted any production activity and entire sales were made out of opening stock. The Assessing Officer accordingly disallowed the entire expenses debited to the profit and loss account in a sum of Rs. 10,60,661 and made the addition.
6. In the computation of income, the assessee has also claimed depreciation of Rs. 7,46,209. The assessee was asked to explain as to why depreciation should not be disallowed, in view of the fact that no production activity took place during the year and that only sales were made out of opening stock. The assessee, however, replied before the Assessing Officer that the claim of depreciation has been made as per law and may be allowed. The Assessing Officer did not accept the contention of the assessee in view of the fact that there was no production activity carried during the year under consideration and that there was no business activity. The Assessing Officer also observed that the assessee has not filed any evidence to show that the assets was put to use during the previous year. The Assessing Officer accordingly disallowed the entire depreciation claimed by the assessee in a sum of Rs. 7,46,209.
7. The Assessing Officer further noticed that the assessee has declared other income of Rs. 23,56,415, which includes commission income of Rs. 16,56,415 and income from sale of Safeda trees of Rs. 7 lakhs. The assessee has taken this income in the profit and loss account and treated it to be business income. The assessee was directed to file complete details of both the above incomes, names and addresses of the parties from whom the incomes were received, the basis of receipt of income, the details of services rendered for earning the income alongwith confirmations of the parties from whom the above income were received. The assessee filed letter dated 17-1-2001 stated before the Assessing Officer that the commission income was earned from the sister concern on account of booking arrangements done by the assessee with film distributors. It was further stated that the assessee's Memorandum and the Articles of Association permitted it to do the business of films, commission and trading activities. Details of the parties from whom the commission income was received was stated as under :-
Details |
Amount |
(1)M/s. Shingar Palace |
6,77,042 |
(2)M/s. Mini Shingar |
3,89,365 |
(3)M/s. Midi Shingar |
5,90,008 |
Total |
16,56,415 |
8. The Assessing Officer considering the above facts was of the view that the nature of the service rendered is not explained and, therefore, it being a loss case of the assessee, therefore, the assessee could have accommodated its sister concern by entering into sale of its loss transaction. The Assessing Officer further observed that the assessee has failed to produce any documentary evidence to prove that commission income was actually earned by it by rendering services.
9. The Assessing Officer further observed that as regards miscellaneous income of Rs. 7 lakhs which was stated to have been received from the sale of Safeda trees, the assessee has filed copies of two agreements with Shri Iqbal Singh and Shri Balbir Singh to whom the assessee has sold 2000 trees for Rs. 7 lakhs to these persons at the rate of Rs. 350 per tree. The copy of the reply and agreement was taken on record. The assessee further directed to file evidence in support of growing Safeda trees alongwith other evidence such as details of expenses incurred on growing of these trees, expenditure on maintenance and preserving of these trees, details of land on which these trees were grown etc. However, no detail or the evidence was filed as required by the Assessing Officer. The Assessing Officer, therefore, was of the view that assessee has failed to discharge the onus cast upon it to prove the genuineness of the transaction. The Assessing Officer further observed that similarly miscellaneous income was shown in the earlier year which was treated as income from undisclosed sources. The Assessing Officer considering the facts and the circumstances of the case treated the income of Rs. 23,56,415 under the head "Income from other sources" and, therefore, the same was taxed as income from other undisclosed sources. It resulted into the brought forward losses adjusted for the assessment year 1996-97 were not allowed as the income has become only under the head "Income from other sources".
10. The above addition was challenged before the CIT(A) and the counsel for the assessee filed written submissions before the CIT(A). It was pointed out that the expenses of Rs. 10,60,661 were necessary to maintain the office of the assessee even though no business carried out. It was explained that major expenditure was on account of electricity expenses and these were minimum charges of PSEB. It was further mentioned that though sales were minimum yet the same were effected at a sum of Rs. 30,900. The assessee relied upon the decision of the CIT(A), Jalandhar dated 1-8-1996 in which on the same facts expenses were allowed. The Assessing Officer joined the appellate proceedings and reiterated the findings. The CIT(A) considering the submissions and details of the expenses was of the view that expenses mainly relate to the electricity expenses charged by the PSEB even though no production activities was carried out by the assessee. The other expenses are administrative expenses for maintenance of office, bank charges and charges etc. The CIT(A) seen from the electricity bills that there was consumption of units for the lines installed in the premises of the assessee. The contention of the assessee was that there being no production activity, the PSEB for every month has charted flat rate of Rs. 67,000 as becomes evident from the copies of the bills. Though the consumption of units in the bills for relevant financial year vary and assessee explained that the working was done by the PSEB indicating units consumed but for every month it charged the flat rate of Rs. 67,000. The CIT(A) found the contention of the assessee to be correct after verifying the bills. The CIT(A) further observed that in the decision relied upon by the assessee it was held that the expenses were allowable which are essential for maintenance of the company under the Companies Act even if no business was carried on. The CIT(A) observed that in the case of the assessee major expenses is electricity and the same cannot be said to be for maintenance of office of the assessee and that it was spent for the load sanctioned for the factory premises. The CIT(A), however, considering the administrative expenses and minimum electricity tariff charged for the office was of the view that the assessee is eligible administrative expenses, deduction for maintenance of the office premises and accordingly, allowed deduction of Rs. 1 lakh out of total disallowance and restricted the addition of Rs. 9,60,661.
11. On the issue of depreciation, the counsel for the assessee argued before the CIT(A) that the depreciation was claimed in accordance with law even though production was not carried in the year, the some activity for sale of stock was undertaken. It was further mentioned that staff was kept for lubricating the machines and for upkeep of the machinery. The CIT(A), however, confirmed the order of the Assessing Officer as the assets on which the depreciation was claimed were not proved to have been used for the purposes of the business being one of the conditions precedent for grant of the depreciation. The addition on account of depreciation was, therefore, confirmed. The counsel for the assessee on the issue of other income submitted before the CIT(A) that the miscellaneous income on account of sale of trees was supported by the documentary evidence in the form of agreements with the purchasers of the trees. As regards commission income, the same was earned on account of booking arrangements effected by the assessee with various distributors. Reliance was placed in this regard on the Memorandum and Articles of Association of the assessee-company. Details of the commission earned by the assessee alongwith theatre hire charges earned on screening of films were also submitted which in turn were supported by copies of bill of the sister concerns from whom the commission was earned. It was also mentioned that the claim regarding commission has already been accepted in the assessment proceedings in the case of the sister concern M/s. Shingar Palace wherein the said claim was accepted after verification by the Assessing Officer in the order passed under section 143(3) of the Income-tax Act. The CIT(A) observed that the commission income has been reflected by the assessee in its accounts after its main activity of manufacture of fluorescent tubes came to a stand still. The associate concerns were seem to be following the same business right from the earlier assessment years and it was not explained as to how the commission expenditure booked by them in the name of the assessee have effected through business. The CIT(A) further observed that it is not a material factor that the expenditure claimed on account of commission was accepted in the hands of the associate concern because the same might have been accepted by the Assessing Officer on the basis of certain documentary evidence produced before him. The CIT(A) further observed that it is not the case that the assessee had special expertise in the line related to the film industry. The CIT(A) accordingly upheld the findings of the Assessing Officer and dismissed the appeal of the assessee on this issue.
12. As regards miscellaneous income of Rs. 7 lakhs which was received by the assessee from the sale of Safeda trees, the details of the land purchased by the assessee was produced before the CIT(A) alongwith the details mentioned in Jamabandi but the CIT(A) found that on the said deeds there is no mention of the purchase of trees i.e., Safeda trees alongwith the land. Similarly details of the expenditure for grown up Safeda trees is also not filed. The CIT(A) considering the facts of the case on this issue was of the view that in the absence of any evidence with regard to growing of the Safeda trees, submissions of the assessee cannot be accepted. He accordingly dismissed the appeal of the assessee on this issue.
13. The assessee is in appeal on all the three issues before us.
14. The learned counsel for the assessee reiterated the submissions made before the authorities below. The learned counsel for the assessee submitted that the Memorandum and Articles of Association of the assessee provides main object to be pursued by the assessee-company are :
(1)To carry on the business of manufacturing. Trading, export, import of incandescent lamps, Fluroscent Lamps, Tubes, Bulbs, Glass Shells and Automobile Bulbs.
(2)To carry on the business of selling, trading, manufacturing of Glass and articles of Glass.
(3)To carry on the business of Cinema Halls and Film Distributors.
He has further submitted that in order to achieve the above objects ancillary or incidental to the attainment of the main objects are also provided therein. The learned counsel for the assessee further submitted that the assessee has made sales in the year under consideration and minimum expenditure were paid to the PSEB and other expenses were spent for wages and on account of maintaining staff which includes salary, auditors fees, postage, telephone, legal expenses, T.A. and conveyance, insurance, repair of building and bank charges and advertisement charges which are incurred for maintenance of the office and business activity of the assessee. He has further submitted that the genuineness of the expenditure have not been disputed. He has further submitted that the resolution was passed in the Board meeting of the company on 20-1-1996 in which is was noticed that there has been heavy losses in the business of manufacturing of electric tubes. Therefore, it was resolved that the assessee-company shall also carry on business of film distribution as per clause 3 of the main object of the company and further efforts shall be made to earn maximum income from this activity also. The learned counsel for the assessee submitted that the assessee had no intention to close the unit of manufacturing. He has further submitted copy of auditors report, profit and loss account for the year ending 31-3-1999 i.e., assessment year 1999-2000 in which the assessee has revived the business and made the sales for business of Rs. 4,09,250 and wages were also paid alongwith the electricity charges and the assessee has also made purchases. The learned counsel for the assessee submitted that the CIT(A) allowed relief of Rs. 1 lakh upon the revenue is not in appeal but the learned counsel for the assessee submitted that the assessee has no intention to close the business of manufacturing activities and the next year's figure shows that the manufacturing activity was carried out by the assessee. The learned counsel for the assessee submitted that there was temporary suspension of manufacturing because of lull in the business and that other expenses were spent on staff etc. He has further submitted that the expenditure were necessary for the business activity of the assessee and therefore expenses were allowable as deduction. The learned counsel for the assessee relied upon the following decisions:-
(1)CIT v. Northern India Iron & Steel Co. Ltd. [1997] 226 ITR 342 (Delhi),
(2)Order of the ITAT, Chandigarh Bench in the matter of ITO v. Metal Products of India, Chandigarh, dated 30-7-2001 in [IT Appeal Nos. 748 to 751 (Chd.) of 1992].
The counsel for the assessee also filed copies of various orders of the different Benches of the ITAT in support of his contention and submitted that since there was temporary lull in the business because of heavy losses, therefore, the authorities below were not justified in disallowing the expenditure claimed by the assessee. The learned counsel for the assessee further submitted that this fact is also proved by the Resolution of Board of Directors and the copy of the auditors report filed for the assessment year 1999-2000. We will discuss the case law referred to above by the learned counsel for the assessee subsequently. The learned counsel for the assessee further submitted that the assessee was having other business income also as per main object of the assessee, therefore, even on that issue there was no discontinuation of business. In support of his contention, he has relied upon the order of the ITAT, Chennai Bench in the matter of ITO v. Mrs. Vanishree Karunakaran [2003] 86 ITD 373 . The learned counsel for the assessee further submitted that similarly the depreciation in respect of machinery already in use which could not be used in the relevant year was also allowed. The learned counsel for the assessee submitted that the machinery was kept ready for use and all efforts were that to restore the said unit as soon as possible and ultimately the manufacturing activity of the assessee started in the next year itself. Therefore, the assessee is entitled for depreciation. The learned counsel for the assessee further submitted that since the depreciation was claimed on such assets, which was kept ready for use, therefore, the assessee was entitled to deduction for depreciation. He has relied upon the decision of the Hon'ble Delhi High Court in the matter of CIT v. Refrigeration & Allied Industries Ltd. [2000] 247 ITR 12 , decision of the Hon'ble Punjab and Haryana High Court in the matter of CIT v. Pepsu Road Transport Corpn. [2002] 253 ITR 303 and the decision of the Hon'ble Madras High Court in the matter of CIT v. Vayithri Plantations Ltd. [1981] 128 ITR 675 .
15. The learned counsel for the assessee further submitted that the assessee received income on sale of Safeda trees and such was fact supported by the agreement executed between the assessee and the purchaser and there is no dispute with regard to the ownership of the land in which Safeda trees were grown up, therefore, the authorities below were not justified in rejecting the claim of the assessee.
16. The learned counsel for the assessee further submitted that the assessee had main object to carry out the business of cinema halls and film distributors. The assessee has earned commission in earlier as well as in subsequent year. During the assessment years 1999-2000 to 2002-03 the assessee earned the similar commission from the same three sister concerns and in which the income has been accepted by the department. The learned counsel for the assessee supported the submission from the profit and loss account of all these parties claiming payment on account of commission. He has further submitted that even in the case of Shingar Palace, the Assessing Officer passed the order under section 143(3) for preceding assessment year 1997-98 in which deduction on account of commission was allowed in favour of the sister concerns of Shingar Palace. The details of the commission earned during the year under appeal are filed from the pages 17 to 32 of the paper book. The learned counsel for the assessee further submitted that the Assessing Officer did not make any enquiry from the concerned parties and as such it being the main object of the assessee to pursue the business of film distributors and the income is shown in the profit and loss account, therefore, the same was business income of the assessee. Safeda trees sale is also business income of the assessee which was wrongly treated as income from undisclosed sources. The learned counsel for the assessee relied upon the decision of the Hon'ble Bombay High Court in the matter of CIT v. Paramount Premises (P.) Ltd. [1991] 190 ITR 259 and the decision of the Hon'ble Calcutta High Court in the matter of CIT v. Tirupati Woollen Mills Ltd. [1992] 193 ITR 252. The learned counsel for the assessee submitted that the findings of the CIT(A) are contradictory and such orders of the authorities below are liable to be set aside on the issue.
17. On the other hand, the learned D.R. relied upon the orders of the authorities below and submitted that no evidence of growing of Safeda trees was filed before the Assessing Officer. Therefore, it was rightly held the income from undisclosed sources. He has further submitted that the income earned by way of commission not supported by any documentary evidence, therefore, the authorities below were justified in treating the commission income to be income from undisclosed sources.
18. We have heard the rival submissions and material available on record and the case laws referred to by the learned counsel for the assessee. We give our findings on all the grounds issue-wise as under :-
19. Ground No. 1(a) and (b) for disallowing the expenditure in a sum of Rs. 9,60,661 and addition on account of depreciation of Rs. 7,46,200 :-
The relevant material facts on record show that the assessee had three main objects for the purpose of incorporating the business i.e., carry on business of manufacturing of Bulbs and Tubes, to carry out the business of manufacturing, trading, export, import of incandescent lamps, fluorescent lamps and to carry out business of cinema halls and film distributors. Other objects are ancillary and incidental to the attainment of the main objects. Therefore, it is clear that the assessee is incorporated for the purpose of doing business of manufacturing of bulbs and tubes, trading and manufacturing of glass and articles of glass and to carry business of cinema halls and film distributors. Film distribution is the main business of the assessee and as such commission earned by the assessee on account of commission for arranging of films to the sister concern has a direct nexus and connection with the main object of the assessee-company. The resolution passed in Board meeting of the assessee-company also clarified that the assessee has been engaged in the business of manufacturing of tubes. One of the main objects of the company as per Memorandum and Articles of Association has also been carry business of film distributors also. The Board of Directors noticed that there had been heavy losses in the business of manufacturing of electric tubes. Therefore, it was resolved that the assessee-company shall also carry on business of film distributors as per clause 3 of the main objects of the company and efforts shall be made to earn maximum income from this activity also. The assessee has also filed audited copy of the balance sheet for the assessment year 1999-2000 in which the assessee has shown the sales in a sum of Rs. 4,09,250 and also charged to the profit and loss account the expenses incurred on purchases, electricity bill, wages. It shows that the assessee-company that no intention to close the unit of manufacturing of tubes and bulbs. According to the learned counsel for the assessee, there was temporary lull in the business of the assessee. Therefore, in the year under consideration manufacturing activity of bulbs and tubes were temporary suspended in order to minimise the loss and in order to achieve that object, the third main object of film distributors with the idea of minimise the business losses was carried out. These facts coupled with fact that there was also sale in the year under consideration as noticed by the Assessing Officer and that the assessee had incurred business expenditure on the electricity charges, consumable and other office expenses would support the contention of the learned counsel for the assessee that there was lull in the business of the assessee in the year under consideration. Therefore, no manufacturing activity was carried on during the assessment year under appeal. However, the assessee has been able to re-start the manufacturing of electric tubes in the subsequent assessment year 1999-2000. These facts would clearly establish the fact that the assessee had no intention to close the business of manufacturing permanently during the assessment year in question. There were sales in the year under appeal and expenses were also made for the purpose of business and the production also restarted in the next year. These factors would clearly prove that it was because of lull in the business of the assessee as regards manufacturing activity. Similarly the assessee has been able to prove that the assets upon which the depreciation has been claimed were kept ready for the purpose of manufacturing activity. There is no denial that in the earlier assessment year the manufacturing activity of the assessee was going on. In subsequent year also manufacturing activity were carried out by the assessee. Therefore, due to business exigency and in order to minimise the business loss in the trading activity, the Board of Directors resolved to suspend the manufacturing activity temporarily and to start achieving the other main objects of film distributors in this year so that the business loss could be minimised. These facts would clearly establish that the business assets of the assessee were kept ready for the purpose of use by the assessee.
20. Now we take up the case laws referred by the learned counsel for the assessee as under :-
(1) Order of the ITAT, Chandigarh (SMC) Bench dated 30-7-2001 in the case of Metal Products of India (supra) in which it was observed by the Tribunal that the Assessing Officer did not bring any material on record to show that the business had been closed down and not suspended on temporary basis as claimed by the assessee. It is not shown that the building and machinery which were earlier treated as business assets, ceased to be so and become capital assets only. The Appellate Tribunal on such facts and the circumstances held that it was a case of lull in the business. Therefore, the order of the CIT(A) was confirmed and the appeal of the revenue was dismissed.
(2)The decision of the Hon'ble Delhi High Court in the matter of Northern India Iron & Steel Co. Ltd. (supra) in which it was held that the lease money received by the assessee during the assessment year under appeal was assessable under section 28 of the Income-tax Act and not under section 56.
(3)The order of the ITAT, Delhi 'C' Bench in the matter of Vishal International Production (P.) Ltd. v. IAC [1993] 46 ITD 312 (Delhi), in which it was held that when the entire operation of manufacturing and selling is a combined one, temporary discontinuance of manufacturing cannot be said to be discontinuance of business activity.
(4)The order of the ITAT, Jaipur Bench in the matter of Udaipur Mineral Development Syndicate (P.) Ltd. v. ITO [1992] 44 TTJ (Jp.) 113 in which it was held that the business expenditure allowability - unit remained close in the year in question and also in preceding year - It was a period of temporary lull power charges and engine hire charges had to be incurred necessarily - same allowable - similarly, depreciation in respect of machinery already in use which could not be used in the relevant year was also allowable.
(5)The order of the ITAT, Delhi (SMC) Bench in the matter of Onkar Engineers (P.) Ltd. v. ITO [2004] 84 TTJ (Delhi) 776 in which it was held that the assessee maintaining staff and also incurring administrative expenses - as against rental income of Rs. 1,36,000, assessee incurring expenses of Rs. 96,600 on staff and Rs. 35,379 towards administrative charges - it was a case of temporary suspension and lull in the business of assessee nurtured a hope of reviving the business - Further, the lease was for a period of two years only - It was a case of exploitation of commercial asset and the lease income was assessable under the head 'Business income' - Matter remanded to the Assessing Officer for the limited purpose of examining the allowability of expenditure claimed by the assessee.
(6)The order of the ITAT, Calcutta Bench in the matter of Asstt. CIT v. Master Stores [2002] 75 TTJ (Cal.) 452 in which it was held that the expenses incurred by the assessee towards retrenching its staff at the time of temporary cessation of the business was allowable as a business expenditure incurred by it wholly and exclusively in connection with this business deduction.
(7)The order of the ITAT, Hyderabad Bench in the matter of ITO v. Smt. C. Kusuma Kumari [1989] 33 TTJ (Hyd.) 124 in which it was held that set off of carried forward loss of assessment year 1980-81 against income from the assessment year 1982-83 was refused on grounds that both businesses were (sic) inasmuch as the assessee did not carry on business during the assessment year 1980-81 - Not justified - Business of production and distribution of feature films would be same even if such venture is carried on either by a firm or as a proprietorship - Moreover very fact that assessee produced film in assessment year 1982-83 would show that during assessment year 1981-82 she was having plea of going for production of film for which lot of preparation is required. Therefore, there was only a lull in business during assessment year 1981-82 - Provision of section 72(1) were therefore, applicable to facts of case and assessee was entitled to set off of loss.
(8)The decision of the Hon'ble Madhya Pradesh High Court in the matter of Rajkumar Oil Mills (P.) Ltd. v. CIT [1982] 11 Taxman 51 in which test for allowing expenditure on upkeep and maintenance of plant was "Is to see whether assessee continued business by leasing his godowns as business asset or the godowns ceased to be business assets".
(9)The order of the ITAT, Calcutta Bench in the matter of West Bengal Power Supply Co. Ltd. v. ITO [1983] 16 TTJ (Cal.) 342 in which it was held that disallowance of business expenditure on the ground that the business had been closed was not justified as interest income from deposits constituted new business - deduction for business expenditure was allowable.
(10)The order of the ITAT, Bangalore Bench in the matter of Emdee Exports v. Eleventh ITO [1985] 13 ITD 8 in which it was held that the assessee engaged in the business of exporting coffee, no business done during the relevant previous years except one small transaction. The assessee, however, maintained registered office - besides partners undertook foreign tours for exploring business - Commissioner acting under section 263 rejected the assessee's claim for loss and registration to firm-not justified on facts. In this case also, it was held that business during the year in question was lull and inactive. Therefore, merely becuse there was lull and inactive, it cannot be held that business had ceased to exist.
21. The learned counsel for the assessee relied upon the following decisions in support of the contention to grant depreciation on the assets which were kept ready for use of business :-
(1)The decision of the Allahabad High Court in the matter of CIT v. Swarup Vegetables Products India Ltd. [2005] 145 Taxman 253 in which it was held 'Assessee-company claimed depreciation on plant and machinery of its vegetable ghee unit - Assessing Officer rejected assessee's claim on ground that plant and machinery was not actually used for full year relevant to assessment year 1977-78. On appeal, Tribunal, in finding that vanaspati unit though was not actually in use, but it was kept ready for use and all efforts were made to restore said unit as soon as possible, allowed claim of assessee'. The Hon'ble Allahabad High Court confirmed the view of the Tribunal.
(2)The order of the ITAT, Ahmedabad Bench in the matter of Gujarat Narmada Valley Fertilizers Co. Ltd. v. Dy. CIT [2001] 73 TTJ (Ahd.) 787 in which it was held that the depreciation - user for business - active or passive user - if the plant and machinery are kept ready for user but not used due to factors beyond assessee's control, depreciation cannot be disallowed.
(3)The decision of the Hon'ble Madras High Court in the matter of Vayithri Plantations Ltd. (supra) in which it was held that user of machinery - machinery should be kept ready for use - forced idleness of machinery immaterial - machinery not actually used due to labour unrest - should be considered used in business - development rebate should be granted in year in which it was kept ready for use.
(4)The decision of the Hon'ble Punjab and Haryana High Court in the matter of Pepsu Road Transport Corpn. (supra) in which it was held that spare engines kept ready for use - assessee entitled to depreciation in respect of spare engines.
(5)The decision of the Hon'ble Delhi High Court in the matter of CIT v. Refrigeration & Allied Industries Ltd. [2001] 247 ITR 12 in which it was held that the assessee was entitled to depreciation allowance on the cold storage plant though the machinery had not actually worked during the accounting period. It was clarified that user of the assets means used for the purpose of business includes positive user of the assets in business.
22. Considering the above discussion and the various decisions referred to above, it is clear that it is a case of lull in business of the assessee during the year under appeal because of heavy losses suffered by the assessee in the trading manufacturing activity, therefore, the other main objects to minimise losses was kept in mind. Ultimately in the next year, there were sales and there are also sales in the year under consideration. The assessee had to pay minimum electricity charges to the Punjab State Electricity Board and also including office expenses establishment laid down for the purpose of business. These factors would show that the assessee had no intention to close down the business activity in the year under consideration. Accordingly the orders of the authorities below are set-aside on this issue. The entire additions of Rs. 9,60,661 and Rs. 7,46,100 are deleted. This ground of appeal of the assessee on this issue is allowed.
Issue No. 2 (Income from sale of Safeda trees):-
23. The assessee did not file any details before the Assessing Officer for explaining the expenditure for growing of Safeda trees in the land of the assessee. The authorities below noted that documents of ownership of the land also did not prove if there was any standing of Safeda trees in the land of the assessee. In the absence of any evidence on record, the authorities below were justified in rejecting the claim of the assessee with regard to the earning income by way of sale of Safeda trees. The assessee has to prove the existence of Safeda trees at the time of purchase of the same were grown by the assessee. However, the assessee has failed to prove both the factors and as such in the absence of any evidence the authorities below were justified in pleading the income earned by way of Safeda trees to be the income from the undisclosed sources. We confirm the findings of the authorities below on this issue and dismiss the appeal of the assessee on this issue.
Issue No. 3 :-
24. This issue relates to the commission income of Rs. 16,56,415. We have recorded above that one of the objects of the assessee-company was to carry on the business of cinema Hall or film distributors. The Borad of Directors resolved that since in the manufacturing of tubes and bulbs, there were heavy losses, therefore, that activity was temporarily suspended. Further resolved to carry out the third object of the assessee, therefore, in view of the respondent, the assessee-company started carrying business for making arrangement of the films to the sister concerns. The assessee earned commission income in the preceding assessment year 1997-98 and the assessment year under appeal, the assessee has shown the commission income in a sum of Rs. 16,56,415 as commission received and was shown in the profit and loss account as business income of the assessee. The assessee earned the commission income for making arrangement of films to the sister concerns in pursuance of object No. 3 of the assessee-company. Therefore, it has a direct nexus with the business activity of the assessee, which was in pursuance of this object. The assessee has, therefore, rightly shown it to be a business income in the profit and loss account. The learned counsel for the assessee submitted details of commission earned from films distribution in the subsequent assessment years on our query. The details of the same are as under :-
Name of the party from whom commission recd.Asstt. Year 1999-2000Asstt. Year 2000-01Asstt. Year 2001-02Asstt. Year 2002-03
Shingar Palace714500699148572088585591
Midi Shingar554186484442443458361135
Mini Shingar388660367000406503394969
1657346155059014220491341695
25. It is also clarified that above income as disclosed from the film distributors has been accepted by the department as business income in the later years and as such the department cannot take a contrary view in the assessment year 1998-99 under appeal. We find from the details submitted before us that those figures of subsequent years have been supported by audited balance sheet of the assessee and the profit and loss account of the three parties from whom the assessee received commission, namely M/s. Shingar Palace, M/s. Midi Shingar and M/s. Mini Shingar. The profit and loss account support the version of the assessee that the assessee received commission from all these three parties in the subsequent years also. The assessee also in the paper book submitted the details as regards earning of the commission from M/s. Shingar Palace, M/s. Midi Shingar and M/s. Mini Shingar from pages 17 to 32 of the paper book. The details of the names of the firms and commission received from the parties are filed. The proof of filing income-tax return in the case of M/s. Midi Shingar and M/s. Mini Shingar is also filed in which they have claimed deduction by way of commission paid to the assessee for making arrangement of films. In the assessment year 1997-98 in the case of M/s. Shingar Palace, copy of assessment order under section 143(3) is also filed which shows that the Assessing Officer has not made any disallowance of the commission paid in this case. All these factors clearly proved that the assessee earned commission from all these three parties. All these parties have disclosed and claimed deduction of commission in their respective profit and loss account not only in the year under consideration but in the subsequent year also. The names of the films and amount of commission also strengthens the submission of the learned counsel for the assessee that assessee actually earned commission income from three parties. Copies of confirmations are also filed.
26. The I.T.A.T., Calcutta Bench in the matter of Asstt. CIT v. Master Stores [2002] 75 TTJ (Cal.), 452 held "Business income - vis-a-vis income from other sources - Commission income - Assessee had shown receipt of commission and submitted full particulars and also a certificate from the payer concerned before the Assessing Officer - Simply because the payer did not respond to the summons issued by the Assessing Officer under section 131, it could not be said that the receipt of commission was not there - Assessing Officer has not been able to prove conclusively that there was no receipt of commission income by the assessee - CIT(A) justified in directing the Assessing Officer to assess the income as disclosed by the assessee". The Tribunal further held that this is not the case of a claim of commission payment by the assessee. It is receipt of commission.
27. The Hon'ble Bombay High Court in the case of CIT v. Paramount Premises (P.) Ltd. [1991] 190 ITR 259 affirmed the view of the Tribunal in which the Tribunal has given a finding of fund to the effect that the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity. Accordingly the interest income was considered as business income of the assessee.
28. Considering the above discussion, we are of the view that the assessee filed sufficient and cogent material before the authorities below to prove that the assessee earned commission income in pursuance of the main object of the assessee-company as per the Memorandum and Articles of Association and as such the assessee has rightly treated it to be a business income. The authorities below were not justified in treating the same income to be income from undisclosed sources. The assessee has explained all the facts, which were supported from the material, therefore, there is no question of treating the same income from undisclosed sources. Considering the above discussion, the orders of the authorities below are set aside and the Assessing Officer is directed to treat the income of Rs. 16,56,415 as business income. This ground of appeal of the assessee is accordingly allowed.
Issue No. 4 :-
29. The issue of charging of interest under sections 234B and 234C of the Income-tax Act is consequential as is admitted by the learned counsel for the assessee. It is also stated that the brought forward losses of the earlier year are also consequential which is depended upon the findings of the issue decided in this appeal. The Assessing Officer shall take the appropriate action with regard to the brought forward losses in view of our findings on the main issue.
30. No other issue is pressed or argued.
31. As a result, the appeal of the assessee is partly allowed.Bottom of Form
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