Temporary business closure, lull-Rent, staff, other business expenses incurred to keep business alive cannot be disallowed-ITAT

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Temporary business closure, lull and disallowance of expenses

Expenses of rent staff and various other business expenses establish that those were incurred to keep its business alive they cannot be disallowed merely on the ground of temporary closure or lull in business due to recession in the market-held by ITAT Delhi

Case Law Details:
ITA No. 321/Del/2016  AY 2011-12
Micro Turners (P) Ltd. vs. JCIT
Date of Judgment: 04/05/2016

Facts of the Case:
The Assessing Officer (AO) during the course of scrutiny proceedings noticed that the assessee company had claimed set off of business loss of Rs. 5,72,702/- against income of Rs. 7,56,000/- declared under the head “income from house property”. Considering the fact that the business activity of “manufacturing and job work of precision turned components” had been discontinued after 31.3.2009 the AO held the setting off business loss not allowable. Consequently he also disallowed administrative & other expenses  and depreciation.

CIT(Appeals) also rejected the plea of the assessee holding that where the business operations were closed in the month of September, 2007 and have not restarted till date, it could not be said to be a case of temporary closure of business in a particular year but a case of permanent closure extending for the last 7 to 8 years. 

Contentions of the Assessee:
The assessee submitted that it was a case of temporary suspension of business. The lull in the business had occurred on account of temporary recession.  The nature of expenses were incurred on rent, salary and wages, audit fee, legal and professional charges and depreciation and they by their very description establish that the assessee incurred them in order to maintain its existence. That in all the earlier years the returned income had been accepted by the Revenue.

Contentions of the Revenue:
The Revenue argued that profit and loss account and the balance sheet for the year under consideration shows that the assessee continued to hold the very same inventory for years on end. Similarly there was no change in the sundry debtors of the assessee over the years. In fact the details pertaining to sundry debtors for more than 6 months showed that they continue to remain static. Accordingly the additions made by way of these disallowances should be sustained.

Important Excerpts from ITAT Judgment:

….. we find that there is no dispute that whenever an assessee is able to establish that the expenses of rent staff and various other business expenses were incurred to keep its business alive they cannot be disallowed merely on the ground of temporary lull in business. Thus a temporary lull on account of the circumstances prevailing in the market cannot lead to the conclusion that the assessee has no intention to resume its business. The law on this issue is well-settled. Similarly the decisions in the context of the assessee company being an artificial judicial person which necessarily needs to incur expenditure to keep itself alive also are well-settled as the expenses incurred to keep the existence of the assessee company alive also cannot be disallowed on the ground that temporarily there is a lull in the business as there may be periods when there are intervals of inactivity due to no fault of the assessee and thus the expenses incurred for the business during this period cannot be disallowed. 

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