INCOME TAX APPELLATE TRIBUNAL AHMEDABAD ‘D’ BENCH, AHMEDABAD

I.T.A. No.:889/Ahd/2014 Assessment year: 2010-11
Chinubhai M Patel (Appellant) vs. Income Tax Officer (Respondent)
Date of Order: 28-12-2015

ORDER

Per Pramod Kumar AM:
1. This is an appeal filed by the assessee and it calls into question correctness of learned CIT(A)’s order dated 19th February 2014, in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2010-11.

2. In the first ground of appeal, the assessee is aggrieved that the learned CIT(A) was in error in confirming the disallowance of Rs 1,16,738 on the ground that the assessee did not carry out any business during the year. In ground no. 3, which is somewhat interconnected and which we will take up together with ground no. 1, the assessee is aggrieved that the learned CIT(A) was also in error in upholding the disallowance of various expenses, aggregating to Rs 8,00,962, ion the ground that the business had closed down.

3. The relevant material facts are like this. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that the while the assessee is said to be engaged in the business of making threads from the colon, there was no activity during the relevant previous year. It was also noted that the office of the assessee is virtually closed and the factory premises is rented out. The Assessing Officer also noted that the assessee has shown rental income from the said factory, amounting to Rs 13,66,732, as also income from other sources, being bank and FD interest, aggregating to Rs 1,80,140. The Assessing Officer further noted that the assessee had claimed various expenses, such as electricity, commission, interest, telephone and vehicle expenses etc, amounting to Rs 8,06,080. On these facts, the Assessing Officer noted that “since there was no business income, in computation of business income, assessee has claimed these expenses as business loss ( and in effect) he has deducted the same from the house property income and income from other sources”. He further noted that as “the assessee was not carrying out any business activities”, these expenses cannot be allowed. On a separate note, the Assessing Officer disallowed depreciation claim of Rs 1,16,738 by stating that “since the assessee has not carried out any business during the year, the depreciation of Rs 1,16,738 claimed by the assessee is hereby disallowed”. Aggrieved, inter alia, by these disallowances, assessee carried the matter in appeal before the CIT(A) but without any success. The assessee is not satisfied and is in appeal before us.

4. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

5. We have noted that the authorities below have disallowed the expenses and the disallowance on the ground that no business activities were carried out but, in our considered view, business activities not being carried out during the year per se cannot even lead to the conclusion that the business was discontinued, leave aside the question of closure of 'assessee’s business’. In the case of L. Ve. Veravan Chettiar vs. CIT (1969) 72 ITR 114 (Mad), Their Lordships of Hon’ble Madras High Court were in seisin of a situation where the assessee had obtained an import licence for doing arecanut business but due to adverse conditions in market, he temporarily suspended the arecanut business for the assessment year in question. Nevertheless, he was maintaining the establishment and was waiting for improved market conditions in arecanuts. It was thus an admitted position that no activities were carried out so far as this part of the business was concerned. On these facts, their Lordships took note of the position that "There is nothing on record to show that he completely abandoned or closed the business forever. On the other hand, his books of account revealed that he was meeting the establishment charges and interest payments as detailed in the accounts in the year of accounts." It was then observed that the question whether the business is being carried on must depend in each case on its own facts and not on any general theory of law. Their Lordships then referred to, with approval, Lord Summer’s observation in IRC vs. South Behar Railway Co. Ltd. (1925) 12 Tax Cases 657 that business is not confined to being busy; in many businesses long intervals of inactivity occur. The concern is still a going concern though a very quite one." After elaborate survey of judicial precedents on the issue, Their Lordships concluded, in the light of, as noted above, the factual position that "there is nothing on record to show that he completely abandoned or closed the business forever. On the other hand, his books of account revealed that he was meeting the establishment charges and interest payments as detailed in the accounts in the year of account," that the loss in arcanut business, in which admittedly no activity was carried out during the relevant previous year, was to be set off against assessee’s business income in the year. As the ratio of the aforesaid judgment is summed up in the ITR headnotes at p. 115 of the report, "As the assessee was maintaining the establishment and waiting for the improved market conditions in arecanuts and there was nothing to show that he completely abandoned or closed the business forever, the business must be deemed to be continuing." In the light of this legal position, it would follow that unless there is some material on record to show that the assessee has completely abandoned the business. There is no finding by any of the authorities below that there was a cessation of business. It is not the case, as has been stated by the AO, that the assessee is claiming deduction of business expenses from rental income. The expenses incurred by the assessee are business expenses and just because there is no business income during the relevant period, such deductions cannot be declined. The depreciation is not in respect of the assets rented out either. The assessee is incurring is a business loss and thats all that matters. Whatever be the consequences of such losses on assessee’s ultimate tax liability does not govern the question whether deduction for expenses could be allowed or not. In the light of these discussions and bearing in mind entirety of the case,in our considered view, therefore, the disallowances sustained by the CIT(A) infact deserve to be deleted. We do so. The assessee gets the relief accordingly.

6. Ground no. 1 and 3 are thus allowed.

7. In ground no 2, the assessee is aggrieved of the learned CIT(A) upholding the addition of Rs 3,00,000 as unexplained credit.

8. So far as this addition is concerned, the amount of Rs 3,00,000 shown as deposit received from Pharmason Exports was added as unexplained credit by the Assessing Officer, for want of complete details and verifications. In the first appellate proceedings, it was pointed out by the assessee that the said amount was received, by way of account payee cheque drawn on Samra Vithal Cooperative Bank, from the tenant, i.e. Pharmasons Exports Pvt Ltd, as security deposit. A copy of the rent agreement , evidencing the above transaction, was also filed. Yet, CIT(A) too confirmed the addition. The assessee is aggrieved and is in further appeal before us.

9. Having heard the rival contentions, and having perused the material on record, we are not inclined to uphold this addition. We have noted that the amount is received from the banking channel, it is duly referred to in the rent agreement itselfa copy of which was placed before us as well, and the assessee has regular dealing with the concern which has placed this security deposit. On these facts, this amount cannot be treated as unexplained credit. It stands duly explained. We, therefore, direct the Assessing Officer to delete this addition as well.

10. Ground no. 2 is also thus allowed.

11. In the result, the appeal is allowed in the terms indicated above. Pronounced in the open court today on 28th day of December, 2015.

S S Godara                  Pramod Kumar
(Judicial Member)        (Accountant Member)