Income Tax Appellate Tribunal - Delhi
Sheela Overseas Pvt. Ltd.,, New Delhi vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : G : NEW DELHI
BEFORE SHRI G.E. VEERABHADRAPPA, VICE PRESIDENT
AND
SHRI I.P. BANSAL, JUDICIAL MEMBER
ITA No.4687/Del/2009
Assessment Year : 2006-07
ACIT, Vs. Sheela Overseas Pvt. Ltd.,
Circle 8(1), Room No.163, A-42, Mayapuri Industrial Area,
CR Building, Phase II,
New Delhi. New Delhi.
PAN : AABCS0790D
CO No. 23/Del/2010
(ITA No.4687/Del/2009)
Assessment Year : 2006-07
Sheela Overseas Pvt. Ltd., ACIT,
A-42, Mayapuri Industrial Area, Circle 8(1), Room No.163,
Phase II, CR Building,
New Delhi. New Delhi.
PAN : AABCS0790D
(Appellant) (Respondent)
Assessee by : Shri T.R. Talwar, Advocate
Revenue by : Shri Inderjit Singh, Sr. DR
ORDER
PER I.P. BANSAL, JUDICIAL MEMBER
The appeal is filed by the revenue and the Cross Objection is filed by the assessee. Both of them are directed against the order of the CIT (A) dated 4th September, 2009 for assessment year 2006-07. Grounds of appeal and grounds of Cross Objection read as under:-
Grounds of appeal
1. Ld. Commissioner of Income tax (appeals) erred, in law and on the facts and circumstances of the case, in restricting the disallowance of Rs.14,45,360/- made by the Assessing 2 ITA No.4687/Del/2009 C.O. No.23/Del/2010 Officer on account of indirect expenses to Rs.1,00,643/-
2. Ld. Commissioner of Income Tax (Appeals) erred, in law and on the fact and circumstances of the case, in deleting the addition of Rs.1,48,760/- made by the Assessing Officer on account of Direct Expenses.
3. The appellant craves to amend, modify, alter, add or forego any ground of appeal at any time before or during the hearing of this appeal.
Grounds of Cross Objection On the facts and circumstances of the case, the Learned CIT (A) has erred in not allowing depreciation of Rs.10,94,734/- on the assets when the same were kept ready for actual use in the profit making apparatus the moment a need arises.
2. The assessee is a company engaged in the export of leather goods, valets and purses, etc. For the year under consideration, the assessee has declared loss of Rs.11,75,920/-. During the year under consideration the assessee did not carry out any business activity and the following amount was claimed as an expenditure:-
i) Direct expenses Rs.1,48,708/-
ii) Indirect Expenses Rs.14,45,360/-
iii) Depreciation Rs.13,69,707/-
Total Rs.29,63,775/-
3. The reply of the assessee to the query regarding allowability of above mentioned expenditure was as under:-
"During the year, the company did not carry any production activity, as it did not receive orders at the feasible rates. The company is engaged in manufacturing/fabrication of leather valets and ladies purses, etc. and there was stiff rate competition from other competitors. Since the production was suspended due to reasons beyond the control of the management and the minimum expenses were incurred to maintain the unit for future production, the expenses are admissible under the provision of Income Tax Act."3 ITA No.4687/Del/2009 C.O. No.23/Del/2010
4. Being not satisfied with the above explanation, the AO assessed the rent received by the assessee by treating the same as house property income and the income of the assessee was computed at a sum of Rs.11,32,137/- as per the following computation:-
Income from House property:-
Rent Received Rs.9,11,284/-
Less repairs: Rs.2,73,384/-
Rs.6,37,900/-
Add:
(i) Interest from FDR Rs.4,64,991/-
(ii) Interest on IT refund Rs.29,246/-
(iii) Share Income from Rs.22,741/- NIL
Less Exempt Rs.22,741
Total Income Rs.11,32,137/-
5. Before CIT (A) it was submitted that as a result of stiff competition from the international market. The assessee was not able to do any production.
However, it continued its efforts to obtain fresh orders and was able to resume production in subsequent period. Following figures were given to show that in subsequent period the assessee was able to revive its business:-
(Amount in Rs. Lacs) Fin. Year Turnover Net Profit (-) Loss 2006-07 8.16 (-)7.93 2007-08 11.75 (-)11.13 2008-09 33.08*
6. The ld. CIT (A) after considering these submissions of the assessee observed that assessee had incurred direct expenses of Rs.1,48,708/ as against Rs.13,14,755/- for the immediate preceding year and, thus, the expenses was in the nature of generator expenses, labour wages, machinery repair and ESI and PF payments required for running a business. Ld. CIT (A) also noted that there was legal obligation under the Companies Act to maintain the accounts, get them audited, filing statutory returns, etc. and there is no material on record that there was any desire or intention of the assessee to discontinue or close its business as it has neither been established by the AO in his order and considering these circumstances, the CIT (A) observed that the assessee was entitled to incur such expenditure and he deleted the addition with respect to direct expenses.4 ITA No.4687/Del/2009 C.O. No.23/Del/2010
7. Coming to indirect expenses, the CIT (A) observed that these expenses were amounting to Rs.14,45,360/- as against Rs.32,01,555/- and major expenses under the said head were on Director's remuneration, staff salary, car petrol Toyota, Telephone, fax, etc., insurance premium, horticulture, interest on car loan, etc. He observed that these expenses were to be incurred for running of business even if there was business activity during the year. He also observed that the assessee itself has added a sum of Rs.1,07,361/- in the computation of taxable income which was ignored by the AO. He also observed that the assessee has earned interest income of Rs.4,64,991/- as against Rs.7,95,792/- for immediate preceding year and has incurred expenses of Rs.3,03,107/- as against Rs.3,44,367/- for immediate preceding year and though the AO has taken the income received of interest, but ignored the expenses, the assessee withdrawn certain deposits from the bank for business expenses and deposits were reduced. The loss of Rs.98,89,744/- which was incurred in the previous year was out of own sources of the assessee, therefore, the interest was substantially reduced and after examining all these facts, the CIT (A) observed that all these expenses were incurred by the assessee wholly and exclusively for the purpose of business except the expenses of Rs.1,00,643/-
(incurred on Toyota car) and the assessee is entitled for relief of the balance amount.
8. On depreciation, Ld. CIT (A) observed that as machinery was not used, therefore, provisions of Section 32/38(2) will be attracted. He also observed that the record does not justify that the machinery in question was employed by the assessee for the purpose of business, therefore, he refused to accept the claim of the assessee regarding depreciation. Revenue is aggrieved by the deletions made by the CIT (A) and the assessee is aggrieved by the addition sustained by the CIT (A), hence, both are in appeal and Cross Objection.
9. After narrating the facts, Ld. DR pleaded that the assessee did not carry on any manufacturing activity during the year under consideration. The assessee rented the part of its building. The AO assessed the rental income of 5 ITA No.4687/Del/2009 C.O. No.23/Del/2010 the assessee as house property income. The assessee did not raise any ground against such treatment given by the AO. He submitted that in the absence of any manufacturing activity/business activity, the AO was right in disallowing the expenditure and also disallowing the depreciation. He submitted that against house property income assessed, the AO has also given the statutory deduction u/s 24 and, therefore, the order of the CIT (A) on these issues may be set aside and that of AO be restored.
10. On the other hand, it was submitted by Ld. AR that there was a temporary lull in the business and from the fact it is clear that in subsequent year the assessee was able to carry on its business. Therefore, he pleaded that the CIT (A) was right in allowing the necessary expenditure which was incurred by the assessee to enable it to keep its business assets intact. He contended that depreciation is allowable even in the cases when the assets are kept ready for use. There being temporary lull in the business, the assets were kept ready for use and, therefore, disallowance of depreciation thereon was not in accordance with law.
11. Ld. AR has submitted the synopsis of his submissions which are as follows:-
"BEFORE THE HON'BLE ITAT 'G' BENCH NEW DELHI In ITA No. 4687/D/09 in the case of ACIT Circle 8(1), New Delhi Vs. M/s Sheela Overseas Pvt. Ltd.--Assessment Year 2006-07.
LIST OF CASES CITED On Lull in business There is a catena of decisions wherein it has been held that if there is lull in business, then it cannot be said that the assessee ceases to carry on the business and therefore, it is to be held that in respect of such business Assessing Officer is bound to compute the profit or loss if any of such business.6 ITA No.4687/Del/2009 C.O. No.23/Del/2010
1. CIT V. Bharat Nidhi Ltd. (1966) 60 ITR 520 (Pub.) Once a business has commenced, it does not cease to be carried on merely because there is a period of lull, quiescence or temporary inactivity. A business may be inactive for a period and merely because of the dormancy of the business, the conclusion that it has ceased to run does not arise.
2. Inder chand Hari Ram V. CIT (1953) 23 ITR 437 (All) The mere fact that for some time, he is not able to secure a contract or do the work, which he set out to do should not disqualify from pleading that the expenditure that he had incurred was expended for the purposes of the business.
3. Karsondas Ranchhoddass V. CIT (1972) 83 ITR 1 (Born.)
4. Sarojini Raja V. CIT V. (1969) 71 ITR 504 (Mad.) On Depreciation Ready for use is use. Passive use is good enough for satisfaction of the user test.
1. Capital Bus Service Ltd. V. CIT (1980) 123 ITR 404 (Delhi) The allowance for normal depreciation does not depend upon the actual working of the machinery: it is sufficient if the machinery in question is employed by the assessee for the purposes of the business and for no other business and it is kept by him ready for actual use.
2. CIT V. OP Khanna & Sons (1983) 140 ITR 558 (P& H)
3. CIT V. Geo Tech Construction Corporation (2000) 244 ITR 452 (Ker)
4. CIT V. Southern Petrochemical Industries Corporation Ltd. (2007) 292 ITR 362 (Mad) , (2008) 301 ITR 255 (Mad.)
5. Siv Industries Ltd. V. Dy. CIT (2008) 306 ITR 114 (Mad.) against which special leave petition filed by the Dept. was also declined (2008) 306 ITR (St.)
6. Gujrat Narmada Valley Fertilizers Co. Ltd. V. Dy. CIT (2001) 73 TTJ (Ahd.) 787, 796
7. Sumerpur Cooperative Marketing Society Ltd. V. Asstt. CIT (2002) 75 TTJ (Jodh) 324, 327 7 ITA No.4687/Del/2009 C.O. No.23/Del/2010
12. We have carefully considered the rival submissions in the light of the material placed on record. We have carefully gone through the order of AO and CIT (A). During the year under consideration, the assessee had given its premises partly on rent from where the income has been earned by the assessee and such income has been assessed by the AO as income from house property and statutory deduction regarding repair has been given out of the said income and the income has been computed accordingly. Though the submission has been made before the CIT (A) axs it appears from the papers filed along with this appeal that area during the year which was given on lease was having 59.18% and, thus, it was the submission of the assessee that if the proportion is considered then the depreciation relating to lease will be an amount of Rs.4,18,190/- as against the claim of the assessee for such asset of Rs.7,06,558/-. These submissions are part of written submissions made before the CIT (A) dated 8th April, 2009. There is no such finding in the order of the CIT (A) regarding that aspect of the matter. The CIT (A) has accepted that there was a temporary lull in the business. From the facts stated before us also it is clear that it was a temporary lull in the business. The CIT (A) has given a finding of fact that the assessee has incurred these expenditure as these were necessarily to be incurred for the purpose of business and if it is so, then, his order regarding deleting the additions regarding expenses and maintaining certain part addition which was on account of non-business user cannot be said to have any infirmity in accordance with the law. Therefore, we decline to interfere so far as it relates to disallowances made by the CIT (A) except depreciation. So far as it relates to depreciation, we are of the opinion that this matter has not been properly examined by the CIT (A). It has never been the case of the assessee either in the grounds of appeal filed before the CIT (A) or in the grounds of appeal filed before us that the treatment given by the AO to the house property income was wrong. If it is so, then, the depreciation with regard to that part cannot be allowed as statutory deduction regarding house property income has already been allowed. So far as it relates to other assets, the details have not been discussed either by the AO or CIT (A). If the assets on which depreciation has 8 ITA No.4687/Del/2009 C.O. No.23/Del/2010 been claimed are in the nature that they have necessarily to be maintained or kept ready for the use of business, then, the claim of the assessee can be considered in the light of the decision relied upon by him. As there is lack of clarity on facts, so as it relates to issue regarding depreciation, we restore this issue to the file of AO to consider the same denovo as per law after giving a reasonable opportunity of hearing to the assessee.
13. To sum up, our finding on the appeal of the department and Cross Objection filed by the assessee are as under:
i) the CIT (A) was right in deleting the additions and, thus, the appeal filed by the revenue is dismissed;
ii) So as it relates to assessee's Cross Objection, we restore this issue to the file of AO to re-consider the same as per the directions given hereinabove. Therefore, the CO is partly allowed for statistical purposes in the manner aforesaid.
14. In the result, the appeal filed by the revenue is dismissed and the Cross Objection filed by the assessee is partly allowed for statistical purposes.. .
The order pronounced in the open court on 19.02.2010.
Sd/- Sd/-
[G.E. VEERABHADRAPPA] [I.P. BANSAL]
VICE PRESIDENT JUDICIAL MEMBER
Dated, 19.02.2010.
dk
9 ITA No.4687/Del/2009
C.O. No.23/Del/2010
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
TRUE COPY
By Order,
Deputy Registrar,
ITAT, Delhi Benches