Bhavnesh Saini, Judicial Member - This appeal by assessee is directed against the order of ld. CIT (Appeals), Chandigarh dated 01.02.2013 for assessment year 2009-10 on the following grounds :
| 1. |
The CIT Appeals) has erred in law and facts of the case in sustaining the addition of Rs. 25,05,898/- being entire depreciation on fixed assets. |
2. |
The ld. CIT (Appeals) has erred in law and facts of the case in confirming addition of Rs. 9,63,029/- being entire expenditure incurred by the assessee. |
2. Earlier this appeal was dismissed in default. However, allowing the Miscellaneous Application of the assessee, the appeal was restored for hearing on merits.
3. The brief facts of the case are that the appellant company had a license to deal in wholesale trade of liquor for financial year 2007-08 relevant to assessment year 2008-09 for the State of Utter Pradesh. The appellant had applied for license for F.Y. 2008-09, but the same was not granted. In the absence of the license, the appellant was not authorized to carry on the liquor business and so the opening stock value of Rs. 45.14 crores brought forward from the previous year was transferred to the concerns, which had been granted license by the Government in the subsequent year. The Assessing Officer noticed that no revenue was recognized except the transfer of stock at the same value, which was brought forward from the previous year and the stock had been transferred without any element of profit. As the appellant had not carried out any business during the year under consideration, the appellant was asked by the Assessing Officer to explain regarding allowability of depreciation claimed of Rs, 25,05,898/- and other expenses of Rs. 9,66,029/- debited to the profit and loss account. The appellant had submitted that depreciation was allowable on the assets owned by the appellant even if it was not carrying on the business due to some unavoidable reason. The Assessing Officer was not satisfied with the explanation of the appellant and disallowed the depreciation of Rs. 25,05,898/- and other expenses of Rs. 9,63,029/- debited to the profit and loss account.
4. During the course of appellate proceedings, the Ld. Counsel for the appellant has filed a written submission, relevant portion of which is reproduced below :
"During the year the license for the sale of liquor was not renewed by the State Government and the business was discontinued. The closing stock of previous year was transferred to the other companies at the cost price as the assessee was not legally entitled to sell the stock. It is common in this type of trade to run the business for short duration i.e. mostly for a year and then wind up to start afresh by floating another concern. The assessee had not been able to prove how the assets utilized by no business was carried on by it.
As a result of this assessment order the appellant's income was enhanced by Rs. 34,68,927/- taking it to a net taxable income of Rs. 17,42,170/-. The appellant is in appeal before your honour on account of the addition of depreciation and other expenses to the income of the appellant company.
Before proceeding any further it will be pertinent to mention here that the appellant company got the license for financial year relevant to assessment year 2010-11. As such the entire stock lying unsold as on 31.03.2008 was sold during the year to those parties who had got the license to deal in trade of liquor. The appellant company sold the stock lying in its godowns to the new license holders during the year. We are enclosing along with ledger account of sale to prove that the sale did not take place at one go or in one transaction but was a number of transactions."
5. The ld. CIT (Appeals), considering the submissions of the assessee, dismissed both the grounds of the assessee. The findings of ld. CIT(Appeals) in para 2.3 of the appellate order are reproduced as under :
"2.3 I have considered the submission of the Ld. Counsel. The license for sale of liquor was not renewed in the case of the appellant company by the State Government and so the appellant was not entitled to carry on the liquor business during the year under consideration and the appellant did not carry on this business, ipso-facto. As per the excise policy, the appellant could not have sold the stock remaining at the end of the year in the market and so it was transferred to the concerns, which were granted license by the Government in the succeeding year. Such transfer of stock on 'as is where is basis' cannot be treated as sale and the explanation of the appellant that the so-called sale had been entered in ledger account is immaterial. In fact, the appellant could not have carried on the liquor business, during the year under consideration and did not do it also. Obviously no asset were put to use during the year and so the depreciation on the assets was not allowable. For the same reasons i.e., there being no business, no expenses were allowable, since the expenses claimed do not relate to the book transfer of stock. It cannot be said to be a case of temporary suspension of business, as grant of license to carry on liquor business to any subsequent year is not guaranteed. I have gone through the various decisions quoted by the appellant in its reply and find that the ratio of none of these decisions even remotely apply to the case of the appellant. Hence, it is held that the Assessing Officer has rightly disallowed the depreciation and the entire expenses claimed in the profit and loss account. Grounds of appeal Nos. 1 and 2 are dismissed."
6. We have heard ld. Representatives of both the parties and perused the findings of authorities below and considered the material on record. It is admitted facts that assessee-company was dealing in wholesale trade of liquor for the State of Uttar Pradesh. The assessee was not granted license to deal in liquor in the assessment year under appeal. In the absence of license, the assessee company was not authorized to carry on liquor business and so the opening stock value of Rs. 45.14 Cr brought forward from the previous year was transferred to the concerns which had been granted license by the Government in subsequent year. The Assessing Officer found that no revenue was recognized except the transfer of the stock at the same value which was brought forward from the earlier years and the stock had been transferred without any element of profit. The assessee submitted before Assessing Officer that depreciation was allowable even if it was not carrying on the business due to some unavoidable reasons.
7. The assessee also filed written submissions before ld. CIT (Appeals) which is reproduced above in which the assessee company admitted that since the license for the sale of liquor was not renewed by the Government, therefore, business was discontinued. The assessee also admitted that closing stock of the previous year was transferred to some other company at the cost price because the assessee was not legally entitled to sell the stock. The assessee also admitted the fact that in this type of the trade to run the business for short duration i.e. mostly for a year and then wind up to start afresh by floating another company. The assessee admitted before ld. CIT (Appeals) that assessee company had not been able to prove how the assets utilized by when no business was carried on by it. The assessee in the Paper Book filed the Profit & Loss Account for the year ending 31.03.2009 (PB-18) in which also, it was admitted that net purchases (opening stock) was of Rs. 45.14 Cr and the same was sold at the same price. Merely because in the Profit & Loss Account, assessee has used the word 'net purchases' or 'sales' but in fact, there were no purchases or sales conducted by the assessee in the year under consideration because the assessee was not having any license from the State Government to deal in wholesale trade of liquor. The alleged purchases are only the opening stock value of Rs. 45.14 Cr and the alleged sales in fact is the amount of the stock transferred to other companies at the cost price because assessee was not legally entitled to sell the stock. The submission of the assessee before ld. CIT (Appeals) thus, clearly shows that assessee has not made any purchases or sales during the year under consideration. No business is thus conducted in year.
7(i) The other income shown by the assessee is explained in Schedule 15 which has given the bifurcation of other income as rebate and discounts received, interest on FDR and miscellaneous income. Thus, it is also clear that even the other income shown by the assessee in the Profit & Loss Account has no connection with the wholesale trade of liquor business. No other business activities have been carried on by the assessee during the year under consideration and has also not been reported by assessee if any other activity was carried on by the assessee during the year under consideration. The details of expenses are mentioned at page 23 of the Paper Book in which the assessee mainly claimed the rent for godown and office. The Hon'ble Delhi High Court in the case ofBharat Development (P.) Ltd. v. CIT [1982] 133 ITR 470/[1980] 4 Taxman 58 considered the meaning of 'business'. It was observed that ;
'The expression "business" is a word of indefinite import. In taxing statutes, it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealing, either actually continued or contemplated to be continued with a profit motive and not for sport or pleasure. Whether a person carries business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transactions must ordinarily be entered into with a profit motive.'
7(ii) Hon'ble Supreme Court in case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 held as under :
'Held, that although the amounts paid were "expenditure", they were not allowable under section 10(2)(xv) of the Indian Income-tax Act, 1922, as business expenditure because the payments were not" for the purpose of the business". The payments had nothing to do with the conduct of its business. The fact that on its default, if any, in the payment of the dues, the revenue might realise the amounts from the business assets was a consequence of the default of the company in not discharging its statutory obligation, but that did not make the expenditure, any the more expenditure incurred in the conduct of the business. The obligation of the company to pay estate duty under section 84 of the Estate Duty Act, 1953, was a statutory duty unconnected with the business, though the occasion for imposition arose because of the territorial nexus afforded by the accident of its doing business in India.
The expression "for the purpose of the business " is wider in scope than the expression "for the purpose of earning profits". Its range is wide; it may take in not only the day to day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of the business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory.'
8. In the earlier assessment year 2008-09, assessee was dealing in wholesale trade of liquor for the State of Uttar Pradesh. It is well settled that for dealing in business of liquor, the license from the State Government shall have to be obtained for selling the liquor in a specific area. In case no license is held by the businessman or there is any violation of license to deal in liquor, the same is punishable under the concerned State Excise Act. For the sake of convenience, Section 60 of the Uttar Pradesh Excise Act is reproduced as under:
"[60. Penalty for unlawful import, export, transport, manufacture, possession, sale, etc.—
| (1) |
Whoever, in contravention of this Act or of any rule or provision made thereunder, or of any licence, permit of pass obtained thereunder:— |
(a) |
imports, exports, transports or possess any intoxicant other than charas; or |
(b) |
cultivated any hemp plant (cannabis saliva); or |
(c) |
collects or sells any portion of the hemp plant (cannabis sativa); or |
(d) |
collects or sells any portion of the hemp plant (cannabis sativa) from which any intoxication drug can be manufactured; or |
(d) |
constructs or works any distillery, brewery or vintnery; or |
(e) |
uses, keep or has in his-possession any material, still, utensil, implement or apparatus, whatsoever, for the purpose of manufacturing any intoxicant other than tari; or |
(f) |
removes any intoxicant from and distillery, brewery, vintnery or warehouse licensed, established or continued under this Act; or |
(g) |
bottles any liquor for the purposes of sale; or |
(h) |
sell any intoxicant, save in the case provided for by Section 61; or |
(i) |
taps, or draws tari from any tari-producing tree in the areas notified under Section 42; |
|
shall be punished with imprisonment which may extend to two years and with fine which shall, in the case of an offence under clauses (i) not be less than ten times the amount of duty which would have been leviable if such intoxicant had been dealt with in accordance with this Act and the rules and orders made thereunder or in accordance with any licence, permit or pass obtained thereunder, and in any other case, not be less than ten times the amount of such duty, or five hundred rupees whichever is greater. |
(2) |
Whoever in contravention of this Act or any rule or order made thereunder or of any licence, permit or pass, obtained under this Act, manufactures any intoxicant or imports, exports, transports or possesses any charas, shall be punished with imprisonment which shall not be less that six months and which may extend to three vears and also with fine which shall not be less than two thousand rupees and which may extend to five thousand rupees.] |
(3) |
Whoever, in contravention of this Act, or any rule or order made thereunder, consumes any intoxicant, shall be punished with fine which shall not be less than five hundred rupees and which may extend to one thousand rupees-]" |
9. Since the assessee is assessed in State of Punjab, therefore, Section 61 of the Punjab Excise Act is also reproduced for the sake of convenience :
"61. (1) |
Whosoever, in contravention of any Section of this Act or of any rule, notification issued or given thereunder or order made, or of any license, permit or pass granted under this Act. |
(a) |
imports, exports, transports, manufacturers, collects or possesses any intoxicant; |
(b) |
constructs or works any distillery or brewery; or |
(c) |
uses, keeps, or has in his possession any material, still, utensil, implement or apparatus, whatsoever, for the purpose of manufacturing any intoxicant other than tari; shall be punishable for every such offence with imprisonment for a term which may extend to (three years) and with fine upto two thousand rupees and if found in possession of a working still for the manufacture of any intoxicant shall be punishable with the minimum sentence of six months imprisonment and fine of two hundred rupees. |
(2) |
Whosoever, in contravention of any section other than sections 29 and 30 of this Act or of any rule, notification issued or given thereunder or order made, or of any license, permit or pass granted under this Act— |
(b) |
sells any intoxicant; or |
(c) |
cultivates the hemp plant, or |
(d) |
removes any intoxicant from any distillery, brewery or warehouse established or licensed under this Act; or |
(d) |
bottles any liquor for the purpose of sale; or |
(e) |
taps or draws tari from any tari-producing tree; |
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Shall be punishable with imprisonment for a term which may extend to two years and fine which may extend to two thousand rupees." |
10. There are similar provisions provided under other State Excise Acts also dealing with the offences and penalties for violation of any license, notification or the rules under the State Excise Act. The Uttar Pradesh Excise Act as well as Punjab Excise Act reproduced above clearly shows that for any contravention under the above Acts, for possessing or selling the liquor illegally without license or in violation of any rule or notification, the acts of the concerned persons would be an offence and is punishable by competent Court or law. Since the assessee was not having any license to deal in wholesale trade of liquor either in Utter Pradesh or Punjab, therefore, assessee could not do any business in wholesale trade of liquor otherwise the assessee would be subject to prosecution and penalties. It was admitted by the assessee before ld. CIT (Appeals) that in the year under consideration, only the closing stock of the previous year was transferred to other companies at the cost price because the assessee was not legally entitled to sell the stock. The Assessing Officer, therefore, found that no revenue as recognized except the transfer of stock at the same value which was brought forward from the previous year and the stock had been transferred without any element of profit. Thus, the finding of fact recorded by the authorities below in the light of the reply of the assessee clearly proved on record that assessee has not conducted any purchase or sale and did not deal in any type of liquor during the year under consideration and only the opening stock was transferred at the cost value to some other companies. There were no object also involved for making any profit. Thus, the assessee has not entered into any occupation or profession and has not dealt in any item with a profit motive. Therefore, there is no question of assessee doing any business or profession during the year under consideration.
11. Section 32 of the Income Tax Act provides for grant of depreciation in respect of building, machinery, plants or furniture etc. when the assets are owned wholly or partly by the assessee and used for the purpose of business or profession. As noted above, it is clear that assessee has not conducted any business or profession in the year under consideration, therefore, there is no question of using any asset by the assessee for the purpose of business or profession during the year under consideration so as to claim entitlement of depreciation. The assessee in reply before ld. CIT (Appeals) admitted that it had not been able to prove how the assets utilized by no business was carried on by it.
12. Section 37(1) of the Income Tax Act provides that any expenditure not being in the nature of capital expenditure or personal expenses of assessee, laid out or expanded wholly and exclusively for the purpose of business or profession shall be allowed in computing the income chargeable under the head 'profits & gains' of business or profession. The explanation to this Section also provides that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. The provisions of Section 37 therefore, clearly provides that the expenditure which is laid out or expanded wholly and exclusively for the purpose of business or profession, shall be allowed as deduction. The business of liquor in any form is controlled by the State Government. The license is granted for one financial year only and is renewed time to time. Admittedly in the year under consideration, the assessee was not granted license to run the business/trade of liquor. Therefore, it is not a case of temporary lull or temporary dis-continuation of business. It is a case of no-business carried on by assessee in the year under appeal. It is well settled law that when the assessee claimed deduction of the expenditure, the burden is upon assessee to prove that expenditure is laid out or expended wholly and exclusively for the purpose of business or profession.
13. The assessee in the reply before ld. CIT (Appeals) as regards to depreciation admitted that it has not been able to prove how the assets utilized by when no business was carried on by it. Therefore, the assessee has failed to discharge the burden upon it in claiming deduction of the expenditure. The payment of expenses and depreciation have nothing to do with the conduct of liquor business which was not carried out by the assessee in the year under consideration.
14. Hon'ble Kerala High Court in the case of T.M. Chacko and Partners v. CIT [1992] 195 ITR 904 considered the identical facts that the assessee was carrying on business as Abkari Contractor participating in abkari auctions. Because of abkari arrears due from the assessee, the assessee could not carry on the business after 1971-72 and until 1978-79. The questions referred at the instance of revenue was;
| (i) |
Whether, on the facts and in circumstances of the case, the Tribunal is right in holding that the absence of active trade in abkari during the previous year and in the earlier years amounted only to a lull in the business activity of the assessee and not a discontinuance of the assessee's business? |
(ii) |
Whether on the facts and circumstances of the case, the assessee is entitled to claim deduction of interest on the related payment (beyond the 20th) of abkari dues? |
15. The question No. 1 raised in the reference at the instance of the revenue was answered in negative against the assessee and in favour of the revenue. In view of answer to question No. 1, question No. 2 was found to have academic interest only. The findings of the Hon'ble High Court reads as under :
Under section 28 of the Income Tax Act, 1961, the profits and gains of any business or profession which carried on by the assessee at any time during the previous year shall be chargeable to income tax and the income so chargeable shall be computed in accordance with law sections 30 to 43. Section 37 provides for the deduction of revenue expenditure. In order to get deduction under this Section, the amount should be expended for the purpose of the business, which was the existence in the accounting year the profits of which were under assessment.
The assessee was carrying on business as abkari contractors participating in abkari auctions. Rule 5 of the Kerala Abkari Shops (Disposal in Auction) Rules, 1974, laid down that defaulters of abkari arrears should not be allowed to participate in the auction. Because of the abkari arrears due from the assessee, the assessee could not carry on the business after 1971-72 and until 1978-79.
But, during the previous year relevant to the assessment year 1976-77, the assessee received a sum of Rs. 1,19,146/- as remuneration from firm C for services rendered to that firm. During the accounting year, the assessee paid a sum of Rs. 86,207 being interest for the belated payment of abkari arrears and claimed the same as expenditure. The Income-tax Officer disallowed the claim. The Tribunal held, concurring with the authorities, that the assessee had not carried on the business of abkari contractors during the previous year but was functioning only as an employee of firm C but granted relied holding that the absence of active trade in abkari business during the previous year and in the earlier years amounted only to a lull in the business activity of the assessee and not a discontinuance of the assessee's reference :
Held, (i) that the terms of appointment of the assessee firm or of the constitution of the assessee-firm or of the firm C had not been annexed to the statement of the case. From the facts placed before the Tribunal, the Tribunal came to the conclusion that the assessee-firm was an employee of firm C. No material had been placed to show that the finding was erroneous. Hence, the Tribunal was correct in their finding that the assessee was an employee of firm C.
(ii) That the finding of the authorities was to the effect that the abkari business had not been carried on by the assessee for the past several years. There was no material at all before the Tribunal to come to the conclusion that there was only a lull in the business activity of the assessee and there was no discontinuity of the assessee's business. The authorities as well as the Tribunal came to the conclusion that, on account of the prohibition in law, the assessee could not carry on the abkari business and that during the previous year, the assessee obtained remuneration as an employee from firm C. Thereafter, it was not open to the Appellate Tribunal to come to the conclusion that the assessee must be considered to have carried on its business in a passive sense during the previous year for the assessment year.
16. The Hon'ble Delhi High Court in the case of Dalmia Dairy Industries Ltd. v. CIT [2000] 241 ITR 9/[1999] 107 Taxman 544 held as under :
"Held, that the expenditure incurred was in connection with the assessee's business ventures in Pakistan which stood transferred to the PPCIL and hence the assessee did not have any business which it could be said to be carrying on. Since the same was not incurred wholly and exclusively for the assessee's business it was not allowable under Section 37 of the Income Tax Act, 1961. The main object of the expenditure in question was to realize the sale consideration of the fixed assets in Pakistan in cash or in kind. The expenditure related directed to fixed assets and was capital in nature. Hence, the amounts claimed were not allowable."
17. The Hon'ble Allahabad High Court in the case of Inderchand Hari Ram v. CIT [1953] 23 ITR 437 held as under:
"In order that an expenditure can lie deducted as business expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922, the expenditure must be incurred for the purpose of the business which was in existence in the accounting year and the profits of which are under assessment. If, during the relevant period there was, in fact, no business either because it was discontinued or for some other reason it had ceased to exist, the question of computation of its income after deducting the expenses cannot arise.
The assessee firm was the managing agent of a sugar mill and was also carrying on business as sole selling agents. By reason of the Sugar Control Order and a notification issued thereunder the assessee could not work as setting agents of the mill from 30th April, 1942, but the company continued to pay the assessee brokerage up to 30th September, 1944, on the sale of sugar made by the company direct to the dealers nominated by the Government. On 7th March, 1945, the directors of the company passed a resolution that the assessee would not be given any more brokerage for the sale of sugar after 1st October, 1944. The Appellate Tribunal found that during the period 1st October, 1944, to 30th September, 1945, the assessee did not enter into any agreement and did not receive any sugar from the company, nor did they do any work as selling agents nor were they paid any brokerage. The assessee claimed that the expenses incurred by it in maintaining the selling office between 1st October, 1944, and 7th March, 1945, should be deducted under Section 10(2)(xv) as expenditure laid out or expended wholly and exclusively for the purpose of the selling agency business: Held, that in the circumstances of the case the expenditure incurred was not an admissible deduction under Section 10(2)(xv)."
18. Since in the case of the assessee, no business or profession was carried out during the year under consideration, therefore, no expenditure would be said to have laid out or expanded wholly or exclusively for the purpose of business or profession. Similarly, when the assessee was not granted license to deal in business of liquor in the year under consideration, the assessee even could not possess or sell any liquor in the year under consideration otherwise the possession or selling of the liquor by itself would be an offence and prohibited by law under the State Excise Act. Section 37(1) is therefore, clearly attracted in the case of the assessee because when assessee has not conducted any business or profession during the year under consideration, no expenditure was allowable and as per Explanation to the above provision, even if some expenses were incurred by assessee for the business of dealing in wholesale liquor without license, the same would be prohibited by law and as such on both counts, the expenditure could not be allowed as deduction in favour of the assessee.
19. The ld. counsel for the assessee relied upon decision of the Calcutta High Court in the case of Multican Builders Ltd. v. CIT [2005] 278 ITR 142/147 Taxman 103 on the proposition that when asset is ready for use, depreciation is allowable. There is no quarrel with the legal proposition decided in this case. However, the facts of the case of assessee are clearly distinguishable because the assessee was not authorized by the State Government to deal in the business of liquor in the year under consideration. If the assessee would have dealt in illegal trade of liquor, the assessee would have been prosecuted for the offence under the Excise Act. Therefore, there is no question of passive user of the assets by the assessee for illegal liquor business.
20. The ld. counsel for the assessee also relied upon decision of Hon'ble Madhya Pradesh High Court in the case of CIT v. Dalumal Shyamumal [2005] 276 ITR 62/144 Taxman 151 (MP) which is not relevant on the point in issue.
21. The ld. counsel for the assessee also relied upon following decisions :
| (a) |
L. Ve. Vairavan Chettiar v. CIT [1969] 72 ITR 114 (Mad) |
(b) |
Hindustan Chemical Works Ltd. v. CIT [1980] 124 ITR 561/[1979] 1 Taxman 420 (Bom.) |
(c) |
Carefour WC & C India (P) Ltd. v. Dy. CIT [2014] 368 ITR 692/[2015] 53 taxmann.com 289/228 Taxman 261 (Mag.) (Delhi) |
(d) |
CIT v. Dhoomketu Builders & Development (P.) Ltd. [2014] 368 ITR 680/[2013] 216 Taxman 76/34 taxmann.com 18 (Delhi) |
22. On going through these judgments, we find that the facts are clearly distinguishable from the case of the assessee. Rather, ld. counsel for the assessee admitted during the course of arguments that in the case ofHindustan Chemical Works Ltd. (supra), Bombay High Court held that when the assessee company had not carried out any business, therefore assessee was not entitled to depreciation. This point is, therefore, decided against the assessee. In the case of the present assessee also, since the assessee had not done any business in the year under consideration and had stopped the business because no license to deal in liquor was granted by the State Government, therefore assessee was correctly not allowed depreciation. The case laws stated by ld. counsel for the assessee are, therefore, not applicable to the facts and circumstances of the case.
23. From the facts and circumstances of the case, in the light of the reply of the assessee, we are of the view that since assessee has not conducted any business or profession during the year under consideration, therefore, authorities below were justified in not granting depreciation and deduction on account of expenditure. The appeal of the assessee fails and is dismissed.
24. In the result, appeal of the assessee is dismissed.
T.R. Sood, Accountant Member - I have gone through the order of Ld. Judicial Member. I have also discussed the issues in detail. However, I have not been to persuade myself with the view expressed by the Ld. JM, therefore, I am writing this separate Order.
2. It will be useful to narrate the facts in little more detail. The assessee is a private limited company engaged in the business of wholesale liquor trading. This business can be carried only after obtaining a license which is granted by the State Government which is obtained through bidding in the auction conducted by the State Govt. The assessee had license in the previous year but during the year assessee could not win the license to carry on the trading activity, therefore, as per Excise Rules, the opening stock was transferred to another dealer who won the bidding and acquired the license. The assessee had income from other sources mainly consisting of interest on FDRs, refund of tender fee and misc. income. Such other income amounted to Rs. 49,69,607/-. Against this the assessee has claimed certain expenses as well as depreciation. After claiming such depreciation and expenses, return of income was filed declaring income of Rs. 32,73,350/-.
3. During assessment proceedings the Assessing Officer noticed that since there were no sales, therefore, assessee cannot be said to have carried on any business. Accordingly, assessee was show caused to justify the claim of expenses as well as depreciation. In response, it was stated that though assessee did not have any license to carry on the business but since opening stock was transferred and assessee was a going concern, therefore, expenses and deprecaistion were allowable. However, the Assessing Officer did not agree with these submissions and again observed that assessee did not have license for sale of liquor, therefore, business was discontinued. Further, this type of business is generally run for short periods i.e. mostly for a year after which the business is wound up and upon receiving a fresh license, new concern is floated. He also observed that assessee has not been able to prove how the assets were utilized when no business was carried on. In this background the Assessing Officer disallowed the claim of depreciation amounting to Rs. 25,05,898/- and other expenses at Rs. 9,63,029/-.
4. On appeal action of the Assessing Officer was confirmed by Ld. CIT(A). The findings of Ld. CIT(A) have already been reproduced by Ld. JM, therefore, there is no need to repeat the same.
5. Before us it was mainly contended that assessee could not carry on the business during the year because assessee could not win the license through bidding. The assessee was left with certain stock which had to be disposed off as per rules; the stock was transferred to the dealer who won the license at cost price. It was further pointed out that assessee had hired a godown and office for which rent has to be paid amounting to Rs. 3,55,974/- and Rs. 2,58,600/-. The other main expenditure was audit fee and some small expenses. The assessee had also paid salary of Rs. 1 lakh. Therefore, assessee has incurred minimum expenses which were required to maintain the office. The assessee could not vacate the office and godown and the same was continued because assessee always wanted to carry on the business. In fact the assessee has won license given for assessment year 2010-11 and carried the business again. As far as the depreciation is concerned it was submitted that assessee wanted to carry on the business, therefore, it was thought fit to retain the assets in the form of everything with fixtures, vehicles, office equipments etc. The Ld. Counsel submitted that it is settled law that even if the fixed assets are not used for business purposes but they are kept ready then depreciation had to be allowed. In the case before us the assets were ready to be used whenever the license was to be won. It was the case of only temporary lull of business and, therefore, expenses as well as depreciation should be allowed. In this regard he relied on the following decisions:—
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(a) L. Ve. Vairavan Chettiar (supra) |
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(b) Hindustan Chemical Works Ltd. (supra) |
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(c) Multican Builders Ltd. (supra) |
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(d) Anil Bulk Carriers (P.) Ltd v. CIT [2005] 276 ITR 625/142 Taxman 673 (All.) |
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(e) Carefour WC & C India (P) Ltd. (supra) |
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(f) Dhoomketu Builders & Development (P) Ltd. (supra) |
|
(Copy of the judgments filed in the paper book - ITA 528/2012 & 529/2012) |
6. On the other hand Ld. DR while strongly supporting the order of CIT(A) submitted that since the assessee has discontinued business during the year, therefore, disallowance of expenses as well as depreciation is totally justified.
7. I have considered the rival submissions carefully. In the present case there is no dispute regarding the fact of incurring expenditure or genuineness of expenses. The only dispute is whether the assessee was carrying on business or the business was discontinued. It is settled law that there can be situation where there can be lull in the business and in such a situation various Courts have clearly held that it cannot be said that business has been discontinued. The Hon'ble Bombay High Court commenting upon this aspect in the case of Hindustan Chemical Works Ltd (supra) relied by Ld. Counsel for the assessee has observed as under:—
"There is a marked distinction between "lull in business" and "going out of business". A temporary discontinuance of business may, in certain circumstances, give rise to an inference that a business is going through a lean period of transition and it could be revived if proper circumstances arise. But where an assessee decides to dispose of its property, the plant and machinery are dismantled and taken away from the factory premises, there is not even the slightest chance of the assessee re-starting production, and there is no finance available, and even the licences ceased to be effective, it cannot be held that there was a lull in business which was of a temporary nature. "
Therefore, it is clear that going out of business is different proposition and lull in the business is a different proposition. Similar observations were made by Hon'ble Madras High Court relied on by the assessee in the case of L. Viaravan Chettiar (supra). The relevant observations are as under:-
"The question whether a business was being carried on or was discontinued must depend in each case on its own facts. It is not necessary that a business to be in existence should have work 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. "
8. This can be further understood by a very simple example. Let us say, a company is incorporated to carry on the construction of bridges or dams. Its business would commence the moment it wins a contract for construction of bridge or a dam. Let us assume further that last bridge / dam is constructed in a period of 2 years and the company is not able to win another contract for next two years. Then it cannot be said that in those later two years the assessee is not carrying on the business of construction of bridges or dams because for business of construction of bridges / dams the assessee must have acquired plant and machinery and other assets. Similarly, in the case of liquor trade there is no doubt that business can be conducted only when a license is granted by the State Govt. which is generally granted through auctions. It may be a practice that generally this business is conducted by floating of temporary firms and then such firms are closed when the license is not obtained. However, in the present case, the assessee is incorporated as a company which itself shows that intention was to carry on the business in the longer term. Further, assessee has taken a godown as well as office for the purpose. The assessee cannot be expected to vacate godown and office immediately on expiration of license. Such godown and office etc. are again required whenever the assessee is able to win the license. In fact, in the case before us admittedly the assessee has again obtained the license in assessment year 2010-11 i.e. immediately in the following year and carried on this business.
9. No doubt in the case of liquor business, the business cannot be carried out until and unless license is there with the businessman and if assessee did not have license but then it can be said that there was a temporary lull in the business because assessee failed to win the license.
10. The Ld. JM has referred to the decision of Hon'ble Kerala High Court in the case of T.M Chacko and Partners v CIT [1992] 195 ITR 904. In that case the assessee was carrying on business as 'Abkari contractors' and was participating in Abkari auctions. Rule 5 of the Kerala Abkari Shops (Disposal in Auction) Rules, 1974 provided that defaulters of abkari arrears should not be allowed to participate in the auction. The assessee has some abkari arrears and, therefore, could not carried on the business from assessment years 1971-72 to 1978-79. In these circumstances the Hon'ble Court held that it cannot be said that assessee was carrying on abkari business. It should be noted that in this case the assessee has defaulted in payment of abkari business i.e. why the assessee was barred from participating any auctions for next six years. Whereas in the case before us, the assessee simply could not win the auction and has not been barred by any authority.
11. In fact, in the later decision of the Kerala High Court in the case of K. Sreedharan & Co. v CIT [1993] 202 ITR 796, a different view was taken. The facts of this case are identical to the facts of the assessee's case. In that case the assessee was carrying on the business of purchase and trading of liquor and arrack for many years. During the year, before the Court the assessee could not win the contract and therefore, was not in this business. Further, in 1984 the assessee again borrowed some money for participating in the auction and question arose whether such interest expenditure was allowable. Though initially this expenditure was allowed but on revision by Commissioner it was held that since no arrack or branded business was carried on by the assessee during the relevant assessment year, the expenditure was not allowable. On a writ petition, it was held as under:—
"Held, that, admittedly, the assessee had to participate in the auction which was conducted during the relevant assessment year for the purpose of carrying on the business in the following year. The assessee had to incur expenses for the above purpose. It was also an admitted fact that, for many years previous to the assessment year, the assessee had been carrying on the same business. Under these circumstances, the assessee was entitled to claim deduction in respect of the amount paid as interest for raising the loan during the relevant year. (see p. 799B-D) "
12. Therefore, it becomes clear that even if the assessee is not carrying on the business in a particular year because of not winning the license in auction, it cannot be said that assessee has gone out of the business. Therefore, in my opinion the assessee was very much in business and expenses incurred by the assessee should have been allowed. It is to be noted that expenses have been incurred mainly on payment of godown rent and statutory expense like audit fee, filing fee and only a sum of Rs. 1 lakh has been paid towards salaries which seems to be for minimum of employees. The second question was whether in such circumstances the depreciation should be allowed. In my opinion on the basis of same analogy as given for allowance of expenditure, the depreciation is also required to be allowed. In this regard Ld. Counsel has cited the judgment of Hon'ble Calcutta High Court and Allahabad High Court in the case of Multican Builders Ltd. v CIT (supra) andAnil Bulk Carriers (P.) Ltd (supra) where depreciation was held to be allowable even when the assets are kept ready for use. In fact in this regard our own Jurisdictional High Court of Punjab & Haryana has held that depreciation can be allowable on passive user in the following cases:—
| (a) |
CIT v Pepsu Road Transport Corporation [2002] 253 ITR 303/121 Taxman 232 (Punj. & Har.) |
(b) |
CIT v Shahbad Co-Op Sugar Mills Ltd, [2011] 12 taxmann.com 421/201 Taxman 66 (Punj. & Har.) |
(c) |
CIT v Oswal Woollen Mills Ltd [2007] 289 ITR 261 (Punj. & Har.) |
13. In view of the above discussion, in my opinion, depreciation has to be allowed, therefore, I set aside the order of Ld. CIT(A) and hold that assessee is entitled to the allowance at business expenditure as well as depreciation.
14. In the result, assessee's appeal is allowed.
REFERENCE UNDER SECTION 255(4) OF THE ACT
In this case, the Members of the Tribunal differed in their opinion on the following points/questions. Therefore, this reference is made to the Hon'ble President, Income Tax Appellate Tribunal for reference of these points/questions to the Third Member for his esteemed opinion.
| (i) |
Whether on the facts and in the circumstances of the case, when the assessee being wholesale trader of liquor had not been granted licence to run liquor business, was also not authorized to carry on liquor business and no liquor business is carried on in the assessment year 2009-10 in appeal, whether it could be considered that there was a temporary lull in the business of the assessee? |
(ii) |
Whether in the facts and circumstances of the case, the assessee is entitled to deduction on account of depreciation and other expenses as claimed when no business of wholesale liquor trade was carried on by the assessee in assessment year in appeal? |
THIRD MEMBER ORDER
Justice Dev Darshan Sud, President (As a Third Member) - This reference under Section 255(4) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act) arises out of the difference which arises in the opinion of two Hon'ble Members dealing with the appeal of the assessee.
2. The Hon'ble Judicial Member on the admitted facts on record concurred with the findings of learned CIT(Appeals) disallowing the depreciation and other expenses claimed by the appellant-assessee holding that for the assessment year in consideration, the assessee who is admittedly a wholesale trader in liquor, was not carrying on any business and in the circumstances, it could not be said that the assets for which and the expenses claimed were relatable to any business activity of the assessee. The learned Accountant Member, on the same set of facts holds that since the assessee, subsequent to the assessment year in question was granted license by the Uttar Pradesh Government to carry on trade of liquor, it cannot be said that there was any intention to have permanently abandoned the business activity or that it had ceased to exist. His opinion was that it was a temporary cessation. Under these circumstances, both the Assessing Officer as also the appellate authority were wrong in disallowing the expenditure claimed.
3. It is not denied and accepted by the parties that the assessee was dealing in wholesale trade of liquor in the State of Uttar Pradesh, for which he had been granted a lawful licence under the relevant law. It was only in the year under consideration that there was no business activity because the assessee had no licence in its favour. The learned Members note that for the year in question, the liquor licence was not renewed and that the closing stock of liquor lying with it was transferred to a third trader. On this difference, two questions have been referred:
| (i) |
Whether on the facts and in the circumstances of the case, when the assessee being wholesale trader of liquor had not been granted license to run liquor business, was also not authorized to carry on liquor business and no liquor business is carried on in the assessment year 2009-10 in appeal, whether it could be considered that there was a temporary lull in the business of the assessee? |
(ii) |
Whether in the facts and circumstances of the case, the assessee is entitled to deduction on account of depreciation and other expenses as claimed when no business of wholesale liquor trade was carried on by the assessee in assessment year in appeal? |
4. The answer to second question depends upon the answer to the first. The learned Judicial Member holds that the assessee was not granted licence for trading in liquor for assessment year under appeal i.e. 2009-10 and in the absence of such licence, he could not carry on trade in liquor and that there was no stock with the assessee. No revenue was generated except the transfer of the stock at the same value of purchase, which was brought forward from the earlier years and that there was no profit involved in the transfer of such stock. This aspect of the case is also accepted by the learned Accountant Member. It is also undisputed that possession of liquor for any purpose of trade is prohibited unless it is under a licence from the State. It is also admitted that no other business was carried on by the assessee during the assessment year under appeal.
5. A number of decisions have been cited by both sides in support of the contention as to whether this expenditure i.e. depreciation and other expenditure claimed was relatable or not to the business carried out by the assessee. In Bharat Development (P.) Ltd. (supra) interpreting the word 'business', while following the decision of the Supreme Court in the case of Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 it was held
"The expression 'business', as observed by Shah J., speaking for the court in the case of State of Gujarat v.Raipur Mfg. Co. [1967] 19 STC 1 (SC), though extensively used in taxing statutes, is a word of indefinite import, in taxing statutes, it is used in the sense of an occupation or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit motive, and not for sport or pleasure. Whether a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transactions must ordinarily be entered into with a profit motive. By the use of the expression 'profit motive' it is not intended that profit must in fact be earned. Nor does the expression cover a mere desire to make some monetary gain out of a transaction or even a series of transactions, it predicates a motive which pervades the whole series of transactions effected by the person in the course of his activity. In the case of Commissioner of Income-tax v. Lahore Electric Supply Co. Ltd. [1966] 60 ITR 1 (SC), Sarkar J., speaking for the majority, observed that business as contemplated by Section 10 of the Indian Income-tax Act, 1922, is an activity capable of producing a profit which can be taxed. In the case of the appellant-trust the activity of the trust, as observed earlier, has in fact been yielding profits and that apparently accounts for the increase in the value of its assets..." (PP. 474.475)
6. Now I refer to the decisions cited before me to urge that in order expenditure can be allowed as a deduction u/s 10(2)(xv) of the Act it must be incurred for the purpose of business which was in existence in the accounting year for which the profits were a subject matter of assessment. In Inderchand Hari Ram (supra), this very proposition was considered. The Allahabad High Court held.
"In considering, however, whether the expenditure can be deducted as business expenditure one must remember that sub-section (2)(xv) is a part of Section 10 and at the time of computation of the income of a business, though that income may be nil, the expenses wholly and exclusively for the purposes of that business may be a permissible deduction, but in order to be deductible under this clause the expenditure must be incurred for the purpose of the business which was in existence in the accounting year and the profits of which are under assessment. If during the relevant period there was, in fact, no business either because it was discontinued or for some other reason it had ceased to exist, the question of computation of its income after deducting the expenses cannot arise..." (P.443)
In Multican Builders Ltd. (supra) the court while interpreting the word "used" held that two conditions should be fulfilled in order that the depreciation claimed can be allowed. Firstly, plant and machinery must be owned by the assessee and secondly, it was used for the purpose of business of the assessee. Actual use was not contemplated by section 32 of the Act as expression used was "used for the purpose of business or profession". In Hindustan Chemicals Works Ltd. (supra), the court considered the aspect 'lull in business' and 'going out of business' and held that they were two different situations. The court holds.
'... There is a marked distinction between "lull in business" and "going out of business". A temporary discontinuance of business may in certain circumstances give rise to an inference that a business is going through a lean period of transition and it could be revived if proper circumstances arise... '(P 569)
A temporary discontinuance of business may lead to the inference that there is some lean economic period of recession and that the business can be revived when proper circumstances exist but then it is not a conscious or deliberate act on the part of the assessee which would lead to the abandonment of business. In L.Ve. Variavan Chettiar (supra), court held that it is the peculiar facts of the case which would determine as to whether the assessee has ceased to carry on its business or it was a temporary discontinuance. In CIT v. Integrated Technologies Ltd., the High Court of Delhi in ITA No. 530/2011 dated 16.12.2011, holds that the only condition to claim depreciation etc., as expenditure is that it is not necessary that plant & machinery owned by the assessee should be actually put to use in the relevant accounting year to justify the claim of depreciation and even if such plant & machinery or other assets are kept ready for use in assessee's business, the assessee would be entitled to claim depreciation. The only condition added is that the business should not be closed down once and for all and that the assessee should demonstrate that the hopes of the business being revived are alive and real. It is however not a matter that can turn entirely on the assessee's hopes alone but then there should be evidence on record to show that the assessee took efforts to keep the business alive in the hope of reviving it. I need not multiply precedents further. In the present facts of the case in the reference before me, the trade is one in liquor and there are two judgments of the Kerala High Court on the point, one favouring the assessee in one sense and the other against what the assessee seeks to urge.
7. Some other decisions have also been cited before me, which require consideration. In Anil Bulk Carriers (P.) Ltd. (supra) the High Court of Allahabad relying upon the decision of Punjab & Haryana High Court in Pepsu Road Transport Corporation (supra) amongst others held that actual user of the asset was not a sine qua non for claiming depreciation on an asset. The asset in question were 'trucks' and before Hon'ble Punjab & Haryana High Court, it was 'buses'. I now refer to the two decisions of the Kerala High Court which are nearer to the facts of the case. In the case of T.M. Chacko and Partners (supra) while dealing with two questions namely:
| "1. |
Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the absence of active trade in abkari during the previous year and in the earlier years amounted only to a lull in the business activity of the assessee and not a discontinuance of the assessee's business? |
2. |
Whether, on the facts and in the circumstances of the case, the assessee is entitled to claim deduction of interest on the related payment (beyond the 20th) of abkari dues ?" (P. 906) |
8. The Court was called upon to consider the fact as to whether non-payment of abkari fees which resulted in denying permission to the assessee for carrying on business could be interpreted to mean that there was continuity in the business when after payment of the fees for the next year, the assessee revived his business. The question, in short, was as to whether during the period when the business remained suspended, expenditure could be claimed as relatable to business. The Court, while considering the relevant provisions of the Kerala Abkari Shops (Disposal in Auction) Rules, 1974 which provided:
"No defaulter of abkari arrears shall be allowed to participate in the auction unless he produces from the Excise Inspector concerned a certificate to the effect that he has remitted before the date of auction 20% of the arrears pending as on the date of the auction notification." (P. 907)
held that the assessee had no right to carry on business, therefore, the expenditure was disallowed. The court holds
"Under Section 28 of the Act, the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year shall be chargeable to income-tax and the income so chargeable shall be computed in accordance with Sections 30 to 43. Section 37 provides for the deduction of revenue expenditure. In order to get deduction under this section, the amount should be expended for the purpose of the business. The finding of the authorities is to the effect that the abkari business has not been carried on by the assessee during the previous several years. The business expenditure has to be related to a business which is taxed or taxable before it can be deducted and, therefore, there is no scope for deduction of the interest paid by the assessee in this case. There is no justification, and there was no material at all before the Tribunal, to come to the conclusion that there was only a lull in the business activity of the assessee and there was no discontinuity of the assessee's business. The authorities as well as the Tribunal came to the conclusion that, on account of the prohibition in law, the assessee could not carry on the abkari business and during the previous year the assessee obtained remuneration as an employee from Messrs. Crossfield Trades. 'Thereafter, it was not open to the Appellate Tribunal to come to the conclusion that the assessee "must be considered to have carried on its business in a passive sense during the previous year" for the assessment year. We, therefore, hold that the Tribunal erred in law in holding that, during the previous year, the absence of active trade amounted to a lull in the business activity and not a discontinuance in the business..." (PP 908 -909)
In the other decision of the same High Court in K. Sreedharan & Co. (supra), a learned Single Judge held on the established fact that during the relevant assessment year, no business of arrack and brandy was carried out as the assessee failed in getting licence in the auction conducted but, however, in the subsequent year, he obtained such a licence and in that eventuality, there could be no discontinuance of business. In these facts, the Court held that the assessee was entitled to claim the expenditure in the assessment year for which no business had been carried out. I may add at this juncture that in the law, a Division Bench judgment always has precedence over judgment of learned Single Judge more specially, when the Division Bench judgment has not been considered in the subsequent judgment to either distinguish it or stating that it is inapplicable to the facts of the case. It is, therefore, Chacko's case which is more nearer to the facts of the present case and would apply. Decisions have also been cited by learned counsel for the assessee to assert that there was a lull in the business and mere failure to obtain a licence could not disentitle the assessee from claiming such expenditure as there was no abandonment of the business or anything on the record to show that the assessee had no intention to carry on the business.
9. Liquor business is on a different footing than other business activities. It is undisputed before me that under Section 60 of the Uttar Pradesh Excise Act, carrying on trade in liquor without licence is punishable with imprisonment.
10. Emphasis has been laid down by the learned Counsel for the assessee on Sreedharan's decision to urge that the case of the assessee is squarely covered by the law laid down therein. What I find is that Chacko's decision, which is a Division Bench judgment, has not been considered in this decision. In these circumstances, submission made by the learned Counsel for the assessee cannot be accepted. It is Chacko's case which is nearer to the facts in the present case. I may add at this stage that it is not disputed by both the sides that section 60 of the Uttar Pradesh Excise Act, which is attracted to the facts of the present case, outlaws any business activity in Liquor without license, making it punishable with imprisonment. It is also urged for me that the expression 'for the purpose of business' as defined in section 10(2)(xv) of the Act, is much wider in scope than the expression 'for the purpose of earning profits'. There is no dispute about this established proposition of law.
11. Some other decisions of various Benches of this Tribunal were cited to urge that in order to claim expenditure there should be evidence or material to show that the assessee made efforts to keep the business alive. I am not going into this proposition since the two decisions of the Kerala High Court cover the case of the assessee squarely and it is the Division Bench judgment which has precedence over the judgment of the Single Bench.
12. In the circumstances, I hold that because of the statutory prohibition under the Uttar Pradesh Excise Act, it could not be said that there was a temporary lull in the business of the assessee but that there was a legal bar. In view of this, the first question is therefore answered against the assessee and in favour of the revenue and the second question is also answered against the assessee and in favour of the revenue.
13. The case be put up before Division Bench for further proceedings.
ORDER
Bhavnesh Saini, Judicial Member - On being a difference of opinion between the Members of the Tribunal, the matter in issue was referred to the Third Member for his esteemed opinion.
2. Hon'ble President, ITAT, being the Third Member, has agreed with the view of the Judicial Member.
3. In view of the majority decision, the appeal of the assessee stands dismissed.