2010 (7) TMI 797 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of severance cost as revenue expenses.
2. Disallowance of market research study expenses.
3. Disallowance of carry forward of business losses and unabsorbed depreciation.
4. Penalty u/s 271(1)(c).

Summary:

1. Disallowance of Severance Cost as Revenue Expenses:
The first grievance of the assessee was that the CIT(A) erred in confirming the disallowance of Rs. 93,91,706 claimed as revenue expenses on severance cost. The Assessing Officer (AO) disallowed the claim, reasoning that the business had ceased operations and the severance costs were for closure, not running the business, thus not allowable u/s 37. The Tribunal, however, held that if the business activity was not totally closed but merely suspended, severance costs are allowable. The assessee had only suspended manufacturing but continued trading, thus the severance costs were deemed allowable.

2. Disallowance of Market Research Study Expenses:
The second issue was the disallowance of Rs. 9,77,025 and Rs. 14,75,191 incurred on market research study. The AO treated these expenses as capital in nature, arguing they were for developing a new product. The Tribunal, however, found that the expenses were for understanding market conditions to enhance existing business operations, not for creating a new product. Thus, these expenses were considered revenue in nature and allowable.

3. Disallowance of Carry Forward of Business Losses and Unabsorbed Depreciation:
The third issue involved the disallowance of carry forward of business losses and unabsorbed depreciation amounting to Rs. 34,87,18,783. The AO disallowed the claim, stating the business had ceased operations, thus not meeting the conditions u/s 32(2), 72(2), and 73(3). The Tribunal noted that the assessee had only suspended manufacturing and continued trading, thus the business was not closed. The Tribunal remanded the issue back to the AO for re-adjudication, emphasizing the need for proper opportunity for the assessee to present its case.

4. Penalty u/s 271(1)(c):
The AO levied a penalty u/s 271(1)(c) on the disallowed severance cost and market research expenses. The CIT(A) confirmed the penalty on the severance cost but deleted it for the market research expenses. The Tribunal, having deleted both disallowances in the quantum appeal, held that no penalty was sustainable.

Result:
1. ITA No. 2422/Del/2007 is allowed for statistical purposes.
2. ITA No. 2168/Del/2009, the appeal of the assessee is allowed.
3. ITA No. 2735/Del/2009, the appeal of the revenue is dismissed.