2016 (4) TMI 1296 - AT - Income Tax

Depreciation on fixed assets - non-commencement of business - not able to prove how the assets utilized by when no business was carried on by it. - Held that - 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. - 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.

Issues Involved:
1. Sustaining the addition of ?25,05,898/- as depreciation on fixed assets.
2. Confirming the addition of ?9,63,029/- as other expenses incurred by the assessee.

Detailed Analysis:

1. Depreciation on Fixed Assets:
The primary issue revolves around whether the assessee, a company engaged in wholesale liquor trading, is entitled to claim depreciation on fixed assets amounting to ?25,05,898/- for the assessment year 2009-10, despite not having a license to carry on the liquor business during that year.

Assessing Officer’s Findings:
The Assessing Officer noted that the assessee did not carry out any business during the year under consideration as it was not granted a license to deal in liquor. Consequently, the opening stock valued at ?45.14 crores was transferred to other licensed concerns without any profit element. The Assessing Officer disallowed the depreciation claim, asserting that no business was conducted, and the assets were not used for business purposes.

CIT(A) Decision:
The CIT(A) upheld the disallowance, emphasizing that the assessee was not entitled to carry on the liquor business without a license, and hence, no business activities were performed. The CIT(A) concluded that the assets were not put to use, and therefore, depreciation was not allowable.

Tribunal’s Analysis:
The Tribunal reaffirmed the CIT(A)’s decision, stating that the assessee did not conduct any business or profession during the year under consideration. The Tribunal highlighted that for depreciation to be allowable under Section 32 of the Income Tax Act, the assets must be used for business purposes, which was not the case here. The Tribunal cited various judicial precedents, including the Hon’ble Supreme Court’s decision in CIT v. Malayalam Plantations Ltd., to support its conclusion that the expenditure must be incurred for the purpose of an existing business.

Separate Judgment by Accountant Member:
The Accountant Member dissented, arguing that the assessee’s business was temporarily dormant due to the failure to obtain a license, but the intention to carry on the business remained. He emphasized that the assets were kept ready for use, and thus, depreciation should be allowed. He relied on judicial precedents, including the Hon’ble Calcutta High Court’s decision in Multican Builders Ltd. v. CIT, which held that depreciation is allowable even if the assets are not actively used but kept ready for use.

Third Member’s Decision:
The Third Member, agreeing with the Judicial Member, held that the prohibition under the Uttar Pradesh Excise Act prevented the assessee from carrying on the liquor business without a license. Therefore, it could not be considered a temporary lull in business. The Third Member concluded that the assessee was not entitled to claim depreciation as the assets were not used for any business activity during the assessment year.

2. Addition of Other Expenses:
The second issue pertains to the addition of ?9,63,029/- as other expenses incurred by the assessee, which were disallowed by the Assessing Officer.

Assessing Officer’s Findings:
The Assessing Officer disallowed the expenses, asserting that since no business was conducted, the expenses were not incurred for business purposes.

CIT(A) Decision:
The CIT(A) upheld the disallowance, stating that no business activities were performed during the year, and hence, the expenses were not allowable under Section 37(1) of the Income Tax Act, which requires the expenses to be incurred wholly and exclusively for business purposes.

Tribunal’s Analysis:
The Tribunal concurred with the CIT(A)’s decision, emphasizing that the assessee did not carry on any business or profession during the year under consideration. The Tribunal cited judicial precedents, including the Hon’ble Allahabad High Court’s decision in Inderchand Hari Ram v. CIT, which held that expenses must be incurred for the purpose of an existing business to be deductible.

Separate Judgment by Accountant Member:
The Accountant Member dissented, arguing that the expenses were minimal and necessary to maintain the office and godown, which were required for the business. He emphasized that the business was temporarily dormant, and the expenses should be allowed. He relied on judicial precedents, including the Hon’ble Kerala High Court’s decision in K. Sreedharan & Co. v. CIT, which allowed expenses incurred during a temporary lull in business.

Third Member’s Decision:
The Third Member, agreeing with the Judicial Member, held that the prohibition under the Uttar Pradesh Excise Act prevented the assessee from carrying on the liquor business without a license. Therefore, it could not be considered a temporary lull in business. The Third Member concluded that the assessee was not entitled to claim the expenses as they were not incurred for any business activity during the assessment year.

Conclusion:
In view of the majority decision, the appeal of the assessee was dismissed, and the additions of ?25,05,898/- as depreciation on fixed assets and ?9,63,029/- as other expenses were sustained.

← Previous Next →