2011 (2) TMI 936 - HC - Income Tax

Deleting the disallowance - Expenditure relating to the closed business - The assessee filed return on the net loss which included brought forward losses - The Assessing Officer did not accept the return and disallowed the expenses and brought forward loss on the ground that no business was being carried on by the assessee - Its electricity supply had been cut off and there was no transaction of business - The factory was lying closed. Operation of bank account also showed that no business was being run - No workers were employed - On appeal, the CIT(A) set aside the additions on the ground that the assessee had operated the bank accounts, its books of account were duly audited and thus, its business was continuing. It has not been disputed that the electricity supply of the assessee had been cut off and the business had stopped - The expenses claimed also do not show any claim towards wages or electricity charges - Irrespective of meaning of the term business , entirety of facts and circumstances are required to be seen. No doubt, if business is being run, its volume may not be conclusive - However, where numerous circumstances indicate closure, insignificant turnover can be taken into account to determine whether such entry is only being used as device - The CIT(A) in the circumstances was required to go into the question whether plea of the assessee that it was carrying on business was merely a device to avoid tax by claiming carry forward of losses and business expenses which could be allowed only if the business was still continuing which has not been done. In the circumstances of the case, the finding of the CIT(A) as affirmed by the Tribunal cannot be sustained - Hence, answer the question in favour of the revenue

Summary

Issues Involved:
1. Continuation of business operations by the assessee.
2. Deletion of addition of Rs.9,01,232/- by the ITAT.
3. Deletion of disallowance of Rs.2,79,306/- by the ITAT.

Issue-wise Detailed Analysis:

1. Continuation of business operations by the assessee:
The primary issue was whether the assessee continued its business operations despite the closure of its premises and disconnection of electricity. The Assessing Officer (AO) observed that the factory was closed, electricity was cut off, and no business transactions were evident apart from bank withdrawals and deposits. The CIT(A) and the Tribunal, however, held that even a single transaction could be treated as business, and the quantum of business was not relevant. The CIT(A) noted that the assessee's books were audited and business activities continued through bank transactions and job work. However, the High Court found that the CIT(A) and Tribunal erred in their findings, emphasizing that numerous circumstances indicated the closure of business, and the insignificant turnover could be seen as a device to avoid tax.

2. Deletion of addition of Rs.9,01,232/- by the ITAT:
The AO disallowed the expenses claimed by the assessee, amounting to Rs.9,01,232/-, on the grounds that the business was not operational. The CIT(A) allowed these expenses, stating that the business was ongoing and the expenses were legitimate. The Tribunal affirmed this view. However, the High Court found that the CIT(A) and Tribunal failed to consider the overall circumstances indicating business closure and ruled that the expenses were not justifiable as business expenses in a non-operational business.

3. Deletion of disallowance of Rs.2,79,306/- by the ITAT:
The AO disallowed the interest expense of Rs.2,79,306/-, arguing that no evidence was provided to show that the liability accrued during the year, especially since the business was not operational. The CIT(A) allowed this expense, citing ongoing business activities. The Tribunal upheld this decision. The High Court, however, noted that the CIT(A) and Tribunal did not adequately address the AO's findings and the circumstances indicating business closure, thus ruling that the disallowance was justified.

Conclusion:
The High Court concluded that the CIT(A) and Tribunal erred in their findings regarding the continuation of business operations by the assessee. The Court emphasized that the overall facts and circumstances indicated business closure and that the minimal business activities were likely a device to avoid tax. Consequently, the High Court set aside the orders of the CIT(A) and Tribunal and remitted the matter back to the CIT(A) for a fresh decision in accordance with the law.