2014 (2) TMI 647 - AT - Income Tax

Continuity of Business activity Allowability of Expenses Held that - The CIT(A) has well appreciated the facts - The CIT(A) has also given very sound reasons for not accepting the order of the Tribunal in assessee s own case for A.Y. 2006-07 - CIT(A) held that the facts as existing in F.Y.2005-06 are different from the facts which are existing in the relevant F.Y. i.e. F.Y.2008-09 - The appellant has not incurred expenses on account of maintaining old business establishment - These expenses were incurred for a new line of business from which no income was earned by the appellant either during the relevant previous year or even in future years - When appellant has never earned any income from the activity on which expenses were incurred, the same cannot be allowed in case of appellant. It is not a case where there was a slowdown in the business - In F.Y.2004-05 appellant earned only royalty income - In subsequent years i.e. from F.Y.2005-06 till F.Y.2008-09 neither any regular business activity has been carried out by the appellant nor any business income is earned - The reason of slow down or lull in the business does not exist in the case of appellant and in any case such a reason cannot be a valid ground for several years - the appellant claimed to have sold its entire manufacturing business to one of its related concern named Sigma Laboratories Ltd. on w.e.f. 01-04- 2009 - The expenses have been claimed by the appellant for F.Y.2008-09 and immediately thereafter the entire business was transferred by the appellant to its related concern - This means that the business was closed immediately after the relevant previous year as far as the case of the appellant is concerned - Relying upon M.M. Ipoh V. CIT 1967 (7) TMI 8 - SUPREME Court that facts of each year are only important in order to decide the income of that year thus, there is no reason to interfere with the findings of the CIT(A) Decided against Assessee.

Summary

Issues Involved:
1. Continuity of business activity.
2. Taxability of interest income on bonds.
3. Classification of job work charges.
4. Set off of brought forward business loss/unabsorbed depreciation.
5. Income from manufacturing activity and the legitimacy of the Goa plant setup.

Detailed Analysis:

1. Continuity of Business Activity:
The primary grievance of the assessee was that the lower authorities did not recognize the continuity of its business activity. The assessee claimed that it was in the process of setting up a manufacturing plant in Goa, which was a continuation of its existing business. The assessee supported its claim with various registrations and a trial run at the Goa plant. However, the lower authorities rejected this claim, stating that the processing charges received from a sister concern were not genuine business activities and that no actual manufacturing or production had occurred.

2. Taxability of Interest Income on Bonds:
The assessee argued that the interest income of INR 348.98 lakhs earned on REC bonds, which were business assets, should be treated as taxable under "Business Income." The lower authorities disagreed, stating that the interest income should be taxed under "Income from Other Sources" as the bonds were not directly related to any ongoing business activity.

3. Classification of Job Work Charges:
The assessee contended that job work charges should be classified under "Income from Business or Profession" as they were part of its business activities. The lower authorities classified these charges under "Income from Other Sources," emphasizing that the processing charges were not part of any genuine business activity, especially since they were received from a sister concern.

4. Set Off of Brought Forward Business Loss/Unabsorbed Depreciation:
The assessee sought to set off brought forward business loss and unabsorbed depreciation from earlier years. The lower authorities rejected this claim, reasoning that no business activity had been carried out during the relevant financial year, and thus, the set-off was not permissible.

5. Income from Manufacturing Activity and Legitimacy of Goa Plant Setup:
The lower authorities noted that the assessee had not earned any income from manufacturing activity and that the setup of the Goa plant appeared to be a device to claim expenses and avoid tax. The entire business was transferred to a related concern, Sigma Laboratories Ltd., immediately after the financial year, indicating that the expenses incurred were not for a genuine business purpose. The lower authorities also pointed out that the plant was taken on lease for only ten years through an unregistered deed, which further questioned the legitimacy of the business activity.

Conclusion:
The appellate tribunal upheld the findings of the lower authorities, dismissing the appeal filed by the assessee. The tribunal concluded that the assessee had not carried out any genuine business activity, and the expenses claimed were merely a device to avoid tax. Consequently, the interest income on bonds and job work charges were to be taxed under "Income from Other Sources," and the set-off of brought forward business loss/unabsorbed depreciation was not allowed. The tribunal also emphasized that the facts of the case for the relevant assessment year were distinguishable from earlier years, and thus, the previous tribunal order in the assessee's favor was not applicable.