2014 (2) TMI 1068 - AT - Income Tax

Partial business loss allowed - Allowability of claim expenditure Continuity of Business Activity Whether the CIT(A) has erred in only allowing expenditure partially instead of allowing the entire business loss and in holding that no business was carried out by the assessee as such the expense incurred including deprecation etc. were not allowable Held that - The decision in Commissioner of Income Tax vs Northern India Iron & Steel Co. Ltd. 1994 (9) TMI 53 - DELHI High Court relied upon - where the assessee has the intention to take up manufacturing activity in the near future, an inference should be drawn that the assessee has an intention to conduct business activities - the intention to conduct business activity is a paramount factor for examining the claim of the assessee in regard to expenses and depreciation - there was lack of cash flow and funds during the financial year and the same cause is acceptable and cogent reason for non-conducting of any business activity during the year under consideration - In this situation when the assessee is intending to carry on business activity but due to unavoidable circumstances beyond his control, the assessee could not conduct business activity during the financial year, then also the assessee company is entitled to allowance of fixed and necessary expenses to maintain basic infrastructure of the company and also depreciation on plant and machinery although the same could not be used for manufacturing activity during the year under consideration. The assessee has an intention to conduct business and manufacturing activity during the financial year under consideration thus, basic expenses to maintain office and factory premises of the assessee are allowable and legal expenses pertaining to auditor s fee etc. are also allowable - the plant and machinery was ready for use in manufacturing activity, then obviously the assessee is also eligible for allowance of depreciation on plant and machinery for the year under consideration - But there is a certain discrepancy, inconsistency in the amounts shown by the assessee in its profit and loss account and computation of depreciation - the amount of depreciation is to be determined at the end of Assessing Officer as per provisions of the Act as well as Company s Act in the light of amount of depreciation which was allowed for the assessee during the preceding assessment year to the year under consideration and as per written down value brought forward in the beginning of the year thus, The claim of the assessee pertaining to expenses and depreciation is allowable Decided in favour of Assessee.

Summary

Issues Involved:
1. Allowance of business loss amounting to Rs.23,82,956
2. Disallowance of business expenses and depreciation on plant and machinery

Analysis:

Issue 1: Allowance of business loss amounting to Rs.23,82,956
The appeal was filed against the order of the Commissioner of Income Tax(A) for AY 2009-10, where the assessee's claim of business loss totaling Rs.23,82,956 was partly allowed. The Assessing Officer disallowed the claimed amount, stating that if the assessee did not carry on business during the previous year, the income cannot be considered as profit of the business. The Tribunal noted that the assessee conducted business activities in the preceding year and maintained infrastructure for future business operations. Citing legal precedents, it was held that the intention to conduct business is crucial for claiming expenses and depreciation. Despite no business activity during the year due to financial constraints, the assessee's intention to continue business was acknowledged. Therefore, the Tribunal allowed the claim for business loss based on the assessee's intent and past business activities.

Issue 2: Disallowance of business expenses and depreciation on plant and machinery
The Tribunal considered the disallowance of expenses and depreciation on plant and machinery by the lower authorities. The revenue argued that without business activity, such claims are not valid. However, the assessee contended that certain expenses, like power and fuel charges, were essential for maintaining infrastructure and corporate office. The Tribunal accepted the genuineness of these expenses. Regarding depreciation, it was noted that the assessee had been allowed depreciation in the preceding year. Given the intention to continue business activities, the Tribunal held that depreciation on plant and machinery should be allowed. However, discrepancies in the claimed amounts required the Assessing Officer to determine the final depreciation amount based on relevant provisions. Consequently, the Tribunal set aside the lower authorities' orders and directed the allowance of expenses and depreciation in accordance with the Act and Company's Act, considering past allowances and written down values.

In conclusion, the Tribunal allowed the appeal, permitting the business loss claim and directing the allowance of necessary expenses and depreciation on plant and machinery based on the assessee's intent to continue business activities and past practices.