2016 (5) TMI 284 - AT - Income Tax

Disallowance of expenditure including depreciation incurred and claimed by the appellant company - case of temporary suspension of business - finding of the learned Commissioner of Income Tax (Appeals) that on plot of land was leased overlooks the buildings constructed by the assessee and forming part of fixed assets declared in financial statement furnished alongwith return of income - Held that - Apart from requiring the lessee to pay rent the lessee is furthered required to make payments towards electricity charges as per the meter reading and make any permanent construction and alterations. In the said plot as per its requirements the assessee as a lessor further expresses that it has no objections for inspection/verification of the bonded premises by the Central Excise and Customs officer at any time. Not only the fact that both the lessor and the lessee in regard to its Registered office function from the very same location. The lessor assessee being a Private Limited company and the lessee being a partnership firm also function from the very same premises as per the lease deed. In the peculiar facts and circumstances of the present case it is necessary to first address the facts which admittedly have not been properly addressed. Principally if the assessee is able to show that the expenditure claimed qua Ground no.1 pertains to it alone and not to the related concern and is incurred to keep its existence alive the expenditure on verification has to be allowed. However, if the assessee s expenditure also includes the expenditure of the related concern then to that existent it has to be disallowed. Further the nature of work by related concern may also be an area for consideration as if the very same nature of work is done then it cannot be said to be a case of recession or lull in the business as then by conscious acts the assessee itself is parting with work in favour of a related concern. Nothing has been placed before us to show what is the nature of work entered into by the related concern i.e. the partnership firm to whom a plot of land has been leased. Thus the issues arising in Ground No.1, we deem it appropriate to restore to the AO giving liberty to the assessee to lead evidence if any in support of its claim. Qua Ground No.2, we find in the absence of any evidence to the contrary the clear recitals in the lease deed relied upon consistently by the tax authorities do not call for any variation in the conclusion arrived at.

Summary

Issues Involved:
1. Disallowance of ?5,72,702/- representing expenditure including depreciation.
2. Disallowance of ?1,80,000/- representing statutory deduction claimed u/s 24(a) of the Act.

Issue-wise Detailed Analysis:

1. Disallowance of ?5,72,702/- Representing Expenditure Including Depreciation:

The primary issue revolves around whether the business expenses and depreciation claimed by the appellant company, amounting to ?5,72,702/-, should be allowed given the context of business closure. The Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the business had permanently ceased, not temporarily closed, thus justifying the disallowance of these expenses. The appellant contended that the business was only temporarily suspended due to adverse business conditions and that the expenses were necessary for maintaining and protecting the company's assets and fulfilling statutory obligations.

During scrutiny, the Assessing Officer (AO) noted that the business activity had ceased after 31.3.2009, and thus, the setting off of business loss against income from house property was disallowed. The AO also disallowed administrative and other expenses and depreciation totaling ?5,72,702/-.

The CIT(A) upheld this decision, noting that business operations had been closed since September 2007 without resumption, indicating a permanent closure rather than a temporary suspension. The case laws cited by the appellant were deemed distinguishable as they involved temporary closures.

Upon appeal to the ITAT, the appellant argued that the expenses were incurred to maintain business existence during a temporary lull due to market recession. The appellant cited past acceptance of similar claims in previous years' assessments. The ITAT acknowledged that expenses to keep a business alive during temporary inactivity should not be disallowed. However, due to a lack of evidence supporting the claim of market recession and the intertwined nature of the appellant's business with a related concern, the ITAT restored the issue to the AO for verification. The appellant was given the liberty to provide evidence supporting the claim.

2. Disallowance of ?1,80,000/- Representing Statutory Deduction Claimed u/s 24(a) of the Act:

The second issue pertains to the disallowance of a statutory deduction of ?1,80,000/- claimed under section 24(a) of the Income Tax Act. The AO disallowed this deduction, asserting that the property in question was merely a plot of land, not a constructed building, as described in the lease deed. The CIT(A) upheld this view, emphasizing that the lease deed explicitly referred to the property as a "plot of land" and allowed the lessee to make permanent constructions, which indicated that no building existed on the land at the time of the lease.

The appellant argued that the lease deed's reference to electricity charges suggested the presence of some construction. However, the CIT(A) and the ITAT found this argument unconvincing. The ITAT noted that the lease deed's clear recitals, consistently relied upon by the tax authorities, did not support the appellant's claim. Consequently, the ITAT dismissed the appeal regarding this ground, affirming the disallowance of the statutory deduction.

Conclusion:

The ITAT's judgment resulted in a partial allowance of the appeal for statistical purposes. Ground No.1, concerning the disallowance of ?5,72,702/-, was restored to the AO for further verification, allowing the appellant to present supporting evidence. Ground No.2, concerning the disallowance of the statutory deduction of ?1,80,000/-, was dismissed, upholding the tax authorities' decision. The order was pronounced in the open court on 04th May 2016.