2020 (8) TMI 805 - AT - Income Tax

Disallowances of expenses claimed in Raunak Agency (RA) - AO disallowed the total expenses claimed by the assessee with regard to Raunak agency by taking view that no business was carried out by Raunak agency during the year as it was discontinued in earlier years - HELD THAT - CIT (A) while affirming the action of assessing officer also held that Raunak agency and Amber agency are two different and distinct business carried by assessee and therefore, they did not constitute the same business. As held that only stoppage of the business activities of Raunak agency no deduction was admissible for an expenditure including the bad debts. As held that merely recovering dues and discharging liability after discontinuance of business activity does not amount to carry on business. And that deeming provision of section 41 (1) cannot be extended merely income was offered to tax under section 41. The case law relied by ld. DR for the revenue in Karnataka Instrade Corporation Ltd. vs. ACIT 2009 (2) TMI 248 - ITAT, BANGALORE is also not helpful to the revenue. In the said case it was held that in order to allow business loss under section 72(1)(i) condition is that assessee should carry on business in year under appeal and it is only against profits of such business that brought forward loss can be set off. Where assessee s profits were assessed under section 41(1) as business income, said profits did not represent profits and gains of any business carried on by assessee and therefore, brought forward business loss was not allowable against profits assessed under section 41(1). In the case in hand the assessee throughout the proceedings is claiming that he is carrying his lottery business under two limbs and is entitled for the deductions of bed debts and other expenses. In the result the Ground No. 1 of the appeal is allowed. Disallowance of Debit balances written off in M/s. Amber Agency - assessee submits that MLPL was acting as a sole stockist of Amber agency in Kolkata for marketing the lotteries through a network of its customer - HELD THAT - We have noted that the alternative plea of the assessee was not accepted by ld CIT(A) by taking view that no cogent evidence is furnished by the assessee, the assessee not proved that loss occurred in the course of business or it was a trading loss and not capital. As also held that there is no evidence that advance given to MLPL was utilised for the purpose of business. The assessee has also filed various documentary evidences, which we have recorded in para -3 supra . The assessee has certified that all these evidences were furnished before the lower authorities. We have noted the alternative plea of business loss was raised for the first time before ld CIT(A) and it was rejected summarily without reference to the aforesaid evidence. Therefore, we deem it appropriate to restore the alternative claim of business loss to the file of assessing officer to consider it afresh. Needless to direct that before passing the order afresh the assessing officer shall grant reasonable opportunity of hearing to the assessee and will pass the order in accordance with law. In the result the ground No. 2 of the appeal is allowed for statistical purpose.

Issues Involved:

1. Disallowance of Expenses claimed in M/s. Raunak Agency.
2. Disallowance of Debit Balances written off in M/s. Amber Agency.
3. Alternative claim for business loss in respect of various debit balances written off by the appellant.

Detailed Analysis:

1. Disallowance of Expenses claimed in M/s. Raunak Agency:

The assessee, a proprietor of M/s. Raunak Agency (RA) and M/s. Amber Agency (AA), claimed business expenses and bad debts in RA amounting to ?83,72,085/-. The assessing officer disallowed these expenses, arguing that RA had ceased its business activities in the financial year 2010-11, thus making the expenses non-deductible under Chapter IV of the Income Tax Act. The CIT(A) upheld this disallowance, stating that RA and AA were distinct businesses, and the cessation of RA's business precluded any deductions for its expenses.

The Tribunal, however, disagreed with the lower authorities. It emphasized the concept of "unity of control and common management" between RA and AA, both engaged in the lottery business under the same proprietor. The Tribunal cited several precedents, including the Supreme Court's decision in Standard Refinery & Distillery Ltd. vs. CIT, which supported the notion that different business activities under common management could be considered a single business. The Tribunal concluded that the assessee was entitled to the claimed expenses, including bad debts, as they were part of a composite business.

2. Disallowance of Debit Balances written off in M/s. Amber Agency:

The assessee claimed a write-off of ?1,32,41,948/- in AA, with ?1,10,42,315/- pertaining to M/s. Mainstar Lotteries Pvt. Ltd. (MLPL). The assessing officer disallowed this claim, suggesting that the transactions were a camouflage to reduce taxable income, citing the Supreme Court's decision in McDowell. The CIT(A) upheld this disallowance, arguing that the amount represented a loan, not a debt arising from sales, and thus was not deductible under Section 36(1)(vii) read with Section 36(2) of the Act.

The Tribunal noted the close business connection between AA and MLPL, both involved in the lottery business, and the financial difficulties faced by MLPL due to high sales tax and a subsequent ban on lotteries in West Bengal. The Tribunal considered the assessee's revised ledger accounts and alternative claim for business loss. It found that the CIT(A) had summarily rejected the alternative claim without proper examination. The Tribunal restored the alternative claim for business loss to the assessing officer for fresh consideration, directing a thorough examination of the evidence and a reasoned decision.

3. Alternative claim for business loss in respect of various debit balances written off by the appellant:

The assessee's alternative claim for business loss, in case the bad debt claim was not allowed, was also not properly considered by the CIT(A). The Tribunal noted that the assessee had submitted various documentary evidence, which was not adequately addressed by the CIT(A). The Tribunal restored this issue to the assessing officer for fresh adjudication, ensuring that the assessee's claims are thoroughly examined and decided in accordance with the law.

Conclusion:

The Tribunal allowed the appeal partly, granting the assessee's claim for expenses in RA and restoring the alternative claims related to AA to the assessing officer for fresh consideration. The decision emphasized the importance of considering the unity of control and common management in determining the deductibility of business expenses and losses.

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