2012 (7) TMI 268 - AT - Income Tax

Disallowance of expenditure there was no business activity - Held that - As both the revenue authorities had restricted their thought process in the manufacturing activity and sales whereas from the details in Statement of Facts supplied by assessee and schedules as appended along with the Balance Sheet, it is found that not only the assessee had received advances from its customers, but had also paid advances to its sub contractors, which goes to prove that there was some movement in business, if not full business activity - though there was no manufacturing and sales activity, but there certainly was some business activity - the revenue authorities were incorrect in disallowing the claim of expenses and depreciation - decided in favour of assessee.

Summary

Issues:
Condonation of delay in filing appeal; Disallowance of expenditure for business purpose.

Condonation of Delay:
The appeal was delayed by 127 days, but the Authorized Representative (A.R.) filed a letter and an Affidavit explaining the reasons for the delay. The Deputy Registrar did not object to the appeal's maintainability despite the delay. Consequently, the delay was condoned, and the A.R. was asked to proceed with the matter.

Disallowance of Expenditure:
The dispute revolved around the disallowance of expenditure amounting to Rs. 19,36,104 by the revenue authorities, who held that the expenses were not incurred wholly and exclusively for the purpose of business. The Assessing Officer (AO) questioned the expenses as there was no production or sales activity during the year under consideration. The AO set off the expenses against dividend income, leading to the disallowance. The Commissioner of Income Tax (Appeals) affirmed the disallowance, stating that since there was no manufacturing activity during the year, the expenses could not be allowed. The A.R. argued that although there was no manufacturing or sales activity in the current year, there was still ongoing business activity. The A.R. presented evidence of advances made to subcontractors and received from customers, indicating business operations. Relying on case law, the A.R. contended that business activity need not be continuous and cited instances of inactivity not equating to business discontinuation. The Tribunal agreed with the A.R., emphasizing that business activity encompasses more than just manufacturing and sales, considering the broader scope of business operations. The Tribunal referenced a decision by the Madras High Court to support the argument that intermittent business activity does not negate the existence of a business. Ultimately, the Tribunal held that there was indeed business activity, overturning the disallowance and directing the AO to allow the claimed expenses and depreciation.

Conclusion:
The Tribunal partially allowed the appeal, setting aside the CIT(A)'s order and directing the AO to permit the expenses claimed by the assessee along with the depreciation amount. The decision was based on the recognition of business activity beyond manufacturing and sales, in line with the cited legal precedents.