2014 (9) TMI 294 - AT - Income Tax

Various expenses disallowed - Travelling expenses, Professional charges, Telephone expenses and other expenses Held that - In the previous year s relevant to the assessment years under consideration the assessee company had made bonafide efforts to revive its business and having recognised the seriousness of the Directors to revive its activities, the BIFR sanctioned the rehabilitation scheme and soon thereafter the assessee company commenced its activities and in fact achieved substantial turnover in the subsequent years, which would highlight that the assessee never intended to windup its activity - there was only a temporary lull, in the business, having regard to the circumstances of the case - the plant & machinery, factory premises, etc. were used in the preceding years for the purpose of business and even in the years under consideration they were ready for use and in the language of section 32 of the Act, the assets have been said to be put to use in the form of passive use in which event the assessee is entitled to claim depreciation - CIT(A) has taken into consideration the overall circumstances of the case while granting relief with regard to depreciation, telephone expenses, professional charges, etc. the order of the CIT(A) is upheld Decided against revenue.

Summary

Issues Involved: Assessment of expenditure incurred during a period of business inactivity for revival and rehabilitation purposes; Disallowance of certain expenses by the Assessing Officer; Allowance of depreciation on assets during business inactivity period.

Detailed Analysis:

1. Assessment of Expenditure for Revival and Rehabilitation:
The appeals revolved around the assessment of expenditure incurred by the assessee company during the assessment years 2004-05 & 2005-06 when the company was engaged in preparing revival and rehabilitation plans under the purview of BIFR due to past losses. The company had to incur various expenses such as travelling expenses, professional charges, conveyance expenses, telephone expenses, and depreciation to sustain and revive its business activities. The Assessing Officer disallowed these claims, arguing that since the company was not actively carrying out business activities, the expenses could not be treated as revenue in nature. The AO also contended that the expenses were not aimed at protecting the business of the company. The assessee, on the other hand, argued that the expenditure was necessary for efforts to revive the business and should be considered a temporary lull in business activity rather than a closure.

2. Disallowance of Expenses by the Assessing Officer:
The AO disallowed the expenses claimed by the assessee, including telephone expenses and depreciation, stating that there was no substantial business income to justify the expenditure. The AO also rejected the claim for depreciation, arguing that the company had no intention to revive its business due to forced idleness of assets and employee layoffs. However, the assessee contended that the expenses were incurred to ensure the survival and existence of the company during the revival process, and depreciation should be allowed for passive use of assets even during the inactive period.

3. Allowance of Depreciation on Assets during Inactivity Period:
The issue of allowing depreciation on assets during the period of business inactivity was a crucial point of contention. The Assessing Officer argued against granting depreciation, citing forced idleness of assets and lack of intention to revive business. In contrast, the assessee maintained that the assets were ready for use, and even though they were not actively used during the assessment years, depreciation should be allowed for passive use as per section 32 of the Act. The assessee presented evidence of the company's genuine efforts to revive business, which eventually led to substantial turnover in subsequent years, indicating a temporary lull in business activity during the years under consideration.

In conclusion, the Appellate Tribunal upheld the orders passed by the CIT(A), emphasizing that the overall circumstances of the case demonstrated a temporary lull in business activity rather than a closure. The Tribunal affirmed the allowance of expenses such as travelling expenses, professional charges, and depreciation, considering them necessary for the existence and revival of the business. The judgment highlighted the genuine efforts made by the company to revive its activities, leading to substantial turnover in subsequent years, which supported the claim for depreciation on assets even during the period of business inactivity.