2017 (4) TMI 521 - AT - Income Tax

Allowing business expenses u/s 37 and claim of depreciation - suspension of manufacturing due to action under section 13(2) of SARFESI Act, 2002 by secured lenders against the assessee company - Held that - In any case no evidence has been placed by the assessee on record to demonstrate that any attempt or efforts have been made by the assessee to do any business or to re-start its manufacturing unit at Mansa in the last 12 years since the said industrial unit in Mansa stood closed in the year 2005 till as of now in the year 2017. In our considered view, the expenses claimed by the assessee cannot be allowed as business expenses as they were not incurred wholly and exclusively for the purpose of business of the assessee as there is in-fact no business carried on by the assessee during previous year relevant to the impugned assessment year and there was also no possibility of carrying on business by the assessee in a near distant visible future keeping in view the severe and serious disability imposed by action by secured lenders under SARFESI Act and continued with the secured lenders , as mandate of Section 37(1) of 1961 Act is not fulfilled in the instant case. The secured assets of the assessee being under possession of the secured lenders during the previous year cannot be claimed by the assessee to have been put to business use both active as well passive user as both being ruled out , as it is not temporary lull in business but severe and serious disability disabling assessee to put the said asset for business user as mandated u/s 32(1) of 1961 Act to enable assessee to claim depreciation. The assessee is a single location unit entity having only one manufacturing unit in Mansa at Gujarat and Block of Assets constituted mainly assets of Mansa unit and hence it could also not be claimed by the assessee that the assets of Mansa unit formed part of Block of assets which block of asset also consists to have other assets of any other unit which is functional , as in the instant case it is a single unit / single location entity having only industrial unit in Mansa at Gujarat , and the assessee cannot claim that other assets except assets of Mansa unit were being put to use for business and hence consequently under the concept of Block of Asset, the assessee claim of depreciation of Mansa Unit should be allowed , as it is a single unit / single location company and the entire Block of asset revolves around and consists mainly of assets of Mansa unit which itselves are not put to use for business purposes during the entire previous year due to disability imposed under SARFESI Act, 2002 as discussed above. The depreciation claimed by the assessee is also not allowable as the entire block of asset which consists mainly of assets of Mansa unit at Gujarat was not put to use by the assessee, keeping in view peculiar factual matrix of the case and mandate of Section 32(1) of 1961 Act is not fulfilled in the instant case The expenses like auditor fees , ROC fee and other expenses etc. which are incurred by the assesseee company to carry out and meet legal and statutory compliances has to be allowed as the said expenses are incurred for meeting and complying with statutory compliances and obligations as imposed by law, for which we are remitting matter back to the file of the AO for identification of such expenses incurred for audit, ROC fees and other expenses incurred to carry out other statutory compliances , and to allow such expenses after verification. Thus, the appellate order of the ld. CIT(A) is set aside and the assessment order of the A.O. is confirmed subject to allowability of audit fee, ROC fee and other expenses incurred for undertaking and meeting statutory compliances , in accordance with our orders as detailed above.

Summary

Issues Involved:
1. Allowability of business expenses under Section 37 of the Income Tax Act.
2. Allowability of depreciation under Section 32 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Allowability of Business Expenses under Section 37:

The primary issue was whether the business expenses claimed by the assessee, amounting to ?18.77 lakhs, were allowable under Section 37 of the Income Tax Act. The Assessing Officer (AO) observed that the assessee had no business activity during the assessment year 2010-11, as there were no purchases, sales, or production, and only interest and dividend income were credited in the Profit & Loss account. Consequently, the AO disallowed the claimed expenses, arguing that they were not related to the business of the assessee.

The assessee contended that the expenses were necessary to keep the plant and machinery in a ready-to-operate condition, despite the temporary cessation of manufacturing activities due to adverse market conditions. The CIT(A) accepted the assessee's arguments, stating that the expenses were incurred to maintain the factory in a state of readiness, and thus, were allowable.

However, the Tribunal found that the factory had been closed since 2005 and was under the possession of secured lenders since 2007 due to actions under the SARFESI Act. The Tribunal held that the closure was not a temporary lull but a severe and serious disability, preventing the assessee from restarting its business. Therefore, the expenses could not be allowed as business expenses under Section 37, except for statutory compliance-related expenses like auditor fees and ROC fees. The Tribunal remitted the matter back to the AO for verification and allowance of such statutory compliance expenses.

2. Allowability of Depreciation under Section 32:

The second issue was whether the depreciation claim of ?44.11 lakhs was allowable under Section 32 of the Income Tax Act. The AO disallowed the depreciation on the grounds that the assets were not put to use during the relevant assessment year.

The assessee argued that the plant and machinery were kept in a ready-to-operate condition, and thus, the depreciation should be allowed. The CIT(A) agreed with the assessee, citing the case of CIT vs. Integrated Technologies Ltd., where the Delhi High Court allowed depreciation in similar circumstances.

The Tribunal, however, noted that the factory had been closed for an extended period, and the assets were under the possession of secured lenders, making it impossible for the assessee to use the assets for business purposes. The Tribunal concluded that the assessee could not claim depreciation as the assets were not put to business use, whether actively or passively, during the relevant assessment year. The Tribunal distinguished the case from others cited by the assessee, emphasizing the unique facts of the case, including the prolonged closure and possession by secured lenders.

Conclusion:

The Tribunal partly allowed the Revenue's appeal, confirming the AO's disallowance of business expenses and depreciation. However, it directed the AO to verify and allow statutory compliance-related expenses. The judgment underscores the importance of actual business activity and the use of assets for claiming business expenses and depreciation under the Income Tax Act.