2019 (2) TMI 986 - AT - Income Tax

Discontinuation of Business activity - temporary suspension and/or lull in the business of the assessee - disallowance of Expenditure claimed as deduction u/s 37(1) and the depreciation claimed u/s 32 - Held that - As evident from the documents placed on record including submissions made by the assessee that there was temporary lull in the business of the assessee and it was not a complete cessation of business activity fact of which was not considered by the authorities below in its proper prospective. AO disallowed the expenses incurred by the assessee for discontinuation of its business which deserves to be allowed; in fact the profit and loss of the subsequent years shows that there were considerable materials consumed by the assessee company in the said trading of cotton business. The gross receipt of the assessee became high during the subsequent years which establishes the fact of there being temporary lull in the business activity of the assessee during the year under consideration.The reason which was shown by the assessee while replying the show-cause issued by the AO for such lull in the business seems to be justified which was again not attended by the Learned CIT(A). There was a temporary suspension and/or lull in the business of the assessee and thus the assessee is entitled to the claim of deduction u/s 37(1) of the Act, which was incurred by the assessee as narrated herein before as also the depreciation u/s 32 of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of expenses claimed by the assessee under section 37(1) of the Income Tax Act, 1961.
2. Disallowance of depreciation claimed by the assessee under section 32 of the Act.
3. Treatment of interest income earned on Fixed Deposit Receipts (FDRs) as income from other sources.

Issue 1: Disallowance of Expenses under Section 37(1) of the Act:
The appeal was filed against the order disallowing expenses amounting to ?24,20,798 claimed by the assessee under section 37(1) of the Income Tax Act. The assessee explained that there was a temporary cessation of business activity during the relevant period due to various reasons, including the risky nature of cotton trading and the failure to obtain necessary licenses. The assessee contended that the continuity of business was maintained despite the temporary lull, supported by the fact that sales were made in subsequent years. The authorities disallowed the claimed expenses, but the Tribunal found merit in the assessee's explanation, considering the subsequent revival of business activities and allowed the deduction under section 37(1).

Issue 2: Disallowance of Depreciation under Section 32 of the Act:
The depreciation claimed by the assessee under section 32 of the Act amounting to ?55,808 was also disallowed by the authorities. The assessee argued that the disallowance was unjustified as the business had not completely ceased but experienced a temporary lull. The Tribunal observed that the temporary suspension of business was evident from the records and submissions made by the assessee. Considering the subsequent years' profit and loss statements showing increased activities and receipts, the Tribunal held that the assessee was entitled to claim depreciation under section 32. Therefore, the disallowance of depreciation was overturned.

Issue 3: Treatment of Interest Income on FDRs as Income from Other Sources:
The authorities categorized the interest income earned on Fixed Deposit Receipts (FDRs) as income from other sources due to the alleged lack of business activities during the relevant period. The assessee argued that the interest was earned on FDRs placed to utilize surplus funds during the temporary lull in business. The Tribunal noted that the business continuity was maintained, as evidenced by subsequent sales and activities. The Tribunal disagreed with the authorities' decision and held that the interest income on FDRs could not be solely categorized as income from other sources. The Tribunal considered the overall circumstances and allowed the appeal, concluding that the interest income was not to be treated as income from other sources.

In conclusion, the Appellate Tribunal ITAT Ahmedabad allowed the assessee's appeal, overturning the disallowance of expenses claimed under section 37(1) and depreciation claimed under section 32 of the Income Tax Act. Additionally, the Tribunal held that the interest income earned on FDRs should not be treated as income from other sources, considering the temporary lull in business activities and subsequent revival.