2019 (7) TMI 988 - HC - Income Tax

Benefit of set off of business losses against its other income - income from renting of warehousing - in Assessment Years 1999-00, 2000-01 and 2002-03 the assessee company's assets such as machinery, vehicles, trucks, furniture and fittings, factory sheds were maintained with the hope of getting orders - HELD THAT - In the decision in the case of L.VE.Vairavan Chettiar 1965 (4) TMI 6 - MADRAS HIGH COURT the Court found that there was nothing to show that the business had been abandoned and the assessee was continued to incur expenditure and it would come up and the business would be successful. In the said factual background, the Court held that the resultant loss being business loss is deductible. The three fact finding authorities have held that the entire business activity have come to a grounding halt. Subsequently, the conduct of the assessee also clearly reveals that the same line of business was never restarted. Therefore, we agree with the view expressed by the Tribunal that the assessee is not entitled for the benefit of set off of business loss which is in fact, business expenditure against the other income for all the three assessment years under consideration. In Kisan Sahkari Chini Mills. Ltd. 2004 (11) TMI 77 - ALLAHABAD HIGH COURT it has been held that Section 57 provides for deductions which are admissible from the income taxable under the head income from other sources . If a particular expenditure falls strictly under the sub-clause of Section 57 only then it is liable to be allowed as expenses otherwise not. It was further held that expenditure incurred on maintenance of the office and for planning of construction does not fall under any of the sub-clauses of Section 57 and therefore, the assessee could not have allowed the expenses as deduction from the interest income. Sub-Clause (ii) of Section 56(1) speaks of income from machinery, plant or furniture belonging to the assessee. Admittedly, no such income was generated and therefore, the claim of expenditure to be a business loss and to be set off against the income from house property is a plea which has to be necessarily rejected. Appeal stands dismissed and the substantial question of law is answered against the assessee.

Issues Involved:
1. Entitlement to the benefit of set-off of business losses against other income for the assessment years 1999-2000, 2000-01, and 2002-03.
2. Determination of whether the assessee continued its business activities or had ceased operations.
3. Applicability of Section 71 of the Income-tax Act, 1961, regarding set-off of business losses.
4. Interpretation of income from house property and related deductions under Section 24 of the Act.
5. Applicability of precedents and judicial decisions to the facts of the case.

Detailed Analysis:

1. Entitlement to Set-off of Business Losses:
The core issue was whether the assessee was entitled to set-off business losses against other income for the assessment years 1999-2000, 2000-01, and 2002-03. The assessee argued that it maintained machinery, paid salaries, and retained licenses with the hope of reviving manufacturing activities, thus justifying the business expenses. However, the Assessing Officer (AO) and subsequent authorities found that there was no manufacturing or sale activity since 01.04.1998, and the income was primarily from lease rentals, categorized under "house property" income. Consequently, the expenses claimed under "business" were disallowed.

2. Continuation of Business Activities:
The assessee contended that it had not ceased business operations but was maintaining the infrastructure to restart manufacturing. The AO, CIT(A), and Tribunal found that the business of manufacturing aluminium conductors had ceased, and no business activity was carried out during the relevant years. The Tribunal noted that even in the assessment year 2003-04, the assessee did not resume manufacturing but switched to a new line of business, i.e., trading. Therefore, the authorities concluded that the assessee's business had effectively ceased.

3. Applicability of Section 71 of the Income-tax Act:
The assessee claimed entitlement to set-off business losses against income from house property under Section 71 of the Act. The Tribunal and the Court held that since the assessee had no business activity, the claimed expenses could not be categorized as business losses eligible for set-off against other income. The Court referred to judicial precedents, including P.V. Gajapathi Raju vs. CIT, which emphasized that mere realization of dues or maintenance of assets does not constitute business activity.

4. Income from House Property and Deductions under Section 24:
The AO pointed out that income from house property is computed under specific provisions, and only prescribed expenses under Section 24 are allowable. The assessee's claimed expenses, such as salary, electricity, and telephone charges, were not permissible deductions under this head. The Court upheld this view, stating that the expenses incurred were for fulfilling legal formalities and maintaining the company, not for business purposes.

5. Applicability of Judicial Precedents:
The assessee relied on several judicial decisions, including CIT vs. Vikram Cotton Mills Ltd., L.VE. Vairavan Chettiar vs. CIT, and CIT vs. L.G. Ramamurthi & Ors., to argue that the intention to continue business justified the expenses. However, the Court distinguished these cases based on facts, noting that the assessee's business activities had ceased, and there was no intention to restart the same line of business. The Court also referred to decisions in Lahore Electric Supply Co. Ltd. and Indraprastha Steel Industries Ltd., which supported the view that mere maintenance of assets does not constitute business activity.

Conclusion:
The Court concluded that the assessee was not entitled to the benefit of set-off of business losses against other income for the assessment years in question. The findings of the AO, CIT(A), and Tribunal were upheld, and the appeal was dismissed. The substantial question of law was answered against the assessee, affirming that the claimed expenses did not qualify as business losses eligible for set-off. The Court emphasized that it could not re-examine factual findings concurrently recorded by the lower authorities.

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