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TMI Blog2009 (2) TMI 248X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. In the said letter, the Assessing Officer brought to the attention of the assessee the fact that the assets of the company had been transferred to M/s. Madras Cements Ltd., and the capital gains arising on the transfer were assessed in the asst. year 2000-01 and since the assessee had no business activity, the expenditure debited to the profit and loss account such as salaries and wages, staff welfare, rates and taxes, travelling and conveyance, repairs, etc., cannot be allowed as a deduction. In response to the same, the assessee filed a letter dt.28.2.2005 in which it submitted that the physical transfer of assets took place only in the financial year relevant to the asst. year 2001-02, that the agreement for transfer contained stipulations such as passing of title over all the properties including the mines owned by the assessee, that this necessitated incurring of expenditure by the assessee in perfecting its title to the assets and in meeting various obligations under the agreement, that during the year under appeal the assessee had incurred various expenses such as royalties for mines, expenses to establish the mineral deposits to the satisfaction of Madras Cemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r sources". The total income was thus assessed at Rs.28,82,294/- and since no business activity was carried on during the relevant previous year there was no adjustment made by setting off the brought forward losses. The tax was calculated accordingly and a demand was raised. 4. The assessee filed an appeal and its principal contentions were : a)That the Assessing Officer was not justified in not allowing expenses aggregating to Rs.2,61,60,225/- which consisted of rates and taxes, travelling allowance, legal and professional fee, repairs and maintenance, royalty and bank charges ; b) That the Assessing Officer was not justified in assessing the amount of Rs.34,68,126/- as income from other sources and that it ought to have been assessed as business income ; c) That in the alternative, the Assessing Officer ought to have capitalized the expenses and reduced the same from the sale consideration; d) The Assessing Officer was not right in holding that the transfer of assets took place in the year 2000-01, whereas it actually took place in the year 2005-06 ; e) The Assessing Officer was not justified in not allowing carry forward losses and depreciation to be set off against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Commissioner of Income-tax (Appeals) erred in allowing the expenditure on travelling, legal and professional expenses, repairs and maintenance amounting to Rs.41,26,897/-in the absence of any business activity during the relevant previous year. The business had already been sold to Madras Cements Ltd., It is the requirement of law that the assessee must carry on the business in the relevant previous year in order to get the expenses deducted from the income from the business ; b) The Commissioner of Income-tax (Appeals) was not justified in directing the Assessing Officer to allow set off of the brought forward business loss and depreciation against the income assessed for the year under appeal, the reason being that there was no business carried on by the assessee in the previous year relevant to the year under appeal and further that the assessee did not claim any such set off in the return filed for the year under appeal; 8. We have considered the facts and the rival contentions. The first main question to be decided is the nature of the income of Rs.34,01,644/-. Though before the departmental authorities the assessee had claimed that even the interest income of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee at any time during the previous year. Section 29 says that the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D. Reading both the sections together, it would appear clear that an expenditure relating to the business can be allowed as a deduction only if the business was actually carried on by the assessee at any time during the relevant previous year. In the present case, the assessee has admitted in schedule 13 to the accounts that depreciation was not provided since the unit was dormant and there was no production during the year. This no doubt could give rise to the inference that the business was only dormant but not discontinued or had not ceased, but it is then for the assessee to adduce evidence to show that the business activity was revived later. We had specifically called upon the learned representative for the assessee to adduce evidence to this effect and the appeal was adjourned to enable the assessee to adduce such evidence. However, no such evidence was forthcoming and we, therefore, proceed to decide the issue on that basis. The assessee has, however, furnished the copies of the profit and loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e's business for it would be a contradiction in terms to say that what was already transferred was still being continued. If at all the performance of the obligations under the agreement can only be viewed as activities to effectuate the transfer of the business; they do not amount to carrying on of the business. The argument that the purchase of lands and transfer to Madras Cements Ltd., under the terms of the agreement to transfer would amount to an adventure in the nature of trade is far-fetched for the same reason. The learned representative for the assessee was not able to cite any authority in support of the proposition canvassed by him. 11. For the above reasons, we are unable to agree with the assessee that the business was continued to be carried on during the relevant previous year. The result would be that the assessee would not be entitled to the deduction of any expenditure as business expenditure since there is no question of computing any income under the head "profits and gains of business". The profits u/s.41(l) are no doubt assessable under this head, but for that reason the expenditure cannot be allowed against the same. The fiction contained in the sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We have already held that there was no business carried on by the assessee during the relevant accounting year. It follows that the assessee is not entitled to the deduction of royalty expenses. Ground no.5 is thus dismissed. 13. The alternative plea of the assessee that all the expenses which have been disallowed should be capitalized and reduced from the sale price for the transfer of the business cannot be considered in the present year. The assessee is free, if so advised and if it is permissible in law to raise this plea in the year in which the sale price for the transfer of the business is received and the capital gains are computed. 14. We now come to ground no.4 taken by the department which is against the direction of the Commissioner of Income-tax (Appeals) to the Assessing Officer to allow set off of the brought forward loss and depreciation against the income of Rs.28,82,294/- determined in the assessment. The Assessing Officer treated the amount of Rs.34,68,126/-as income from other sources. We have already held that income to the extent of Rs.34,01,644/- representing balances written back is assessable under the head "business". The Assessing Officer himself has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. We have already found that there was no business carried on during the year and it is not a case of a simple and temporary lull in the business, but is a case of discontinuance of the business on account of transfer of the business undertaking to Madras Cements Ltd., In the absence of any business, no depreciation is allowable, whether current depreciation or brought forward depreciation. Perhaps even the assessee was quite aware of this position and, therefore, did not claim depreciation in the return. Even before the Commissioner of Income-tax (Appeals) there is no specific reference to depreciation for the current year. Section 32(2) says that if there is no depreciation allowance for the current year, the brought forward depreciation will be deemed to be the depreciation allowance for the current year. But this rule is subject to the main condition that there should be some business in which the assets to which the depreciation relates, are used. In the absence of any business carried on by the assessee in the year under appeal, there is no question of treating the brought forward depreciation as current year's depreciation for the purpose of granting the allowance. There ..... X X X X Extracts X X X X X X X X Extracts X X X X
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