Case Law Details
DCIT Vs Presidency Exports and Industries Ltd. (ITAT Kolkata)
Material Facts
The Revenue appealed against the CIT(A)’s order deleting the disallowance of business expenditure of ₹3,50,04,017 and the addition of ₹1,10,07,745 for AY 2018-19. The assessee, engaged in the export business, had reported nil business income but earned lease rental income of ₹1,57,25,350. The Assessing Officer treated the rental income as income from house property and disallowed business expenditure, holding that the absence of sales indicated cessation of business.
Proceedings and Submissions
Before the CIT(A), the assessee submitted that export operations had temporarily stopped due to adverse market conditions but the business had not been closed. It stated that its establishment, workforce, infrastructure and business licences were maintained with the intention of reviving operations. The assessee also contended that the leased property formed part of its commercial assets and that the expenses represented administrative, finance and maintenance costs incurred for continuing the business.
Findings
The CIT(A) found that audited financial statements, fixed assets, statutory filings and continued maintenance of business infrastructure established continuity of business. The leased property was held to be a commercial asset temporarily let out during an idle period, and the rental income was treated as business income. The disallowance of finance cost was also deleted as no conclusive evidence supported diversion of borrowed funds.
The Tribunal agreed with the CIT(A), observing that a temporary lull in business activity did not establish discontinuance of business. It noted that the assessee continued to maintain its business infrastructure and licences with the intention to revive operations. The Tribunal found the CIT(A)’s order to be reasoned and requiring no interference.
Final Ruling
The ITAT upheld the CIT(A)’s order deleting the disallowance of business expenditure and the addition relating to rental income and dismissed the Revenue’s appeal.
Cases Discussed
- Universal Plast Ltd. (Supreme Court of India), 237 ITR 454 (SC)
- Vikram Cotton Mills Ltd. (Supreme Court of India), 169 ITR 597
- CIT v. Integrated Technologies Ltd. (Delhi High Court), (2011) 204 Taxman 82 (Del.)
- K.V. Narayan Builders Pvt. Ltd. v. ITAT, Bangalore, ITA No. 1005/BAN/2015
- Lakshmi Narayan Board Mills (P) Ltd. v. CIT (Calcutta High Court), (1994) 205 ITR 88 (Cal.)
- Sreedharan & Co. v. CIT (Kerala High Court), (1993) 202 ITR 796 (Ker.)
- CIT v. Ganga Properties Ltd. (Calcutta High Court), (1993) 199 ITR 94 (Cal.)
FULL TEXT OF THE ORDER OF ITAT KOLKATA
This is the appeal preferred by the revenue against the order of the Ld. Commissioner of Income Tax (Appeals)-NFAC, Delhi (hereinafter referred to as the Ld. CIT(A)”] dated 13.11.2025 for the AY 2018-19.
2. The only issue raised by the revenue is against the order of Ld. CIT(A) deleting the disallowance by holding that non-activity or sales and production in a particular year does not amount to cessation of business as made by the AO on account of business expenditure of Rs. 3,50,04,017/- and also deleting addition of Rs. 1,10,07,745/- not appreciating the fact that the assessee declared sales at Rs. Nil for AY 2018-19 and in subsequent years i.e. from AY 2019-20 to AY 2025-26 and the assessee company itself declared rental income under the head income from house property.
3. Facts in brief are that the assessee filed return of income on 29.09.2018 declaring total income at Rs. Nil income. Thereafter the case of the assessee was selected for limited scrutiny and the statutory notices along with questionnaire were issued and duly served. The assessee complied with the said notices by uploading the details/evidences as called for by the AO. The AO noted that during the year, the assessee has set off business expenditure against the rental income declared by the assessee. The AO Noted that the assessee has been earning the income from business of export business and offered income during the year by way of rental income to the tune of Rs. 1,57,25,350/- being income from lease rentals and set off of business expenditure of Rs. 3,50,04,017/- being personal expenses, finance charges and other charges including depreciation. The AO noted that since the assessee has not done any business and the sale was zero as on 31.03.2018 as also the sales for the year ending 31.03.2017 which proved that there was no business activity. Consequently, the AO came to conclusion that the expense debited in the profit and loss account included personal expenditure, administrative cost and depreciation and the same could not be allowed as deduction. Consequently, the AO disallowed the expenses claimed at Rs. 3,50,04,017/- thereby assessing the income at Nil and assessing leased rental income after allowing 30% of the rental income to the tune of Rs. 1,10,07,745/- in the assessment framed u/s 143(3) read with Section 144B of the Act dated 21.04.2021.
4. In the appellate proceedings, the Ld. CIT(A) allowed the appeal of the assessee after taking into account the submission and contentions of the assessee by observing and holding as under:
5. Decision on Merit:
5.1 I have carefully considered the assessment order, the grounds of appeal, the written submissions and the arguments and contentions of the appellant as well as other relevant material on record. I have also taken into consideration the arguments and the reasoning/rationale behind the addition(s)/disallowance(s) made by the assessing officer in the assessment order. Accordingly, the grounds of appeal raised by the appellant are adjudicated as hereunder.
5.2 I have carefully perused the assessment order, the grounds of appeal, the written submissions and supporting documents filed by the appellant, as well as the applicable legal position. The core issue for consideration is whether the Assessing Officer (AO) was justified in treating the appellant’s rental income as “Income from Other Sources” and disallowing the claim of business and administrative expenditure of 3,50,04,017/- and finance cost of 2,87,18,000/- on the ground that no business activity was carried out during the relevant previous year.
5.3 The appellant company, engaged in the business of exports, had filed its return of income for the assessment year 2018-19 on 29.09.2018 admitting ‘Nil’ income. The case was selected for limited scrutiny under CASS and notices under sections 143(2) and 142(1) were issued, to which the appellant responded by uploading audited financial statements, profit and loss account, balance sheet, and relevant schedules.
5.4 The AO observed that since no sales had been reported during the financial year 2017-18, the business was non-existent, and hence, the expenses debited to the profit and loss account were not allowable. Consequently, he disallowed all administrative and managerial expenses, depreciation, and finance charges, holding that these could not be set off against the rental income. The AO treated the lease rental income of 1,57,25,350/- as “Income from Other Sources,” allowing a standard deduction of 30% and assessing total income at 1,10,07,745/-.
5.5 In the course of appellate proceedings, the appellant contended that the AO’s observations were factually and legally incorrect. The appellant submitted vide written submission dated 16.04.2025 that:
6.0 Continuity of business:
The assessee company has been engaged in the export business for several years. Due to adverse market conditions and lack of demand in international markets, the export operations could not be carried out during the relevant previous year. However, there was no closure of business, and the company continued to maintain its establishment, workforce, administrative infrastructure, and business licenses with the intention to revive operations. The temporary lull in sales cannot be equated to discontinuation of business.
6.1 Nature of rental income:
The property from which the lease rental income was derived formed part of the fixed assets used for the business of export and was temporarily leased out to generate revenue during the idle period. The income from leasing such business assets is inextricably linked with the business and must be treated as “Business Income.”
6.2 The appellant, in support of its claim that the business had not ceased and that the expenditure incurred was allowable, has relied upon a series of judicial pronouncements affirming that temporary suspension of business activity does not amount to cessation of business. In Lakshmi Narayan Board Mills (P) Ltd. v. CIT [(1994) 205 ITR 88 (Cal.)], the Hon’ble Calcutta High Court held that even if there is no production or sale during a particular year, the business cannot be said to have been discontinued so long as the establishment and commercial apparatus are maintained with the intention of carrying on the business. Similarly, in Sreedharan & Co. v. CIT [(1993) 202 ITR 796 (Ker.)], it was held that where the assessee’s business is temporarily closed due to unfavorable market conditions, the expenditure incurred for maintaining its establishment and assets is allowable as a business expenditure.
6.3 Further, in CIT v. Ganga Properties Ltd. [(1993) 199 ITR 94 (Cal.)], the Calcutta High Court reiterated that the mere absence of business receipts does not establish discontinuation of business if the infrastructure of the business continues to exist and the assessee has not abandoned the business altogether. Likewise, in K.V. Narayan Builders Pvt. Ltd. v. ITAT, Bangalore [ITA No. 1005/BAN/2015], the Tribunal held that expenses incurred for maintaining business operations and meeting statutory obligations during a period of no business turnover are allowable deductions. The appellant has also placed reliance on the decision of the Hon’ble Delhi High Court in CIT v. Integrated Technologies Ltd. [(2011) 204 Taxman 82 (Del.)], wherein it was held that the absence of business income in a particular year does not necessarily indicate that business has ceased, and expenditure incurred to keep the establishment functional is deductible.
6.4 These authorities collectively support the appellant’s contention that thebusiness of the company continued to exist despite the temporary lull in activity, and therefore, the rental income earned from commercial assets and the related business expenditure must be assessed under the head “Profits and Gains from Business or Profession.”
7.0 Allowability of expenditure: The appellant explained that the administrative, financial, and other business expenses were incurred for preserving and maintaining the establishment, statutory compliance, interest obligations, and asset maintenance, which are necessary for the sustenance of the business. It was further contended that the company was under a continuing obligation to pay interest on borrowings taken for business purposes in earlier years, and therefore, the finance cost of 2,87,18,000/- was fully allowable.
7.1 Negative capital and loans: With respect to the AO’s observation that the capital and reserves were negative, the appellant clarified that such negative balance was a result of accumulated losses brought forward from earlier years. The company had not diverted borrowed funds for non-business purposes. The advances referred to by the AO were in the nature of trade advances or inter-corporate loans arising out of earlier commercial transactions. No fresh diversion of interest-bearing funds was made during the year.
7.2 I have examined the material on record and the written submissions of the appellant. The AO’s disallowance rests primarily on the reasoning that since there were no sales during the relevant year, the assessee’s business had ceased to exist. However, the audited financial statements, details of fixed assets, statutory filings, and continued maintenance of business infrastructure clearly establish that the appellant’s business was not discontinued but had only experienced a temporary lull. The appellant has demonstrated continuity of business intent and existence of commercial assets.
7.3 It is settled law that non-activity of sale or production in a particular year does not amount to cessation of business if the business structure and intention to resume operations continue to exist. The Hon’ble Supreme Court in Vikram Cotton Mills Ltd. (169 ITR 597) held that even if a business remains temporarily suspended, expenditure incurred in connection with maintaining the establishment and assets is allowable.
7.4 Regarding the nature of rental income, it is noted that the leased property was part of the commercial assets of the business. As held in Universal Plast Ltd. (237 ITR 454, SC), income earned from leasing business assets on a temporary basis continues to be “Business Income” so long as the intention to exploit the asset commercially persists. In the present case, the appellant has leased out its business assets only temporarily to earn income during the idle period, and therefore the same should be assessed under the head “Profits and Gains from Business or Profession.”
7.5 The AO’s observation regarding the diversion of borrowed funds is also not supported by any conclusive evidence. The appellant has demonstrated that the borrowings were utilized for business purposes and that the advances reflected in the balance sheet are old trade advances. Accordingly, the disallowance of finance cost merely on presumption cannot be sustained. Hence, all the grounds of the appeal are ALLOWED.
8.0 In effect, the appeal stands ALLOWED.
5. We have heard the rival contentions and perused the material on record. We find that temporary lull in the business would not give that the assessee has discontinued the business activity. We note that the assessee was carrying on the business of export and during the year did not file return of income. Consequently the same was shown at nil. The AO disallowed all the expenses and rental income of the assessee to the tune of Rs. 3,50,04,017/- and set off was not allowed on account of lease rental. We also note that the assessee has received lease rental income of Rs. 1,57,25,350/- . The AO treated the same as income from house property after allowing the deduction of 30% towards rental income and assessing the total income at Rs. 1,10,07,745/-. We have perused the order of Ld. CIT(A) and found that the Ld. CIT(A) passed a very reasoned and speaking order after discussion various case laws and holding that there was no closure of business as apparent from the audited financial statement which contained the details of fixed assets, statutory filing fee and other expenses as discussed above. We note that the assessee continued to maintain its business infrastructure and business license with the intention to revive the same . So far as the rental income is concerned, the Ld. CIT(A) held that the rental income was part of the commercial asset and related to the business and therefore rental expenses must be assessed under the head profit and gains from business. In our opinion, the order passed by the Ld. CIT(A) is a very reasoned and speaking order and does not require any interference from our end. Accordingly, we uphold the order of Ld. CIT(A) by dismissing the appeal of the revenue.
6. In the result, the appeal of the revenue is dismissed.
Order is pronounced in the open court on 10th July, 2026
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