Atul Babubhai Shah Vs JCIT (ITAT Ahmedabad)
Conclusion: All the expenses incurred by assessee during the temporary lull period were eligible for deduction as the same were necessary to incur or keep its business setup in existence.
Held: During assessment proceedings, AO observed that assessee for the year under consideration claimed business expenses against NIL business income. Assessee claimed that due to lull in the market, there was no business transaction carried out during the year. But he incurred the expenses in order to sustain his business. However, the AO held that assessee had not carried business activity during the year and the incomes disclosed by assessee were related to other sources. Therefore, the business expenses as claimed by assessee were not eligible for deduction. Accordingly, AO disallowed the entire business expenses. It was held there could be a situation when assessee was not able to generate any business but it had to incur expenses to keep its business setup in existence. Furthermore, business was governed by market forces beyond the control of assessee. Thus mere lull in business activities did not mean that assessee had closed down its business activities. Accordingly, assessee could not be deprived of the benefit of claiming deduction for the expenses incurred to keep setup of business in existence.
FULL TEXT OF THE ITAT JUDGEMENT
The captioned appeals have been filed at the instance of the Assessee against the separate orders of the Commissioner of Income Tax (Appeals)– XIV, Ahmedabad [CIT(A) in short] vide appeal nos.CIT(A)-XVI/JCIT-R-10/311/09-10 dated 22/10/2010, CIT(A)-XVI/ACIT/Cir.10/052/12-13 dated 20/02/2014 & CIT(A)-XVI/ACIT/Circ.10/557/11-12 dated 21/08/2012 in the assessment orders passed under s.143(3) of the Income Tax Act, 1961(hereinafter referred to as “the Act”) dated 26/12/2008,dated 31/12/2009 and penalty u/s 271(1)(c) of the Act dated 28/03/2012 and assessment order u/s.143(3) dated 21/12/2011 relevant to Assessment Years (AYs) 2007-08, 2007-08 and 2009-10 respectively.
First we take up ITA No.76/Ahd/2011 for AY 2007-08, wherein the assessee has raised the following grounds of appeal:
11.1. the order passed u/s.250 on 22.10.2010 for A.Y. 2007-08 by CIT(A)-XVI, Ahmedabad upholding order u/s.143(3) dated 31.12.2009 is wholly illegal, unlawful and against the principles of natural justice.
1.2. TheLd.CIT(A) has grievously erred in law and or on facts in passing the impugned order without allowing sufficient opportunity to the appellant. The Ld.CIT(A) has erred in not considering fully and properly the submissions made and material produced by the appellant.
2.1. The Ld.CIT(A) has grievously erred in law and on facts in confirming the disallowance of expenses of Rs.14,26,813/-.
2.2. That in the facts and circumstances of the case as well as in law, the Ld.CIT(A) ought not to have upheld the disallowance of expenses of Rs.14,26,813/-.
2.3. The Ld.CIT(A) has grievously erred in upholding that there was no business activity during the year and the appellant had failed to prove the same. The appellant was not allowed sufficient opportunity to produce evidence in this regard.
3.1. The Ld.CIT(A) has erred in upholding that rental income from lease o f bungalow to Shell India Marketing Pvt.Ltd., was assessable under the head “income from other sources” and not “House property”.
3.2. That in the facts and circumstances of the case as well as in law the Ld.CIT(A) ought not to have upheld that the intention behind letting out to Shell India Marketing Pvt.Ltd., was land and not house property so that income was not assessable as property income.
4.1. Theld.CIT(A) has grievously erred in law and on facts in upholding the disallowance of interest expenses of Rs.8,00,387/-.
It is, therefore, prayed that the additions upheld by the CIT(A) may kindly be deleted.
2. The first issue raised by the assessee is that the order passed by the learned CIT (A) is bad in law and against natural justice as the same was passed without granting sufficient opportunity. However, the learned AR did not press this ground before us. Accordingly we dismiss the same.
3. The second issue raised by the assessee is that the learned CIT (A) erred in holding that there was no business activity and confirming the disallowances of expenses of Rs. 14,26,813/-.
4. During assessment proceedings, the AO observed that the assessee for the year under consideration claimed business expenses of Rs.14,26,813/-against NIL business income. The assessee claimed that due to lull in the market, there was no business transaction carried out during the year. But he incurred the expenses in order to sustain his business.
4.1. However, the AO held that assessee has not carried business activity during the year and the incomes disclosed by the assessee were related to other sources. Therefore, the business expenses as claimed by the assessee are not eligible for deduction. Accordingly, the AO disallowed the entire business expenses of Rs.14,26,813/- and added to the total income of the assessee.
Aggrieved assessee, preferred an appeal before learned CIT (A).
5. The assessee before the learned CIT (A) submitted that the AO has disallowed the expenses without verifying the fact that the business is continuing. He only submitted that due to lull in the market no business transaction took place during the year.
5.1. The learned CIT (A) after considering the submission of the assessee and assessment order held that the assessee has not submitted anything with regard that the business was not closed. Therefore in absence of any detail such as when he started business and when slowdown came in market and when he restarted his business after lull in market, the contention of the assessee is not acceptable. Accordingly the learned CIT (A) confirmed the order of the AO.
Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.
6. The learned AR before us filed a paper book running from pages 1 to 71 and submitted that the business activities of the assessee were not discontinued/closed down. As such there was a lull in the business activities and therefore it could not show any income under the head business and profession. The learned AR further claimed that the assessee in the assessment year 2010-11 has re-started its business activities. The learned AR in support of his contention drew our attention on the financial statements for the assessment year 2010-11.
6.2. The learned AR also buttressed his contention by filing the assessment order under section 143(3) of the Act for the assessment year 2006-07 wherein the business activities of the assessee were shown.
6.3. In view of the above the learned AR claimed that there cannot be disallowance of the expenses incurred by the assessee to keep its business alive.
7. On the other hand the learned DR submitted that there was no business activity carried out by the assessee in the year under consideration. Similarly, the assessee has not justified weather the expenses incurred by the assessee were incurred to keep the business alive. The learned DR vehemently supported the order of the authorities below.
8. We have heard the rival contentions of both the parties and perused the materials available on record. The facts as discussed above are not in dispute. Therefore, we are not repeating the same for the sake of brevity and convenience. From the foregoing discussion, the issues arise for our consideration stand as under:
1. Whether the assessee was engaged in business activity or business was continuing or closed?
2. Whether the expenses incurred were wholly and substantially for the purpose of business or not?
8.1. Regarding the question No.1, the undisputed fact is that there was the business activity from the transactions of land dealing in the assessment year 2006-07 as evident from the assessment order under section 143(3) of the Act. The relevant finding of the AO in the assessment order stands as under:
“ The assessee is trading in land. He is also doing in investment in shares and stocks and in real estate. During the year, the assessee has sold the land which was lying with him as closing stock since assessment year 2004 05. “
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4. In view of the above, the total income of the assessee is determined as under:
income from business and profession as per statement 259510 ”
8.2. Similarly, we also note that the assessee has carried out this activity in the assessment year 2010-11 as evident from the financial statements. The relevant extract of the financial statement of the assessee these as under:
