2016 (4) TMI 1296 - AT - Income Tax

Assessee's Appeal Dismissed: Depreciation & Expenses Disallowed Due to Lack of Business Use

The appeal of the assessee was dismissed as the majority decision upheld the disallowance of claiming depreciation on fixed assets amounting to Rs. ... Temporary lull in business v. discontinuance - Allowance of depreciation where assets are not used but retained ready for business - Deductibility of expenditure under Section 37(1) when business activity is prohibited by law - Depreciation entitlement under Section 32 where assets are 'used for the purpose of business' - Effect of statutory prohibition (State Excise law) on existence of businessTemporary lull in business v. discontinuance - Effect of statutory prohibition (State Excise law) on existence of business - Whether the assessee's failure to obtain a licence to trade in liquor amounted to a temporary lull in business or to a discontinuance of business for assessment year 2009-10. - HELD THAT: - On the admitted facts the assessee, a wholesale liquor trader, had no licence for the year under appeal and transferred opening stock to licensed parties; no sales or purchases were carried out and no other business activity was shown. The Tribunal examined authorities distinguishing a mere lull from abandonment, but gave primacy to the Division Bench decision in T.M. Chacko which held that where statutory prohibition prevents carrying on the trade, the activity cannot be treated as a temporary lull. The Third Member noted that possession or trade in liquor without licence is an offence under the State Excise law and that the assessee was not merely unlucky in bidding but was legally barred during the year; therefore the facts demonstrated legal prohibition of the trade and not a temporary suspension from which revival was a realistic continuation. For these reasons the Tribunal concluded that there was a discontinuance (or absence) of the liquor business in the year under appeal and not a temporary lull. [Paras 12]There was no temporary lull; statutory prohibition and the absence of licence meant the assessee was not carrying on the liquor business in 2009-10.Allowance of depreciation where assets are not used but retained ready for business - Depreciation entitlement under Section 32 where assets are 'used for the purpose of business' - Deductibility of expenditure under Section 37(1) when business activity is prohibited by law - Whether depreciation and business expenses claimed by the assessee are allowable when no liquor business was carried on in the year because licence was not granted. - HELD THAT: - Section 32 requires assets to be 'used for the purpose of business' and Section 37(1) permits deduction only for expenditure laid out wholly and exclusively for the purpose of a business in existence in the accounting year; the Explanation excludes expenditure for purposes prohibited by law. The Tribunal found the assessee had not shown use of assets in any business activity during the year, admitted inability to prove asset utilisation, and incurred only non-trading 'other income'. Given the statutory prohibition on possession/trade without licence, expenditures relating to the liquor trade would be prohibited by law and thus not deductible. Although some authorities allow depreciation where assets are retained ready for use and the business is only temporarily suspended, the Tribunal held those precedents distinguishable where a legal bar existed. Applying these principles, the Tribunal upheld the disallowance of depreciation and the business expenses. [Paras 11, 12, 18]Depreciation and the claimed business expenses are not allowable for 2009-10 because the assessee did not carry on the business and the expenditures are not shown to be wholly and exclusively for a business in existence; moreover, expenditure relating to a trade prohibited by law is not deductible.Final Conclusion: The Tribunal, by majority, held that the assessee was not carrying on the liquor business in assessment year 2009-10 because of the absence of a licence and statutory prohibition; consequently depreciation and the claimed business expenses were rightly disallowed and the appeal is dismissed. Issues Involved:1. Sustaining the addition of Rs. 25,05,898/- as depreciation on fixed assets.2. Confirming the addition of Rs. 9,63,029/- as other expenses incurred by the assessee.Detailed Analysis:1. Depreciation on Fixed Assets:The primary issue revolves around whether the assessee, a company engaged in wholesale liquor trading, is entitled to claim depreciation on fixed assets amounting to Rs. 25,05,898/- for the assessment year 2009-10, despite not having a license to carry on the liquor business during that year.Assessing Officer’s Findings:The Assessing Officer noted that the assessee did not carry out any business during the year under consideration as it was not granted a license to deal in liquor. Consequently, the opening stock valued at Rs. 45.14 crores was transferred to other licensed concerns without any profit element. The Assessing Officer disallowed the depreciation claim, asserting that no business was conducted, and the assets were not used for business purposes.CIT(A) Decision:The CIT(A) upheld the disallowance, emphasizing that the assessee was not entitled to carry on the liquor business without a license, and hence, no business activities were performed. The CIT(A) concluded that the assets were not put to use, and therefore, depreciation was not allowable.Tribunal’s Analysis:The Tribunal reaffirmed the CIT(A)’s decision, stating that the assessee did not conduct any business or profession during the year under consideration. The Tribunal highlighted that for depreciation to be allowable under Section 32 of the Income Tax Act, the assets must be used for business purposes, which was not the case here. The Tribunal cited various judicial precedents, including the Hon’ble Supreme Court’s decision in CIT v. Malayalam Plantations Ltd., to support its conclusion that the expenditure must be incurred for the purpose of an existing business.Separate Judgment by Accountant Member:The Accountant Member dissented, arguing that the assessee’s business was temporarily dormant due to the failure to obtain a license, but the intention to carry on the business remained. He emphasized that the assets were kept ready for use, and thus, depreciation should be allowed. He relied on judicial precedents, including the Hon’ble Calcutta High Court’s decision in Multican Builders Ltd. v. CIT, which held that depreciation is allowable even if the assets are not actively used but kept ready for use.Third Member’s Decision:The Third Member, agreeing with the Judicial Member, held that the prohibition under the Uttar Pradesh Excise Act prevented the assessee from carrying on the liquor business without a license. Therefore, it could not be considered a temporary lull in business. The Third Member concluded that the assessee was not entitled to claim depreciation as the assets were not used for any business activity during the assessment year.2. Addition of Other Expenses:The second issue pertains to the addition of Rs. 9,63,029/- as other expenses incurred by the assessee, which were disallowed by the Assessing Officer.Assessing Officer’s Findings:The Assessing Officer disallowed the expenses, asserting that since no business was conducted, the expenses were not incurred for business purposes.CIT(A) Decision:The CIT(A) upheld the disallowance, stating that no business activities were performed during the year, and hence, the expenses were not allowable under Section 37(1) of the Income Tax Act, which requires the expenses to be incurred wholly and exclusively for business purposes.Tribunal’s Analysis:The Tribunal concurred with the CIT(A)’s decision, emphasizing that the assessee did not carry on any business or profession during the year under consideration. The Tribunal cited judicial precedents, including the Hon’ble Allahabad High Court’s decision in Inderchand Hari Ram v. CIT, which held that expenses must be incurred for the purpose of an existing business to be deductible.Separate Judgment by Accountant Member:The Accountant Member dissented, arguing that the expenses were minimal and necessary to maintain the office and godown, which were required for the business. He emphasized that the business was temporarily dormant, and the expenses should be allowed. He relied on judicial precedents, including the Hon’ble Kerala High Court’s decision in K. Sreedharan & Co. v. CIT, which allowed expenses incurred during a temporary lull in business.Third Member’s Decision:The Third Member, agreeing with the Judicial Member, held that the prohibition under the Uttar Pradesh Excise Act prevented the assessee from carrying on the liquor business without a license. Therefore, it could not be considered a temporary lull in business. The Third Member concluded that the assessee was not entitled to claim the expenses as they were not incurred for any business activity during the assessment year.Conclusion:In view of the majority decision, the appeal of the assessee was dismissed, and the additions of Rs. 25,05,898/- as depreciation on fixed assets and Rs. 9,63,029/- as other expenses were sustained.