Closed business unit cannot claim revenue expenditure or depreciation on mere readiness for use, while compliance costs need verification.

Where a sole manufacturing unit remained closed for a prolonged period and secured assets were in lenders' possession, expenditure was not allowable under section 37(1) because it was not shown to be incurred for an existing carrying-on business. On the same facts, depreciation under section 32(1) was also denied because the plant and machinery were not actually used and mere readiness for use or passive use could not substitute for real business use. Limited audit, ROC and similar statutory compliance expenses were treated differently and were sent back for verification of their exact nature and quantum before any allowance.

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Issues: (i) Whether business expenditure under section 37(1) of the Income-tax Act, 1961 was allowable when the assessee had no manufacturing activity during the year and its sole unit remained closed under the prevailing facts; (ii) Whether depreciation under section 32(1) of the Income-tax Act, 1961 was allowable when the plant and machinery were not actually put to use and the claim rested on passive use or readiness for use; (iii) Whether limited expenses incurred for audit and statutory compliances required separate verification and allowance.

Issue (i): Whether business expenditure under section 37(1) of the Income-tax Act, 1961 was allowable when the assessee had no manufacturing activity during the year and its sole unit remained closed under the prevailing facts.

Analysis: The assessee's only manufacturing unit had remained closed for a long period, possession of the secured assets had been taken over by lenders under the SARFAESI framework, and there was no credible material showing actual business operations during the relevant year. In these circumstances, the expenditure could not be treated as incurred wholly and exclusively for the purposes of an existing carrying-on business. The situation was held to be more than a mere temporary lull, and the factual matrix did not support continuation of business activity for section 37(1) purposes.

Conclusion: The claim for business expenditure was disallowed and the finding was against the assessee.

Issue (ii): Whether depreciation under section 32(1) of the Income-tax Act, 1961 was allowable when the plant and machinery were not actually put to use and the claim rested on passive use or readiness for use.

Analysis: Depreciation requires use of the assets for business, and the Tribunal held that the concept of passive use could not assist the assessee on these facts because the sole unit remained closed, the secured assets were in the possession of lenders, and there was no real prospect of business resumption in the relevant period. The case law cited by the assessee was distinguished on the ground that those matters involved different factual settings, including functioning units or genuine temporary suspension, which was not the position here.

Conclusion: The claim for depreciation was disallowed and the finding was against the assessee.

Issue (iii): Whether limited expenses incurred for audit and statutory compliances required separate verification and allowance.

Analysis: Expenses such as audit fees, ROC fees, and similar statutory compliance outgoings were recognised as potentially allowable, but their exact nature and quantum required identification and verification by the Assessing Officer. The matter was therefore restored only for that limited purpose.

Conclusion: This limited category of expenses was remanded for verification and possible allowance in accordance with law.

Final Conclusion: The Revenue succeeded on the principal issues relating to business expenditure and depreciation, while a narrow class of statutory compliance expenses was sent back for verification, leaving the assessee only limited relief.

Ratio Decidendi: Where a sole manufacturing unit remains closed for a prolonged period and the secured assets are under lenders' possession, expenses cannot be allowed under section 37(1) and depreciation cannot be claimed under section 32(1) on the basis of mere readiness for use or passive user.

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