TaxTMI 
TaxTMI 
2016 (4) TMI 1296
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....ts of the case are that the appellant company had a license to deal in wholesale trade of liquor for financial year 2007-08 relevant to assessment year 2008-09 for the State of Utter Pradesh. The appellant had applied for license for F.Y. 2008-09, but the same was not granted. In the absence of the license, the appellant was not authorized to carry on the liquor business and so the opening stock value of Rs. 45.14 crores brought forward from the previous year was transferred to the concerns, which had been granted license by the Government in the subsequent year. The Assessing Officer noticed that no revenue was recognized except the transfer of stock at the same value, which was brought forward from the previous year and the stock had been transferred without any element of profit. As the appellant had not carried out any business during the year under consideration, the appellant was asked by the Assessing Officer to explain regarding allowability of depreciation claimed of Rs, 25,05,898/- and other expenses of Rs. 9,66,029/- debited to the profit and loss account. The appellant had submitted that depreciation was allowable on the assets owned by the appellant even if it was not ....
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.... business, ipso-facto. As per the excise policy, the appellant could not have sold the stock remaining at the end of the year in the market and so it was transferred to the concerns, which were granted license by the Government in the succeeding year. Such transfer of stock on 'as is where is basis' cannot be treated as sale and the explanation of the appellant that the so-called sale had been entered in ledger account is immaterial. In fact, the appellant could not have carried on the liquor business, during the year under consideration and did not do it also. Obviously no asset were put to use during the year and so the depreciation on the assets was not allowable. For the same reasons i.e., there being no business, no expenses were allowable, since the expenses claimed do not relate to the book transfer of stock. It cannot be said to be a case of temporary suspension of business, as grant of license to carry on liquor business to any subsequent year is not guaranteed. I have gone through the various decisions quoted by the appellant in its reply and find that the ratio of none of these decisions even remotely apply to the case of the appellant. Hence, it is held that the....
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....ee in the year under consideration because the assessee was not having any license from the State Government to deal in wholesale trade of liquor. The alleged purchases are only the opening stock value of Rs. 45.14 Cr and the alleged sales in fact is the amount of the stock transferred to other companies at the cost price because assessee was not legally entitled to sell the stock. The submission of the assessee before ld. CIT (Appeals) thus, clearly shows that assessee has not made any purchases or sales during the year under consideration. No business is thus conducted in year. 7(i) The other income shown by the assessee is explained in Schedule 15 which has given the bifurcation of other income as rebate and discounts received, interest on FDR and miscellaneous income. Thus, it is also clear that even the other income shown by the assessee in the Profit & Loss Account has no connection with the wholesale trade of liquor business. No other business activities have been carried on by the assessee during the year under consideration and has also not been reported by assessee if any other activity was carried on by the assessee during the year under consideration. The details of ....
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....of its assets and property from expropriation, coercive process or assertion of hostile title may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of the business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. It cannot include sums spent by the assessee as agent of a third party, whether the origin of the agency is voluntary or statutory.' 8. In the earlier assessment year 2008-09, assessee was dealing in wholesale trade of liquor for the State of Uttar Pradesh. It is well settled that for dealing in business of liquor, the license from the State Government shall have to be obtained for selling the liquor in a specific area. In case no license is held by the businessman or there is any violation of license to deal in liquor, the same is punishable under the concerned State Exc....
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....his Act, or any rule or order made thereunder, consumes any intoxicant, shall be punished with fine which shall not be less than five hundred rupees and which may extend to one thousand rupees-]" 9. Since the assessee is assessed in State of Punjab, therefore, Section 61 of the Punjab Excise Act is also reproduced for the sake of convenience : "61. (1) Whosoever, in contravention of any Section of this Act or of any rule, notification issued or given thereunder or order made, or of any license, permit or pass granted under this Act. (a) imports, exports, transports, manufacturers, collects or possesses any intoxicant; (b) constructs or works any distillery or brewery; or (c) uses, keeps, or has in his possession any material, still, utensil, implement or apparatus, whatsoever, for the purpose of manufacturing any intoxicant other than tari; shall be punishable for every such offence with imprisonment for a term which may extend to (three years) and with fine upto two thousand rupees and if found in possession of a working still for the manufacture of any intoxicant shall be punishable with the minimum sentence of six months imprisonment and fi....
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....lved for making any profit. Thus, the assessee has not entered into any occupation or profession and has not dealt in any item with a profit motive. Therefore, there is no question of assessee doing any business or profession during the year under consideration. 11. Section 32 of the Income Tax Act provides for grant of depreciation in respect of building, machinery, plants or furniture etc. when the assets are owned wholly or partly by the assessee and used for the purpose of business or profession. As noted above, it is clear that assessee has not conducted any business or profession in the year under consideration, therefore, there is no question of using any asset by the assessee for the purpose of business or profession during the year under consideration so as to claim entitlement of depreciation. The assessee in reply before ld. CIT (Appeals) admitted that it had not been able to prove how the assets utilized by no business was carried on by it. 12. Section 37(1) of the Income Tax Act provides that any expenditure not being in the nature of capital expenditure or personal expenses of assessee, laid out or expanded wholly and exclusively for the purpose of business or p....
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....s amounted only to a lull in the business activity of the assessee and not a discontinuance of the assessee's business? (ii) Whether on the facts and circumstances of the case, the assessee is entitled to claim deduction of interest on the related payment (beyond the 20th) of abkari dues? 15. The question No. 1 raised in the reference at the instance of the revenue was answered in negative against the assessee and in favour of the revenue. In view of answer to question No. 1, question No. 2 was found to have academic interest only. The findings of the Hon'ble High Court reads as under : Under section 28 of the Income Tax Act, 1961, the profits and gains of any business or profession which carried on by the assessee at any time during the previous year shall be chargeable to income tax and the income so chargeable shall be computed in accordance with law sections 30 to 43. Section 37 provides for the deduction of revenue expenditure. In order to get deduction under this Section, the amount should be expended for the purpose of the business, which was the existence in the accounting year the profits of which were under assessment. The assessee was carr....
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....essee must be considered to have carried on its business in a passive sense during the previous year for the assessment year. 16. The Hon'ble Delhi High Court in the case of Dalmia Dairy Industries Ltd. v. CIT [2000] 241 ITR 9 held as under : "Held, that the expenditure incurred was in connection with the assessee's business ventures in Pakistan which stood transferred to the PPCIL and hence the assessee did not have any business which it could be said to be carrying on. Since the same was not incurred wholly and exclusively for the assessee's business it was not allowable under Section 37 of the Income Tax Act, 1961. The main object of the expenditure in question was to realize the sale consideration of the fixed assets in Pakistan in cash or in kind. The expenditure related directed to fixed assets and was capital in nature. Hence, the amounts claimed were not allowable." 17. The Hon'ble Allahabad High Court in the case of Inderchand Hari Ram v. CIT [1953] 23 ITR 437 held as under: "In order that an expenditure can lie deducted as business expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922, the expenditure must be incurr....
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....ng the year under consideration, no expenditure was allowable and as per Explanation to the above provision, even if some expenses were incurred by assessee for the business of dealing in wholesale liquor without license, the same would be prohibited by law and as such on both counts, the expenditure could not be allowed as deduction in favour of the assessee. 19. The ld. counsel for the assessee relied upon decision of the Calcutta High Court in the case of Multican Builders Ltd. v. CIT [2005] 278 ITR 142 on the proposition that when asset is ready for use, depreciation is allowable. There is no quarrel with the legal proposition decided in this case. However, the facts of the case of assessee are clearly distinguishable because the assessee was not authorized by the State Government to deal in the business of liquor in the year under consideration. If the assessee would have dealt in illegal trade of liquor, the assessee would have been prosecuted for the offence under the Excise Act. Therefore, there is no question of passive user of the assets by the assessee for illegal liquor business. 20. The ld. counsel for the assessee also relied upon decision of Hon'ble Madhya ....
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.... by the State Govt. The assessee had license in the previous year but during the year assessee could not win the license to carry on the trading activity, therefore, as per Excise Rules, the opening stock was transferred to another dealer who won the bidding and acquired the license. The assessee had income from other sources mainly consisting of interest on FDRs, refund of tender fee and misc. income. Such other income amounted to Rs. 49,69,607/-. Against this the assessee has claimed certain expenses as well as depreciation. After claiming such depreciation and expenses, return of income was filed declaring income of Rs. 32,73,350/-. 3. During assessment proceedings the Assessing Officer noticed that since there were no sales, therefore, assessee cannot be said to have carried on any business. Accordingly, assessee was show caused to justify the claim of expenses as well as depreciation. In response, it was stated that though assessee did not have any license to carry on the business but since opening stock was transferred and assessee was a going concern, therefore, expenses and deprecaistion were allowable. However, the Assessing Officer did not agree with these submissions ....
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.... (b) Hindustan Chemical Works Ltd. (supra) (c) Multican Builders Ltd. (supra) (d) Anil Bulk Carriers (P.) Ltd v. CIT [2005] 276 ITR 625 (e) Carefour WC & C India (P) Ltd. (supra) (f) Dhoomketu Builders & Development (P) Ltd. (supra) (Copy of the judgments filed in the paper book - ITA 528/2012 & 529/2012) 6. On the other hand Ld. DR while strongly supporting the order of CIT(A) submitted that since the assessee has discontinued business during the year, therefore, disallowance of expenses as well as depreciation is totally justified. 7. I have considered the rival submissions carefully. In the present case there is no dispute regarding the fact of incurring expenditure or genuineness of expenses. The only dispute is whether the assessee was carrying on business or the business was discontinued. It is settled law that there can be situation where there can be lull in the business and in such a situation various Courts have clearly held that it cannot be said that business has been discontinued. The Hon'ble Bombay High Court commenting upon this aspect in the case of Hindustan Chemical Works L....
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....icense is not obtained. However, in the present case, the assessee is incorporated as a company which itself shows that intention was to carry on the business in the longer term. Further, assessee has taken a godown as well as office for the purpose. The assessee cannot be expected to vacate godown and office immediately on expiration of license. Such godown and office etc. are again required whenever the assessee is able to win the license. In fact, in the case before us admittedly the assessee has again obtained the license in assessment year 2010-11 i.e. immediately in the following year and carried on this business. 9. No doubt in the case of liquor business, the business cannot be carried out until and unless license is there with the businessman and if assessee did not have license but then it can be said that there was a temporary lull in the business because assessee failed to win the license. 10. The Ld. JM has referred to the decision of Hon'ble Kerala High Court in the case of T.M Chacko and Partners v CIT [1992] 195 ITR 904. In that case the assessee was carrying on business as 'Abkari contractors' and was participating in Abkari auctions. Rule 5 of th....
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....ore, in my opinion the assessee was very much in business and expenses incurred by the assessee should have been allowed. It is to be noted that expenses have been incurred mainly on payment of godown rent and statutory expense like audit fee, filing fee and only a sum of Rs. 1 lakh has been paid towards salaries which seems to be for minimum of employees. The second question was whether in such circumstances the depreciation should be allowed. In my opinion on the basis of same analogy as given for allowance of expenditure, the depreciation is also required to be allowed. In this regard Ld. Counsel has cited the judgment of Hon'ble Calcutta High Court and Allahabad High Court in the case of Multican Builders Ltd. v CIT (supra) and Anil Bulk Carriers (P.) Ltd (supra) where depreciation was held to be allowable even when the assets are kept ready for use. In fact in this regard our own Jurisdictional High Court of Punjab & Haryana has held that depreciation can be allowable on passive user in the following cases:- (a) CIT v Pepsu Road Transport Corporation [2002] 253 ITR 303 (Punj. & Har.) (b) CIT v Shahbad Co-Op Sugar Mills Ltd, [2011] 12 taxmann.com 421 ....
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....cannot be said that there was any intention to have permanently abandoned the business activity or that it had ceased to exist. His opinion was that it was a temporary cessation. Under these circumstances, both the Assessing Officer as also the appellate authority were wrong in disallowing the expenditure claimed. 3. It is not denied and accepted by the parties that the assessee was dealing in wholesale trade of liquor in the State of Uttar Pradesh, for which he had been granted a lawful licence under the relevant law. It was only in the year under consideration that there was no business activity because the assessee had no licence in its favour. The learned Members note that for the year in question, the liquor licence was not renewed and that the closing stock of liquor lying with it was transferred to a third trader. On this difference, two questions have been referred: (i) Whether on the facts and in the circumstances of the case, when the assessee being wholesale trader of liquor had not been granted license to run liquor business, was also not authorized to carry on liquor business and no liquor business is carried on in the assessment year 2009-10 in appeal, whe....
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....arity of transactions of purchase and sale in a class of goods and the transactions must ordinarily be entered into with a profit motive. By the use of the expression 'profit motive' it is not intended that profit must in fact be earned. Nor does the expression cover a mere desire to make some monetary gain out of a transaction or even a series of transactions, it predicates a motive which pervades the whole series of transactions effected by the person in the course of his activity. In the case of Commissioner of Income-tax v. Lahore Electric Supply Co. Ltd. [1966] 60 ITR 1 (SC), Sarkar J., speaking for the majority, observed that business as contemplated by Section 10 of the Indian Income-tax Act, 1922, is an activity capable of producing a profit which can be taxed. In the case of the appellant-trust the activity of the trust, as observed earlier, has in fact been yielding profits and that apparently accounts for the increase in the value of its assets..." (PP. 474.475) 6. Now I refer to the decisions cited before me to urge that in order expenditure can be allowed as a deduction u/s 10(2)(xv) of the Act it must be incurred for the purpose of business which was in exi....
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.... to whether the assessee has ceased to carry on its business or it was a temporary discontinuance. In CIT v. Integrated Technologies Ltd., the High Court of Delhi in ITA No. 530/2011 dated 16.12.2011, holds that the only condition to claim depreciation etc., as expenditure is that it is not necessary that plant & machinery owned by the assessee should be actually put to use in the relevant accounting year to justify the claim of depreciation and even if such plant & machinery or other assets are kept ready for use in assessee's business, the assessee would be entitled to claim depreciation. The only condition added is that the business should not be closed down once and for all and that the assessee should demonstrate that the hopes of the business being revived are alive and real. It is however not a matter that can turn entirely on the assessee's hopes alone but then there should be evidence on record to show that the assessee took efforts to keep the business alive in the hope of reviving it. I need not multiply precedents further. In the present facts of the case in the reference before me, the trade is one in liquor and there are two judgments of the Kerala High Court ....
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....ns of any business or profession which was carried on by the assessee at any time during the previous year shall be chargeable to income-tax and the income so chargeable shall be computed in accordance with Sections 30 to 43. Section 37 provides for the deduction of revenue expenditure. In order to get deduction under this section, the amount should be expended for the purpose of the business. The finding of the authorities is to the effect that the abkari business has not been carried on by the assessee during the previous several years. The business expenditure has to be related to a business which is taxed or taxable before it can be deducted and, therefore, there is no scope for deduction of the interest paid by the assessee in this case. There is no justification, and there was no material at all before the Tribunal, to come to the conclusion that there was only a lull in the business activity of the assessee and there was no discontinuity of the assessee's business. The authorities as well as the Tribunal came to the conclusion that, on account of the prohibition in law, the assessee could not carry on the abkari business and during the previous year the assessee obtained....