Commissioner of Income Tax, Faridabad vs Precision Galvanising Works

Adarsh Kumar Goel, J.—This order will dispose of ITA Nos. 361, 371 of 2004, 568 and 688 of 2005. All the four appeals have been filed by the revenue u/s 260-A of the income tax Act, 1961 (for short, ''the Act'') and are said to involve same questions. ITA No. 361 of 2004 arises from order dated 4-6-2004 of the income tax Appellate Tribunal, Bench SMC-I, New Delhi in ITA No. 1926/Del./2000 for the assessment year 1995-96 and raises following substantial questions of law:-

Whether the Hon''ble ITAT has erred in law in holding that the business of the assessee continued particularly when electricity connection had been cut off and no regular business activities were done as all the business premises were lying closed?

Whether the Hon''ble ITAT has erred in law in deleting the addition of Rs. 9,01,232 made by the Assessing Officer on account of expenditure relating to the closed business?

Whether the Hon''ble ITAT has erred in law in deleting the disallowance of Rs. 2,79,306 made by the Assessing Officer by holding that the business of the assessee continued during the year?

The assessee filed return on the net loss which included brought forward losses. The Assessing Officer did not accept the return and disallowed the expenses and brought forward loss on the ground that no business was being carried on by the assessee. Its electricity supply had been cut off and there was no transaction of business. The factory was lying closed. Operation of bank account also showed that no business was being run. No workers were employed. On appeal, the CIT(A) set aside the additions on the ground that the assessee had operated the bank accounts, its books of account were duly audited and thus, its business was continuing. On further appeal, the said finding was affirmed.

We have heard learned counsel for the appellant. None appears on behalf of the assessee inspite of service.

Learned counsel for the revenue submitted that the finding recorded by the Tribunal was perverse. There was no business transaction. The factory of the assessee was lying closed. Its electricity supply had been cut off.

We find merit in the contention. The Assessing Officer observed that except withdrawals and deposits in the Bank, there was no other transaction to show that the business was being carried on. The cash book was not properly maintained. The factory was lying closed. Electricity connection had been cut off. There was no staff. These circumstances showed that the assessee was not carrying on any business. The plea of carrying on business was merely a legal device to avoid tax. The finding recorded is as under:-

On perusal of profit and loss account, balance sheet annexed with the return of loss it transpired that as in the case of M/s Super Steels an associates concern, this concern has also reflected single sale of Rs. 11,812 and purchase of Rs. 9,786. Besides this the assessee reflected interest of Rs. 2,926 on advance, Rs. 23,613 from partners, interest on FD Rs. 7,499 and sundry balances written back Rs. 2,01,011. Inquiries made reveals that assessee''s premises was lying closed and no business was being carried on. Admittedly the electric supply had been cut off in February 1992, when confronted the assessee submitted vide letter dated 3-7-1997 that the assessee is a registered partnership firm engaged in job work/trading of different types of wires and steel wire. The total turnover of the firm was Rs. 11,812 during the year under consideration as against earlier year sales of Rs. 3,31,259. According to the assessee the ''word'' business is very wide and each case is to be determined with reference to the particular kind of activity and occupation of the persons concerned. Though ordinarily business implies a continuous activity in carrying on a particular trade of a vocation it may also include activity which may be called "quiescent", in terms of Supreme Court decision in the case of Commissioner of Income Tax, West Bengal Vs. Calcutta National Bank Limited (In Liquidation), . In view of this decision, the assessee pleaded that firm had carried on purchase and sale, made payment for job charges and earned income as shown in the profit and loss account, hence business activities are continued.

As regards interest accrued on short term deposits these were made out of funds available with the firm before the same were utilized for actual business and as such same were incidental to the business activity of the assessee and interest on short term deposits should be treated as business income. The assessee relied upon the decision of Madras High Court reported on 876 Taxman - 2 (sic)

3.2 The assessee further submitted that a single transaction of sale comes under the definition of business as being adventure in the nature of trade provided the transaction bears clear indication of trade. The assessee relied upon the decision of Supreme Court in the case of Narain Swadeshi Weaving Mills Vs. The Commissioner of Excess Profits Tax, , CIT v. Khariagarh Timber Traders 137 (MP), Commissioner of Income Tax (Delhi Central) Vs. Bharat Insurance Co. Ltd.,

3.3 On perusal of cash book and ledger of the assessee it transpires that except making withdrawal and deposits in bank there is no other transactions which could lead to the assessee''s ascertain that the assessee was carrying on business during the year. Cash book reflects balance of Rs. 18,89,080.42 as on 1-4-1994, despite so much cash available still on 29-6-1994 the assessee is making withdrawal of Rs. 50,000 in cash and again on 30-6-1994 Rs. 3,50,000 in cash. Apparently a person having huge cash would not make nominal withdrawals of Rs. 50,000. No explanation has been given as to where has this cash was being kept when the premises of the assessee was lying closed and the partners were not residing at Faridabad. Only few pages of the cash book has been written and it appears that it has been fabricated in one sitting and has not been maintained in the normal course. As per clause (3) of partnership deed executed on 1-7-1984, the partnership was carrying on the business of manufacturing and trading of steel galvanized, copper and aluminium wires manufacturing, dealing in bolts, nuts and industrial fasteners and all types of railway track material at its registered office and factory at 14/4, Mathura Road, Faridabad. When the factory is lying closed and electric connection is also cut off how the business is carried on manufacturing business during the year. Even the bank account is not in operation and bank has filed suit for recovery of dues. Thus deduction of Rs. 2,79,306 on account of interest claimed by the assessee is without any basis since no evidence has been produced that the bank had raised demand for this amount nor the assessee furnished any evidence that liability of this amount accrued during the year.

3.4 The expenditure can be allowed as business expenditure only if assessee has carried on business in the year under consideration Commissioner of Income Tax, Kerala Vs. Gemini Cashew Sales Corporation, Quilon, It is not enough that the assessee has carried on some other business during the year (1949) 17 ITR 394 (P & H.) . Similarly the Calcutta High Court in the case of Binani Printers (P.) Ltd. Vs. Commissioner of Income Tax, held that expenditure in relation to a closed business was not deductible from income and other business belonging to the assessee. In the present case neither the bank has debited interest of Rs. 2,79,306 in their books of account nor communicated this amount to the assessee. The business of the assessee is lying closed since 1992. No evidence has been produced that bank has claimed this amount. Accordingly the expenditure on account of interest which pertains to closed business of the assessee is not deductible as aforesaid.

3.5 The assessee has received interest of Rs. 2,926 only. Besides this amount of Rs. 25,00,000 continued to be advanced to M/s Aggarwal Hardwares and Foundries and the assessee has not furnished any explanation as to why interest could not be charged from it when the assessee was carrying on money lending business also.

3.6 The assessee had adopted a clear device of preparing its profit and loss account with a single make belief transactions of purchases/sale just to claim set off of losses against interest income. It is not understood when electric connection was disconnected in February 1992, how the business was being carried on. The assessee did not have even any working capital facilities with any bank and dispute was pending in court with the bank of India. Though the assessee stated in letter dated 3-7-1997 that the business transactions are still in operation the assessee has not furnished any evidence how the business transactions are in operation and how many workers were employed. The cases relied upon by the assessee are of no help since in these cases the assessees were not carrying on any business earlier and had embarked upon the sole transaction and the dispute was whether the sole transaction was an adventure in the nature of trade. In view of decision of Supreme Court reported in 148 ITR 154 in the case of M/s Dwell & Co. v. CTO wherein it was held that:

''It is up to the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of emerging techniques of interpretation as was done in Ramsay''s case [1981] 2 WLR 449 AC 300, Burmah Oil (1982) Simon''s Tax Cases 30 and Dawson''s case [1984] All ER 530, 2 WLR 226 (BL), to expose the devices for what they really are and to refuse to give judicial benediction.''

The device of carrying on business with a single sale and purchase particularly when there was no working capital, electric connection had been disconnected in February 1992 and no workers were employed, it cannot be said that the assessee was carrying on business of manufacturing of wires during the year. Thus the loss worked out by the assessee cannot be allowed to be set off against income on account of interest as shown by the assessee. On perusal of schedule H to the balance sheet it transpires that assessee had advanced Rs. 25,00,000 in the preceding years and no interest is being charged. No explanation has been given as to why interest could not be charged particularly when the assessee was carrying on money lending business. As in the case of M/s Super Steels, an associate concern, interest at the rate of 15 percent is deemed to be income of assessee in respect of this advance which comes to Rs. 3,75,000.

3.7 As regards decisions cited by the assessee reported at Commissioner of Income Tax (Delhi Central) Vs. Bharat Insurance Co. Ltd., is not applicable to the facts of the case since in that case the assessee had carried on its statutory function of carrying of an insurance business under the Insurance Act, 1938 whereas there are no such facts in the case of the assessee. In the case reported at 137 ITR 345 the business activity of exploitation of forests was held to be business by relying upon the decision of Orissa High Court reported on 6 STC 674. The facts of this case are altogether different from the case of the assessee. In the case of the assessee business was being carried on upto assessment year 1992-93 thereafter a single entry of purchase and sale was being shown just to make it appear that the assessee was carrying on its business activity while infact it was not being carried out.

3.8 In the light of these facts and decisions reported at 148 ITR 154 and Workmen Employed in Associated Rubber Industry Ltd., Bhavnagar Vs. Associated Rubber Industry Ltd., Bhavnagar and Another, the device of the assessee in claiming set off losses against interest income cannot be allowed.

The CIT(A) allowed the appeal of the assessee on the ground that even a single transaction could be treated as business. The quantum of business was not relevant. The bank transactions had been made. Non-withdrawal of money from the bank was on account of outstanding loan liability. The account books had been audited. The assessee had claimed following expenses:-

Legal & Professional charges

Rs. 2,200

Cartage outward

Rs. 195

Sales tax paid

Rs. 6,06,378

Bank interest

Rs. 2,79,306

Depreciation

Rs. 13,153

Total

Rs. 9,01,232

Finally, the CIT(A) concluded as under:-

I have considered the submission of the appellant firm and found that appellant firm is a registered partnership firm engaged in manufacturing and trading of different types and sizes of iron and steel wires. The business firm is operating at plot No. 34, Sector 6, Faridabad. The facts have never been denied by the Assessing Officer. Further as per clause 3 of partnership deed, the firm is involved in business activities for compliance of the objectives of the partnership deed. The firm is engaged in purchase/sale and other business activities by way of interest income on advance/partners/FDRs and sundry balance written back, which have been duly credited in the books of account maintained by the firm and got it audited by Chartered Accountants firm, who has reported that a proper books of account have been maintained and Assessing Officer has not pointed out any discrepancies in the audited accounts, except the allegation that few paper of cash book has been written and it appears that it has been fabricated in one sitting and has not been maintained in normal course, which does not have any findings. The appellant firm has made deposits and withdrawals from bank, got the materials processed on job basis and made sale thereof and earned interest income on FDRs made out of the funds of the firm, as such the business activities of the firm are continued and there is no closure of business of the firm at all. All the business transactions of the firm have been duly accounted for and reflected in the trading and P&L account of the firm, the business activities have been looked after by the partners, credit facilities had been availed from Canara Bank. All these facts clearly indicates the continuity of the business.

The Assessing Officer never denied about the turnover of the appellant firm. During the assessment year 1995-96, the firm has made turnover of Rs. 11,812 as against earlier year''s sale of Rs. 3,31,259. The appellant firm is carrying on systematic and organized business activities pertaining to continued business of the firm as such profit/loss on these operations are covered under the head income from business which indicated the composite business operations, and there is no segregation of income, other than income from business. The earning for interest is indicated to the business activity of the firm as the FDRs made out of business funds available with the appellant firm which is a business income.

I have considered the submission of the appellant and found that business of the firm has not been closed. The business of the appellant firm is continuing and there is no segregation of business operation, as such allowability of part of expenses amounting to Rs. 4,52,817 considering them as expenditure not pertaining to closed business and remaining expenditure of Rs. 9,01,232 as per details given at point No. 5(2) of this order treating these expenditure pertaining to closed business, applying his own ratio for deciding the separate business operations of the firm, has no basis and there was no device to avoid tax to set off losses against interest income of the business of the firm. I found that on facts of the case, the business of the firm, cannot be considered as closed and disallowance of these expenditure cannot be sustained and is deleted.

The Tribunal has affirmed the above finding.

It is clear that the CIT(A) as well as the Tribunal erred in holding that the assessee was still carrying on business. It has not been disputed that the electricity supply of the assessee had been cut off and the business had stopped. The expenses claimed also do not show any claim towards wages or electricity charges. Irrespective of meaning of the term ''business'', entirety of facts and circumstances are required to be seen. No doubt, if business is being run, its volume may not be conclusive. However, where numerous circumstances indicate closure, insignificant turnover can be taken into account to determine whether such entry is only being used as device. The CIT(A) in the circumstances was required to go into the question whether plea of the assessee that it was carrying on business was merely a device to avoid tax by claiming carry forward of losses and business expenses which could be allowed only if the business was still continuing which has not been done. In the circumstances of the case, the finding of the CIT(A) as affirmed by the Tribunal cannot be sustained. Accordingly, we answer the question in favour of the revenue, set aside the impugned orders of the CIT(A) and the Tribunal and remit the matter back to the CIT(A) for fresh decision in accordance with law.