M/S.mec International v. The Deputy Commissioner Of Income-Tax,Company Circle Iv(1), Chennai-600 034

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 26.06.2019 CORAM THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMandTHE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Tax Case (Appeal) Nos.31 to 33 of 2009 M/s.MEC International,No.37, Arcot Road,Vadapalani, Chennai-600 026. .. Appellant in all Appeals -vs- The Deputy Commissioner of Income-tax,Company Circle IV(1), Chennai-600 034. .. Respondent in all Appeals Appeals under Section 260A of the Income-tax Act, 1961against the common order dated 26.09.2008 on the file of theIncome-tax Appellate Tribunal Chennai 'B' Bench, Chennai, inI.T.A.Nos.1717 to 1719/Mds/06 for the assessment years 1999-2000, 2000-01 and 2002-03. The Appeals filed against the order dated 21/3/2006 on thefile of Commissioner of Income Tax (Appeals) XII Chennai-34 madein ITA Nos.245, 246 & 252/05-06 against the order dated21/3/2005 for the PAN No. /ME-181 on the file of DeputyCommissioner of Income Tax Company Circle IV 2(i/c) Chennai-34. For Appellant:Ms.Sree Lakshmi Valli(In all Appeals) For Respondent :Mr.Karthik Ranganathan(In all Appeals)Senior Standing Counsel https://hcservices.ecourts.gov.in/hcservices/ (Delivered by T.S.Sivagnanam, J.) These appeals, filed by the appellant/assessee under Section260A of the Income-tax Act, 1961 (hereinafter referred to as“the Act”), are directed against the common order dated26.09.2008, passed by the Income-tax Appellate Tribunal Chennai'B' Bench, Chennai (for brevity, “the ITAT”), in I.T.A.Nos.1717to 1719/Mds/06 for the assessment years 1999-2000, 2000-01 and2002-03 respectively. 2.The above appeals have been admitted, on 26.02.2009, onthe following substantial question of law:-“Whether on the facts and in the circumstancesof the case, the Income Tax Appellate Tribunal isright in holding that the Appellant is notentitled to the benefit of set off of businesslosses against its other income in respect ofAssessment Years 1999-00, 2000-01 and 2002-03?” 3.Since the facts are identical in all the three appeals, itwould suffice to refer to the facts for the assessment year1999-2000, which is subject matter of Tax Case (Appeal) No.31 of2009. 4.The assessee, who was engaged in the manufacture and saleof aluminium conductors, filed its return of income on30.12.1999 declaring a total income of Rs.28,83,800/-. Thereturn was processed under Section 143(1), on 29.02.2000.Notice under Section 148 of the Act was issued, on 18.02.2004.In response to the same, the assessee stated that the returnfiled, on 30.12.1999, may be treated as a return in response tonotice under Section 148 of the Act. Subsequently, the case wasdiscussed with the Assessing Officer wherein, the assessee tooka stand that during the assessment year under consideration, theassessee was trying its level best to get orders from the TamilNadu Electricity Board and others. Due to low margin offered bythe Board, they could not get relevant orders. However, theassessee company's assets such as machinery, vehicles, trucks,furniture and fittings, factory sheds were maintained with thehope of getting orders. 5.Further, the assessee continued all its licenses,telephone and electricity connections and also retained theirexisting staff strength only with the object of procuring theorders profitable to the assessee company. The assessee could https://hcservices.ecourts.gov.in/hcservices/ 5.Further, the assessee continued all its licenses,telephone and electricity connections and also retained theirexisting staff strength only with the object of procuring theorders profitable to the assessee company. The assessee could https://hcservices.ecourts.gov.in/hcservices/ not get sufficient orders from the Electricity Board due to thefact that the value of raw material was very competitive andpayments from the electricity boards was not received on time.It was pointed out that for the assessment year 2001-02, theexplanation offered by the assessee was accepted by theTribunal. Therefore, the assessee submitted that the claim ofbusiness expenses be allowed due to the above stated facts. Theassessment was reopened primarily on the ground that for theyear under consideration, there was no manufacturing or sale ofany commodity and the other income mainly included electricityand maintenance charges collected from the tenants and paid tothe Electricity Board. As against the income, the assesseeclaimed huge expenditure and loss under the head “business”. 6.The Assessing Officer pointed out that the question iswhether expenses other than those related to the income fromwarehousing are allowable while computing the income from houseproperty. It was pointed out that in terms of the provisions ofthe Act, when income is computed from house property, onlyprescribed expenses mentioned in Section 24 are to be allowed.However, the assessee incurred certain expenditure on salary,electricity and telephone charges and claimed it as loss underthe head “business”. The Assessing Officer considered theassessee's submission and held, undisputedly and admittedly, thebusiness of manufacturing and sale of aluminium conductors havestopped once and for all and from 01.04.1998 onwards, there wasno manufacture and sale. The assessee would state that theywere trying to get business, which would not qualify as abusiness activity, as only manufacturing/production activityqualifies as the business activity and the assessee has notpurchased any article or thing. The business of manufacturingwas dead for all commercial purpose. 7.Further, the Assessing Officer held that the assessee wasalive to the situation that it had income in the form of leaserentals and the expenditure like telephone, electricity chargesand salary was incurred for fulfilling the legal and otherformalities of maintaining the assessee company. The incomefrom the lease rentals are taxed under the head “house property”and for the income taxed under the house property, theexpenditure incurred on fulfilling the legal and otherformalities of the assessee company is not allowable.Therefore, the argument of the assessee that the expenses had tobe allowed to continue the business of the assessee company isnot sustainable and took note of the Director's report, whereinit has been clearly mentioned that the assessee company is notengaged in the production of conductors. 8.Further, with regard to the plea of depreciation, it washeld that depreciation is allowable only if the assets are usedfor the purpose of business and since the asset has not been putto use, depreciation claim is not allowable. Further, withregard to the order passed by the Tribunal for the assessmentyear 2001-02, it was observed that the said matter was decidedin favour of the assessee on a technical ground. 9.The assessee filed appeal before the Commissioner ofIncome Tax (Appeals)-XII, Chennai (for brevity, “the CIT(A)”),who by order dated 21.03.2006, affirmed the order passed by theAssessing Officer. The assessee carried the matter by way ofappeal to the Tribunal which affirmed the order passed by theCIT(A) and this is how the assessee is before us by way of thisappeal. 8.Further, with regard to the plea of depreciation, it washeld that depreciation is allowable only if the assets are usedfor the purpose of business and since the asset has not been putto use, depreciation claim is not allowable. Further, withregard to the order passed by the Tribunal for the assessmentyear 2001-02, it was observed that the said matter was decidedin favour of the assessee on a technical ground. 9.The assessee filed appeal before the Commissioner ofIncome Tax (Appeals)-XII, Chennai (for brevity, “the CIT(A)”),who by order dated 21.03.2006, affirmed the order passed by theAssessing Officer. The assessee carried the matter by way ofappeal to the Tribunal which affirmed the order passed by theCIT(A) and this is how the assessee is before us by way of thisappeal. 10.The learned counsel elaborately set down the factualposition and endeavoured to convince this Court that theassessee did not close down its business, but was maintainingthe machinery such as paying salary to the employees, renewal oflicense with a faint hope that orders would be placed on theassessee company so as to enable them to revive themanufacturing activity. It is further submitted that theTribunal ought to have allowed the assessee's appeal, since inrespect of the same issue for the assessment year 2001-02, theTribunal by order dated 31.08.2004, has decided the case infavour of the assessee. 11.It is submitted that the decision of this Court in thecase of P.V.Gajapathi Raju vs. CIT reported in (1989) 176 ITR0238, is clearly distinguishable on facts and the CIT(A)erroneously applied the said decision. It is submitted that inthe said case, the assessee was a financier who stopped itsbusiness whereas, the assessee in this case had not stopped thebusiness, but had maintained all the facilities which clearlyshows that the intention of the assessee is not to discontinuethe business. 12.To support her contention, the learned counsel placedreliance on the decision in the case of L.VE.Vairavan Chettiarvs. CIT reported in (1962) 72 ITR 0114 and the decision in thecase of CIT vs. L.G.Ramamurthi & Ors., reported in (1977) 110ITR 0453 (Mad). Further, the learned counsel referred toSection 71 of the Act and submitted that the assessee was https://hcservices.ecourts.gov.in/hcservices/ entitled to set off the business loss against the income fromhouse property. 13.Mr.Karthik Ranganathan, learned Senior Standing Counselappearing for the Revenue submitted that the assessee had fileda return admitting that they had earned income from houseproperty by letting out the warehouse. 14.1. Referring to Section 56 of the Act, which deals with'income from other sources', it is submitted that in terms ofSection 56(1) of the Act, income of every kind which is not tobe excluded from the total income under the Act shall bechargeable to income-tax under the head 'income from othersources', if it is not chargeable to income-tax under any headsspecified in Section 14, items A to E. 14.2. Referring to sub-Clause (ii) in Section 56(2), it issubmitted that income from machinery, plant or furniturebelonging to the assessee and let on hire, if the income is notchargeable to income-tax under the head “Profits and gains ofbusiness or profession”. 14.3. Thus, it is submitted that the assessee was notentitled to seek a set off of what they have incurred asbusiness expenditure especially when, there is no businessactivity by the assessee. 15.Further, the learned counsel referred to Section 24 ofthe Act which refers to “income from house property” and in sub-Clause (a) there of, a sum of thirty per cent of the annualvalue is permissible as deduction and in addition there to,there can be no other deduction. 14.2. Referring to sub-Clause (ii) in Section 56(2), it issubmitted that income from machinery, plant or furniturebelonging to the assessee and let on hire, if the income is notchargeable to income-tax under the head “Profits and gains ofbusiness or profession”. 14.3. Thus, it is submitted that the assessee was notentitled to seek a set off of what they have incurred asbusiness expenditure especially when, there is no businessactivity by the assessee. 15.Further, the learned counsel referred to Section 24 ofthe Act which refers to “income from house property” and in sub-Clause (a) there of, a sum of thirty per cent of the annualvalue is permissible as deduction and in addition there to,there can be no other deduction. 16.Further, it is submitted that even in the assessment year2003-04, there was no manufacturing activity and the board ofthe assessee company passed a resolution and entered into amemorandum of understanding with their sister concern, switchedover to marketing of products manufactured by third parties.Thus, it is the submission that without business activity,neither business expenditure, nor business loss can be claimed. 17.Further, it is submitted that there are two types ofincome, viz., active income where there is requirement to have abusiness income and there should be an activity such asmanufacturing activity whereas, running of property such as inthe assessee's case are all passive income and thus, both cannotbe mixed up together. https://hcservices.ecourts.gov.in/hcservices/ 18.In support of his contention, the learned counsel placedreliance on the decision of the Division Bench of the High Courtof Allahabad in the case of Chief Commissioner of Income-tax vs.Kisan Sahkari Chini Mills. Ltd., reported in [2005] 145 Taxman363 (All.) and the decision of the Division Bench of the BombayHigh Court in Devi Electronics (P.) Ltd., vs. Income-tax Officer5(1) (3) reported in [2017] 77 taxmann.com 259 (Bombay). 19.Heard the learned counsels for the parties. 20.The short issue which falls for consideration is whetherthe appellant is entitled to the benefit of set off of businessloss against its other income in respect of the three assessmentyears under consideration, viz., 1999-2000, 2000-01 and 2002-03. 21.First, let us consider the submission of Ms.Sree LakshmiValli, that the Tribunal ought to have followed its earlierdecision in the assessee's own case for the assessment year2001-02. This decision of the Tribunal has been confirmed bythe Hon'ble Division Bench of this Court in T.C.A.No.441 of2005, dated 02.01.2012. In the said appeal, before this Court,two substantial questions of law were framed for consideration,first of which was whether the Commissioner of Income-tax wasjustified in reversing the assessment order under Section 263 ofthe Act. 22.The second substantial question of law was whether in thefacts and circumstances of the case, business expenditure andbusiness loss can be set off against the income returned by theassessee being only the income from the house property after theclosure of the business in the earlier years. 23.We have perused the order passed by the Tribunal againstwhich T.C.A.No.441 of 2005 was filed. We find from the order ofthe Tribunal that the Tribunal, to come to a conclusion that theassessee did not stop its business, observed that the assesseestarted distribution and marketing of certain different items ofits sister company, since there was a lull in their business,there was a temporary stoppage of manufacture of electricalconductors. This observation was made by the Tribunal to holdthat the Commissioner of Income-tax was not justified ininvoking the power under Section 263 of the Act. When thematter was carried on appeal by the Revenue to this Court, theCourt proceeded on the basis that there were two lines ofactivities and they are interconnected, inter-dependence and https://hcservices.ecourts.gov.in/hcservices/ unity to show the common management. The Division Benchaffirmed the order passed by the Tribunal that there was atemporary stoppage of business. Subsequently, the assesseecontinued the business in distributorship. Unfortunately, thefactual position being, even in the assessment year 2003-04, nobusiness activity was commenced, viz., the business activity ofthe assessee, that is, manufacture of aluminium conductors. Thebusiness activity started by the assessee in the assessment year2003-04 was entirely a new line of activity and the Board ofDirectors passed a resolution, memorandum of understanding wasentered into and it is not a manufacturing activity, but atrading or a distribution activity. Therefore, we are of theconsidered view that the decision rendered by the Tribunal forthe assessment year 2001-02 cannot render any assistance to thecase of the assessee, more particularly when the substantialissue in the said year was whether power under Section 263 ofthe Act could have been invoked by the CIT(A). Therefore, thefirst contention raised by the learned counsel for the assesseestands rejected. 24.Next we move on to consider as to whether the findingrendered by the two authorities, viz., the Assessing Officer andthe CIT(A), and the Tribunal, was just and proper. We find thatthe order passed by the Assessing Officer to be a reasonedorder. Equally, we find the order passed by the CIT(A) was alsoa well reasoned order. Equally, the Tribunal also for its part,examined the factual position and rendered the finding. It isnot in dispute that the assessee had stated that they are in thebusiness of manufacture of electrical conductors. Therefore, tostate that by keeping the machinery idle, they would stillqualify as a manufacturing unit is a proposition which can neverbe accepted. In fact, the Division Bench in the case ofP.V.Gajapathi Raju (supra) took note of such a decision whicharose before the Hon'ble Supreme Court. At this juncture wequote paragraph 4 of the said judgment:- “4. It is not in dispute that during theaccounting years relevant to the two assessmentyears in question, the assessee had not made anyfresh advance or entered into hire-purchasetransactions, but that he had been merelycollecting or attempting to collect theoutstandings due to him by taking proceedingsagainst his debtors. Factually, therefore, thebusiness transactions of the assessee were at anend during the accounting years relevant to theassessment years in question. In other words, theassessee had not carried on any activity, whichcan be described as a business activity, whichwas capable of producing profit, which could be “4. It is not in dispute that during theaccounting years relevant to the two assessmentyears in question, the assessee had not made anyfresh advance or entered into hire-purchasetransactions, but that he had been merelycollecting or attempting to collect theoutstandings due to him by taking proceedingsagainst his debtors. Factually, therefore, thebusiness transactions of the assessee were at anend during the accounting years relevant to theassessment years in question. In other words, theassessee had not carried on any activity, whichcan be described as a business activity, whichwas capable of producing profit, which could be charged to tax. The circumstances that theassessee endeavoured his best to collect theoutstandings cannot be characterised as abusiness activity. It is, in this connection,that the decision of the Supreme Court in CIT v.Lahore Electric Supply Co. Ltd. [1966] 60 ITR 1,is relevant. The Supreme Court pointed out thatit would be laying down strange law to hold thatwhere a business, in fact, ceased to be run, itmust be deemed as continuing because theoutstanding liabilities of that business had notbeen liquidated and business as contemplated isan activity capable of producing a profit andpayment of outstanding liabilities is not anactivity which can ever produce such a result. Tosimilar effect is the decision in IndraprasthaSteel Industries Ltd. v. ITAT (1973) 88 ITR 138(Delhi). There also, during the accounting periodrelevant to the assessment year 1967-68, theassessee did not make any purchases, nor did itspend any amount on purchase of stores and sparesconsumed and had no stock in possession, but itwas realising its dues and earned interest on theoutstandings from the purchasers of themachinery. Affirming the order of the Tribunal,the court held that merely because the assessee,during the relevant year, engaged itself inrealising its assets and had earned interest, itcannot be said that it had engaged in anybusiness. The principle laid down in theaforesaid that it had engaged in any business.The principle laid down in the aforesaiddecisions would squarely apply to the facts ofthis case when it is seen that, during theaccounting years relevant to the assessment yearsin question, the assessee had not made anyadvance at all or entered into hire-purchasetransactions, but had merely been realising theoutstandings. In view of the factual findingregarding the cessation of business of theassessee during the accounting years relevant tothe assessment years in question, it follows thatthe Tribunal was quite right in concluding thatthe assessee had not carried on any businessduring the assessment years in question.” 25.The Division Bench in P.V.Gajapathi Raju (supra) tooknote of the decision of the Hon'ble Supreme Court in CIT vs.Lahore Electric Supply Co. Ltd., reported in (1966) 60 ITR 1(SC), wherein, the Hon'ble Supreme Court held that it would belaying down a strange law to hold that where a business, infact, ceased to be run, it must be deemed as continuing becausethe outstanding liability of that business had not beenliquidated and business as contemplated is an activity capableof producing a profit and payment of outstanding liabilities isnot an activity which can ever produce such a result. 25.The Division Bench in P.V.Gajapathi Raju (supra) tooknote of the decision of the Hon'ble Supreme Court in CIT vs.Lahore Electric Supply Co. Ltd., reported in (1966) 60 ITR 1(SC), wherein, the Hon'ble Supreme Court held that it would belaying down a strange law to hold that where a business, infact, ceased to be run, it must be deemed as continuing becausethe outstanding liability of that business had not beenliquidated and business as contemplated is an activity capableof producing a profit and payment of outstanding liabilities isnot an activity which can ever produce such a result. 26.Further, reliance was placed on the decision of the DelhiHigh Court in Indraprastha Steel Industries Ltd., vs. ITATreported in (1973) 88 ITR 138 (Delhi). We find the factualposition in the said case is more or less identical to the caseof the assessee. In the said case, the assessee did not makeany purchases, nor did spend any amount on purchase of storesand spares consumed and had no stock in possession, but it wasrealising its dues and earned interest on the outstanding fromthe purchasers of the machinery. The Court held that merelybecause the assessee during the relevant year, engaged itself inrealising its assets and had earned interest, it cannot be saidthat it had engaged in any business. In the case of theassessee before us, the assessee does not dispute the fact thatthey stopped business activity. There was no manufacturing.Consequently, there was no sale. The stand taken by theassessee in the year 2004 while responding to the notice underSection 148 of the Act is by stating that they had retained themachinery, staff, electricity connection, telephone connection,etc., with a faint hope that they will get orders. 27.To be noted that what has been claimed by the assessee inthe instant case is, in fact, a business expenditure incurred bythem. Thus, in our considered view, the decision in LahoreElectric Supply Co. Ltd. (supra) and Indra-prastha SteelIndustries Ltd. (supra) would squarely apply to the case to non-suit the assessee. 28.With regard to the decision in CIT vs. Vikram CottonMills Ltd., reported in (1988) 169 ITR 0597 (SC), Ms.SreeLakshmi Valli relied on the same to demonstrate the intention ofthe assessee to start the business and not to close down it. Inour considered view, the stand taken by the assessee in 2004while responding to the notice under Section 148 appears to be aclear afterthought and the explanation given by the assessee canMills Ltd., reported in (1988) 169 ITR 0597 (SC), Ms.SreeLakshmi Valli relied on the same to demonstrate the intention ofthe assessee to start the business and not to close down it. Inour considered view, the stand taken by the assessee in 2004while responding to the notice under Section 148 appears to be aclear afterthought and the explanation given by the assessee can https://hcservices.ecourts.gov.in/hcservices/ hardly qualify to state that there was an intention on the partof the assessee to commence business. This is manifested fromthe fact that even in the assessment year 2003-04, manufacturingactivity did not commence and the assessee switched over to anew line of business, into trading. https://hcservices.ecourts.gov.in/hcservices/ hardly qualify to state that there was an intention on the partof the assessee to commence business. This is manifested fromthe fact that even in the assessment year 2003-04, manufacturingactivity did not commence and the assessee switched over to anew line of business, into trading. 29.In the decision in the case of L.VE.Vairavan Chettiar(supra), the Court found that there was nothing to show that thebusiness had been abandoned and the assessee was continued toincur expenditure and it would come up and the business would besuccessful. In the said factual background, the Court held thatthe resultant loss being business loss is deductible. The threefact finding authorities have held that the entire businessactivity have come to a grounding halt. Subsequently, theconduct of the assessee also clearly reveals that the same lineof business was never restarted. Therefore, we agree with theview expressed by the Tribunal that the assessee is not entitledfor the benefit of set off of business loss which is in fact,business expenditure against the other income for all the threeassessment years under consideration. 30.In Kisan Sahkari Chini Mills. Ltd. (supra), it has beenheld that Section 57 provides for deductions which areadmissible from the income taxable under the head “income fromother sources”. If a particular expenditure falls strictlyunder the sub-clause of Section 57 of the Act only then it isliable to be allowed as expenses otherwise not. It was furtherheld that expenditure incurred on maintenance of the office andfor planning of construction does not fall under any of the sub-clauses of Section 57 of the Act and therefore, the assesseecould not have allowed the expenses as deduction from theinterest income. Sub-Clause (ii) of Section 56(1) speaks ofincome from machinery, plant or furniture belonging to theassessee. Admittedly, no such income was generated andtherefore, the claim of expenditure to be a business loss and tobe set off against the income from house property is a pleawhich has to be necessarily rejected. 31.For the above reasons, the appeal stands dismissed andthe substantial question of law is answered against the assessee. 32.We may hasten to add that we are examining thecorrectness of an order passed by the Tribunal under Section260A of the Act and we cannot convert ourselves into the thirdappellate authority to re-examine and re-appreciatethe factual position concurrently recorded by the threeauthorities. No costs. Sd/- Assistant Registrar(CS VIII) //True Copy// abr Sub Assistant Registrar To 1.The Income-tax Appellate Tribunal Chennai 'B' Bench, Chennai. 2.The Deputy commissioner of Income-tax, Company Circle IV(2)(i/c), Chennai-600 034. 3.The Commissioner of Income Tax (Appeals)-XII, 121, Mahathma Gandhi Road, Chennai-600 034. copy to The Section Officer,VR Section, High Court, Madras. +3cc to Mr.A.Muthukumar, Advocate Sr.53042+1cc to Mr.Karthik Ranganathan, Sr.53003 T.C. (A) Nos.31 to 33 of 2009 vg I[co]srg 22/08/2019