The Commissioner Of Income Tax, Faridabad v. M/S Precision Galvanising Works, Faridabad

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH. ITA No. 361 of 2004 Date of decision: 9.2.2011 The Commissioner of Income Tax, Faridabad -----Appellant Vs. M/s Precision Galvanising Works, Faridabad. ----Respondent CORAM:- HON'BLE MR JUSTICE ADARSH KUMAR GOELHON’BLE MR. JUSTICE AJAY KUMAR MITTAL Present:-Ms. Urvashi Dhugga, Sr.Standing Counsel for the revenue. None for the respondent. Adarsh Kumar Goel,J. 1.This order will dispose of ITA Nos.361. 371 of 2004, 568 and688 of 2005. All the four appeals have been filed by the revenue underSection 260-A of the Income Tax Act, 1961 (for short, ‘the Act’) and aresaid to involve same questions. 2. ITA No.361 of 2004 arises from order dated 4.6.2004 of theIncome Tax Appellate Tribunal, Bench SMC-I, New Delhi in ITANo.1926/Del/2000 for the assessment year 1995-96 and raises followingsubstantial questions of law:- “1.Whether the Hon’ble ITAT has erred in law in holding thatthe business of the assessee continued particularly whenelectricity connection had been cut off and no regularbusiness activities were done as all the business premiseswere lying closed? 2. Whether the Hon’ble ITAT has erred in law in deleting theaddition of Rs.9,01,232/- made by the Assessing Officer onaccount of expenditure relating to the closed business? 3. Whether the Hon’ble ITAT has erred in law in deleting thedisallowance of Rs.2,79,306/- made by the Assessing Officerby holding that the business of the assessee continued duringthe year? 3. The assessee filed return on the net loss which includedbrought forward losses. The Assessing Officer did not accept the return anddisallowed the expenses and brought forward loss on the ground that nobusiness was being carried on by the assessee. Its electricity supply hadbeen cut off and there was no transaction of business. The factory was lyingclosed. Operation of bank account also showed that no business was beingrun. No workers were employed. On appeal, the CIT(A) set aside theadditions on the ground that the assessee had operated the bank accounts, itsbooks of account were duly audited and thus, its business was continuing.On further appeal, the said finding was affirmed. 4.We have heard learned counsel for the appellant. None appearson behalf of the assessee inspite of service. 5. Learned counsel for the revenue submitted that the findingrecorded by the Tribunal was perverse. There was no business transaction.The factory of the assessee was lying closed. Its electricity supply had beencut off. 6.We find merit in the contention. The Assessing Officerobserved that except withdrawals and deposits in the Bank, there was noother transaction to show that the business was being carried on. The cash book was not properly maintained. The factory was lying closed. Electricityconnection had been cut off. There was no staff. These circumstancesshowed that the assessee was not carrying on any business. The plea ofcarrying on business was merely a legal device to avoid tax. The findingrecorded is as under:- 5. Learned counsel for the revenue submitted that the findingrecorded by the Tribunal was perverse. There was no business transaction.The factory of the assessee was lying closed. Its electricity supply had beencut off. 6.We find merit in the contention. The Assessing Officerobserved that except withdrawals and deposits in the Bank, there was noother transaction to show that the business was being carried on. The cash book was not properly maintained. The factory was lying closed. Electricityconnection had been cut off. There was no staff. These circumstancesshowed that the assessee was not carrying on any business. The plea ofcarrying on business was merely a legal device to avoid tax. The findingrecorded is as under:- “On perusal of profit and loss account, balance sheetannexed with the return of loss it transpired that as in thecase of M/s Super Steels an associates concern, this concernhas also reflected single sale of Rs.11,812/- and purchase ofRs.9,786/-. Besides this the assessee reflected interest ofRs.2926/- on advance, Rs.23,613/- from partners, interest onFDRs. 7499/- and sundry balances written backRs.2,01,011/-. Inquiries made reveals tht assessee’spremises was lying closed and no business was beingcarried on. Admittedly the electric supply had been cut offin February 1992. when confronted the assessee submittedvide letter dated 3.7.1997 that the assessee is a registeredpartnership firm engaged in job work/trading of differenttypes of wires and steel wire. The total turnover of the firmwas Rs.11,812/- during the year under consideration asagainst earlier year sales of Rs.3,31,259/-. According to theassessee the ‘word’ business is very wide and each case is tobe determined with reference to the particular kind ofactivity and occupation of the persons concerned. Thoughordinarily business implies a continuous activity in carryingon a particular trade of a vocation it may also includeactivity which may be called “quiescent”, in terms ofSupreme Court decision in the case of CIT v. CalcuttaNational Bank Limited 37 ITR 171. In view of this decision,the assessee pleaded that firm had carried on purchase andsale, made payment for job charges and earned income asshown in the profit and loss account, hence businessactivities are continued. 3. As regards interest accrued on short term deposits thesewere made out of funds available with the firm before the same were utilized for actual business and as such samewere incidental to the business activity of the assessee andinterest on short term deposits should be treated as businessincome. The assessee relied upon the decision of MadrasHigh Court reported on 876 Taxman -2. 3.2 The assessee further submitted that a single transactionof sale comes under the definition of business as beingadventure in the nature of trade provided the transactionbears clear indication of trade. The assessee relied upon thedecision of Supreme Court in the case of Narain SwadeshWeaving Mills v. CEPT 26 ITR 765, CIT v. KhariagarhTimber Traders 137 (MP) CIT v. Bharat InsuranceCo.Limited 142 ITR 342 (Delhi). 3. As regards interest accrued on short term deposits thesewere made out of funds available with the firm before the same were utilized for actual business and as such samewere incidental to the business activity of the assessee andinterest on short term deposits should be treated as businessincome. The assessee relied upon the decision of MadrasHigh Court reported on 876 Taxman -2. 3.2 The assessee further submitted that a single transactionof sale comes under the definition of business as beingadventure in the nature of trade provided the transactionbears clear indication of trade. The assessee relied upon thedecision of Supreme Court in the case of Narain SwadeshWeaving Mills v. CEPT 26 ITR 765, CIT v. KhariagarhTimber Traders 137 (MP) CIT v. Bharat InsuranceCo.Limited 142 ITR 342 (Delhi). 3.3 On perusal of cash book and ledger of the assessee ittranspires that except making withdrawal and deposits inbank there is no other transactions which could lead to theassessee’s as certain that the assessee was carrying onbusiness during the year. Cash book reflects balance ofRs.18,89,080.42 as on 1.4.94, despite so much cashavailable still on 29.6.94 the assessee is making withdrawalof Rs.50,000/- in cash and again on 30.6.94 Rs.3,50,000/- incash. Apparently a person having huge cash would not makenominal withdrawals of Rs.50,000/-. No explanation hasbeen given as to where has this cash was being kept whenthe premises of the assessee was lying closed and thepartners were not residing at Faridabad. Only few pages ofthe cash book has been written and it appears that it hasbeen fabricated in one sitting and has not been maintainedin the normal course. As per clause (3) of partnership deedexecuted on 1.7.84, the partnership was carrying on thebusiness of manufacturing and trading of steel galvanized,copper and aluminum wires manufacturing, dealing in bolts,nuts and industrial fasteners and all types of railway trackmaterial at its registered office and factory at 14/4, MathuraRoad, Faridabad. When the factory is lying closed and electric connection is also cut off how the business iscarried on manufacturing business during the year. Even thebank account is not in operation and bank has filed suit forrecovery of dues. Thus deduction of Rs.2,79,306/- onaccount of interest claimed by the assessee is without anybasis since no evidence has been produced that the bank hadraised demand for this amount nor the assessee furnishedany evidence that liability of this amount accrued during theyear. 3.4 The expenditure can be allowed as business expenditureonly if assessee has carried on business in the year underconsideration CIT v. Gemini Cashew Sales Corporation, 65ITR 643 (SC). It is not enough that the assessee has carriedon some other business during the year Ram ChandraMunna Lal v. CIT (17 ITR 394). Similarly the CalcuttaHigh Court in the case of Binani Printers Pvt. Limited v.CIT 143 ITR 338 held that expenditure in relation to aclosed business was not deductible from income and otherbusiness belonging to the assessee. In the present caseneither the bank has debited interest of Rs.2,79,306/- intheir books of account nor communicated this amount to theassessee. The business of the assessee is lying closed since 1992. No evidence has been produced that bank hasclaimed this amount. Accordingly the expenditure onaccount of interest which pertains to closed business of theassessee is not deductible as aforesaid. 3.5 The assessee has received interest of Rs.2926/- only.Besides this amount of Rs.25,00,000/- continued to beadvanced to M/s Aggarwal Hardwares and foundries and theassessee has not furnished any explanation as to whyinterest could not be charged from it when the assessee wascarrying on money lending business also. 1992. No evidence has been produced that bank hasclaimed this amount. Accordingly the expenditure onaccount of interest which pertains to closed business of theassessee is not deductible as aforesaid. 3.5 The assessee has received interest of Rs.2926/- only.Besides this amount of Rs.25,00,000/- continued to beadvanced to M/s Aggarwal Hardwares and foundries and theassessee has not furnished any explanation as to whyinterest could not be charged from it when the assessee wascarrying on money lending business also. 3.6 The assessee had adopted a clear device of preparing itsprofit and loss account with a single make belieftransactions of purchases/sale just to claim set off of lossesagainst interest income. It is not understood when electric connection was disconnected in February 1992, how thebusiness was being carried on. The assessee did not haveeven any working capital facilities with any bank anddispute was pending in court with the bank of India. Thoughthe assessee stated in letter dated 3.7.1997 that the businesstransactions are still in operation the assessee has notfurnished any evidence how the business transactions are inoperation and how many workers were employed. The casesrelied upon by the assessee are of no help since in thesecases the assesses were not carrying on any business earlierand had embarked upon the sole transaction and the disputewas whether the sole transaction was an adventure in thenature of trade. In view of decision of Supreme Courtreported 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 thenature of the new and sophisticated legal devises toavoid tax and consider whether the situation created bythe devices could be related to the existing legislationwith the aid of emerging techniques of interpretation aswas done in Ramsay’s case (1981) 2 WLR 449 AC 300,Burmah Oil (1982) Simon’s Tax Cases 30 and Dawson’scase (19884) All ER 530, 2 WLR 226 (BL), to exposethe devices for what they really are and to refuse to givejudicial benediction.” The device of carrying on business with a single sale andpurchase particularly when there was no working capital,electric connection had been disconnected in February 92 andno workers were employed, it cannot be said that the assesseewas carrying on business of manufacturing of wires duringthe year. Thus the loss worked out by the assessee cannot beallowed to be set off against income on account of interest asshown by the assessee. On perusal of schedule H to thebalance sheet it transpires that assessee had advancedRs.25,00,000/- in the preceding years and no interest is beingcharged. No explanation has been given as to whey interest could not be charged particularly when the assessee wascarrying on money lending business. As in the case of M/sSuper Steels, an associate concern, interest @ 15% is deemedto be income of assessee in respect of this advance whichcomes to Rs.3,75,000/-. 3.7 As regards decisions cited by the assessee reported at 142ITR 342 is not applicable to the facts of the case since in thatcase the assessee had carried on its statutory function ofcarrying an of insurance business under the Insurance Act,1938 whereas there are no such facts in the case of theassessee. In the case reported at 137 ITR 345 the businessactivity of exploitation of forests was held to be business byrelying upon the decision of Orissa High Court reported on 6STC 674. The facts of this case are altogether different fromthe case of the assessee. In the case of the assessee businesswas being carried on upto assessment year 1992-93 thereafter asingle entry of purchase and sale was being shown just to makeit appear that the assessee was carrying on its business activitywhile infact it was not being carried out. 3.8 In the light of these facts and decisions reported at 148 ITR154 and 157 ITR 77 (SC) the device of the assessee in claimingset off losses against interest income cannot be allowed.” 7.The CIT(A) allowed the appeal of the assessee on the groundthat even a single transaction could be treated as business. The quantum ofbusiness was not relevant. The bank transactions had been made. Nonwithdrawal of money from the bank was on account of outstanding loanliability. The account books had been audited. The assessee had claimedfollowing expenses:- 8.Finally, the CIT(A) concluded as under:- “I have considered the submission of the appellant firmand found that appellant firm is a registered partnershipfirm engaged in manufacturing and trading of differenttypes and sizes of iron and steel wires. The business firmis operating at plot No.34, Sector 6, Faridabad. The factshave never been denied by the Assessing Officer. Furtheras per clause 3 of partnership deed, the firm is involvedin business activities for compliance of the objectives ofthe partnership deed. The firm is engaged inpurchase/sale and other business activities by way ofinterest income on advance/partners/FDRs and sundrybalance written back, which have been duly credited inthe books of accounts maintained by the firm and got itaudited by Chartered Accountants firm, who has reportedthat a proper books of accounts have been maintainedand Assessing Officer has not pointed out anydiscrepancies in the audited accounts, except theallegation that few paper of cash book has been writtenand it appears that it has been fabricated in one sittingand has not been maintained in normal course, whichdoes not have any findings. The appellant firm has madedeposits and withdrawals from bank, got the materialsprocessed on job basis and made sale thereof and earnedinterest income on FDRs made out of the funds of thefirm, as such the business activities of the firm arecontinued and there is no closure of business of the firmat all. All the business transactions of the firm have beenduly accounted for and reflected in the trading and P&Laccount of the firm, the business activities have beenlooked after by the partners, credit facilities had beenavailed from Canara Bank. All these facts clearlyindicates the continuity of the business. The assessing officer never denied about the turnover ofthe appellant firm. During the assessment year 1995-96, the firm has made turnover of Rs.11,812/- as againstearlier year’s sale of Rs.3,31,259/-. The appellant firm iscarrying on systematic and organized business activitiespertaining to continued business of the firm as suchprofit/loss on these operations are covered under thehead income from business which indicated thecomposite business operations, and there is nosegregation of income, other than income from business.The earning for interest is indicated to the businessactivity of the firm as the FDRs made out of businessfunds available with the appellant firm which is abusiness income. I have considered the submission of the appellantand found that business of the firm has not been closed.The business of the appellant firm is continuing andthere is no segregation of business operation, as suchallowability of part of expenses amounting toRs.452817/- considering them as expenditure notpertaining to closed business and remaining expenditureof Rs.901232/- as per details given at point Nos. 5(2) ofthis order treating these expenditure pertaining to closedbusiness, applying his own ratio for deciding theseparate business operations of the firm, has no basis andthere was no device to avoid tax to set off losses againstinterest income of the business of the firm. I found thaton facts of the case, the business of the firm, cannot beconsidered as closed and disallowance of theseexpenditure cannot be sustained and is deleted.” 9.The Tribunal has affirmed the above finding. 10. It is clear that the CIT(A) as well as the Tribunal erred inholding that the assessee was still carrying on business. It has not beendisputed that the electricity supply of the assessee had been cut off and thebusiness 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. Nodoubt, if business is being run, its volume may not be conclusive. However,where numerous circumstances indicate closure, insignificant turnover canbe taken into account to determine whether such entry is only being used asdevice. The CIT(A) in the circumstances was required to go into thequestion whether plea of the assessee that it was carrying on business wasmerely a device to avoid tax by claiming carry forward of losses andbusiness expenses which could be allowed only if the business was stillcontinuing which has not been done. In the circumstances of the case, thefinding of the CIT(A) as affirmed by the Tribunal cannot be sustained. 11. Accordingly, we answer the question in favour of the revenue,set aside the impugned orders of the CIT(A) and the Tribunal and remit thematter back to the CIT(A) for fresh decision in accordance with law. (Adarsh Kumar Goel) Judge February 9, 2011‘gs’ (Ajay Kumar Mittal) Judge