TMI Blog2010 (7) TMI 797X X X X Extracts X X X X X X X X Extracts X X X X ..... /Del/2007. In this appeal the first grievance of assessee is that learned CIT(A) has erred in confirming the disallowance of Rs. 93,91,706 which has been claimed by the assessee as revenue expenses on the ground that it is paid to the employee as severance cost. 3. The brief facts of the case are that assessee company was incorporated on 6-7-1999 as per the Companies Act, 1956. The company had started manufacturing of powdered soft drink in the name and style of Tang . It has filed its return of income for assessment year 2003-04 on 2-12-2003 declaring a loss of Rs. 12,37,31,510. The case of the assessee was selected for scrutiny assessment and statutory notices under section 143(2)/(1) were issued and served upon the assessee. As per the observation of the Assessing Officer in the assessment order, in response to the notices Shri Naveen Kapoor, FCA appeared on behalf of the assessee from time to time and submitted the details. On scrutiny of the accounts it revealed to the Assessing Officer that assessee has debited an amount of Rs. 93,91,706 in the Profit Loss account towards severance cost of employees. The Assessing Officer invited the explanation of the assessee to show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e full period is an allowable business expense under section 37 of the Income-tax Act. He further contended that Assessing Officer has granted all other expenditure claimed by the assessee for maintaining its corporate status meaning thereby, Assessing Officer has not construed that business of the assessee has totally been closed down. For buttressing his contention he drew our attention towards the decision of Hon ble Supreme Court in the case of K. Ravindranathan Nair v. CIT [2001] 247 ITR 178 . In this case assessee was an individual, carried on the business of processing cashew nuts in ten units. Four of these units were situated in Kerala. Of these four units, two were owned by the assessee and two were taken on lease. He faced labour problem in Kerala, consequent upon which he ordered a lockout of the four units there. Ultimately he surrendered two units which were taken on lease and two units were transferred to a company where he and his wife were only the shareholders. On account of closure of these four units he made a settlement with the labourers and paid sum of Rs. 4,18,107. He claimed the deduction of this amount in assessment year 1972-73 under section 37 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but suffice to say that if assessee has not closed down its business activity totally then on retrenchment of employees severance cost is to be allowed. In other words if an assessee has closed down one unit out of many units and incurred severance cost on account of termination of services of employees then such expense would be allowable to the assessee. The main emphasis of the assessee is that it has not closed down the business activity. It has suspended one of the activities i.e., manufacturing of powdered soft drink. It was not only engaged-in the manufacturing of powdered soft drinks rather it was trading also in this soft drink. The trading activity has been retained by the assessee and it has pursued it in the subsequent assessment year. Learned counsel for the assessee at the time of hearing brought to our notice that turnover of the assessee in assessment year 2005-06 became nil but in assessment year 2006-07 it is again Rs. 3,02,15,240 which increased to Rs. 15,06,25,852 in assessment year 2007-08. According to the assessee it indicates that it was just suspension of one activity. One has to bear in mind that business cannot be construed to mean any single activity. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 87 ITR 310 (AP), the Hon ble High Court of Andhra Pradesh decreed that if the expenditure is for the initial outlay or for acquiring or bringing into existence an asset or advantage of an enduring benefit to the business that is being carried on. the expenditure would be capital in nature. ( d )Alternatively, even if the expenditure is considered as revenue expenditure, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year vide Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802 (SC). 9. Dissatisfied with the action of Assessing Officer assessee carried the dispute in appeal before the learned CIT(A). It has filed the break-up of the expenses. These expenses were incurred under seven heads namely, freight charges, labelling, art work for packing material etc. Learned CIT(A) has allowed the expenses incurred by the assessee under all other heads except for market study expenses and product development charges. Under these two heads assessee has debited a sum of Rs. 9,77,325, Rs. 14,75,191 respectively. 10. Learned counsel for the assessee while impugning the order of learned CIT(A) contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stics. These materials have been placed on page Nos. 173-194 and 195 to 270 in Annexs. 18-19. Annexure 18 is a report which was prepared by AC Nielsen for the assessee in August, 2002. The objects for obtaining this report were three in nature namely, (1) The researcher was required to determine the trade of Tang s brand performance with price. (2) Gauge the consumer demand of Tang at the current price versus a low price. (3) If Tang can adopt a differential pricing between the base flavours and the new flavours. AC Nielsen has submitted a comprehensive report. Similarly AC Nielsen has submitted a report on advertising diagnostics. The report depicts the comparative study of different soft drinks i.e., Tropicana, Real, Rasna, Tang etc. If the advertisement was made with different modes i.e., one promoted with pictures; one promoted with stills etc. It is a report of expert about marketing and guidance for any assessee to market its consumer items. After going through these two reports with the assistance of learned representative, we fail to understand which new product has been developed and designed by the assessee. The endeavour of the assessee is to upgrade sale of its Tang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee by observing as under : uAs is evident from the audit report, the assessee has ceased its business operations in the financial year under consideration; uProvisions of section 32(2) are subject to the provisions of sections 72(2) and 73(3) and these sections mandate that the business must be in existence for allowability of these unabsorbed depreciation/losses. uWhen the business is no more in existence, the question of carry forward of unabsorbed depreciation and loss does not arise at all. uThere must not be a change in the assessee suffering the carried forward loss and claiming its set off. uContinuity of the business is a sine qua non for claiming the carry forward and set off of loss and depreciation. uThe losses and depreciation not absorbed in the current year are results of the carrying out of manufacturing of soft drinks by the assessee. But this very business has been ceased by the assessee, hence the question of carry forward and set off does not arise at all as the business itself has closed down. uThe assessee has also taken a decision in its board meeting to sell the business and assets. The very foundation of the loss and depreciation is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the asset in Surat division which was rejected by the Assessing Officer and view of the Assessing Officer was upheld by the learned CIT(A). It was disallowed by the Assessing Officer on the ground that expression "used" is employed in section 32 and assessee has not used the asset for business purpose. Therefore depreciation is not admissible. Learned counsel pointed out that depreciation was allowed to the assessee on the ground that asset at Surat was performing the part of the block of asset and the depreciation was to be considered on the block of assets of common business having different divisions. With regard to brought forward losses he contended that prior to 1-4-2001 there was a proviso with section 72(1)( i ) of the Act which contemplates that carry forward and set off of business losses shall be available to an assessee if only the business in which the losses were incurred is continued by the assessee. However this provision has been deleted by the Finance Act, 1999 with effect from 1-4-2000. Learned counsel for the assessee took us through both the provisions. He further submitted that Tribunal in the case of Efunds International (P.) Ltd. v. Dy. CIT [2009] 120 T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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