TMI Blog2013 (9) TMI 262X X X X Extracts X X X X X X X X Extracts X X X X ..... t be said that the assessee has closed/discontinued us business activity its own. The establishments of the assessee were intact and they were to be maintained. Staff members were kept and salaries were paid to them Loans taken from various banks and others for the purpose of business activity in past were outstanding during the years under consideration; therefore, any interest accrued was to be paid during the year under consideration or was payable. The assessee is having valid BSE card which could not be used for the reason that SEBI has passed an order barring the assessee not to do any business activity. Therefore, it cannot be said that the assessee could not use the BSE card its own which was ready to use – Assessee’s business has not come to an end. The meaning of discontinuation is explained in the Law Lexicon where “it implies a voluntary act and abandonment of possession followed by the actual possession of another, it implied that the person discontinuing has given up the lend and left it to the possessed by anyone choosing to come in - In the present case neither the business is discontinued on account of voluntary act of the assessee nor the same has put to stop i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by Rs.1,07,98,248/- by disallowing the carry forward loss of Rs.1,07,98,248/- on account of trading in shares and securities claimed by the assessee as the assessee has not carried any business activity during the year under consideration. 2.2 The relevant facts are that the assessee, a company, engaged in the business of trading in shares and securities had claimed carry forward business loss of Rs.38.68 crores and loss from speculation business in shares and securities of Rs.1,07,98,248/-. The speculation business loss was mainly on account of decrease in the value of stock in trade. The Ld.CIT(A) disallowed the carry forward of the impugned speculation loss and added the same to the total income of the assessee as no business activity was carried on by the assessee consequent to the ban imposed and cancellation of the registration by the SEBI by its orders dated 04.04.2001, 21.06.2001 and 16.05.2002 by holding that the AO had wrongly allowed the loss carried forward for setting off in the subsequent year. Aggrieved by the impugned decision, the assessee has raised this ground in the appeal before us. 2.3 Before us, the Ld.AR of the assessee has pointed out that the ITAT in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the relevant portion of the said order are contained in para 17 to 22 and the same is extracted hereunder for ready reference: Ground no. 5 raised by the assessee reads as follows: 5. The CIT(A) erred in enhancing the income of the appellants by Rs.37,99,796/- by not allowing expenses claimed by the appellants on the ground that the appellants have not carried on any business activity during the year under reference and thereby not allowing carry forward of loss of Rs.37,99,796/-. The appellants contend that on the fact and circumstances of the case and in law, the CIT(A) ought not to have disallowed the expenses claimed by the appellants inasmuch as the appellants have incurred the impugned expenses in pursuit of business. Consequently, the appellants claim that the appellants have incurred loss which ought to be allowed to be carried forward. 18. The business of assessee was trading in shares and securities. There was no sale and purchase of shares for the year. However the assessee had shown decrease in value of closing stock of shares to the tune of Rs.37,99,796/-. In view of explanation below section 73, the AO held that the assessee is deemed to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mstances, was considered by the Tribunal in the case of NH Securities vs. ACIT, ITA NO. 6875/Mum/08 (another group company of the Assessee) and this Tribunal held as follows: 2. Ground no. 1 raised by the assessee reads as under:- 1. The CIT(A) erred in enhancing the income of the appellants by Rs.31,47,188/- by not allowing expenses claimed by the appellants on the ground that the appellants have not carried out any business activity during the year under reference and thereby not allowing carry forward of loss of Rs.31,47,188/- The appellants contend that on the facts and circumstances of the case and in law, the CIT(A) ought not to have enhanced the income of the appellants and ought to have allowed the carry forward of the business loss of Rs.31,47,188/- inasmuch as the appellants have carried on business during the years. 3. During the course of assessment proceedings, the AO treated the business of Rs.31,47,188/- as speculation loss and allowed to be carried forward as speculation in view of the explanation below section 73 of the Act. No such set-off was allowed on the income from other sources. During the course of appellate proceedings, the learned C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been considered by the Mumbai Bench of ITAT in the assessee s sister concern case, viz. KNP securities P. Ltd. in ITA Nos. 6008 5009/Mum/07 for AYs 2003-04 2004-05 vide order dated 29th May, 2009. The said decision was followed by the ITAT, Mumbai Bench in another sister concern case of the 2111/Mum/08 for Assessment Year 2001-02 2002-03, order dated 31.12.2010. 5. On the other hand, the learned DR submitted that finally the Hon ble High Court and Supreme Court confirmed the order passed by the SEBI and he supported the order passed by the CIT(A) in support of revenue s case. 6. We have heard both the parties, perused the record and gone through the orders of the authorities below. The CIT(A) passed enhancement order on the ground that the assessee has not carried out any business during the year and allowability of business expenses u/s 37 the assessee has to carry out the business activity and directed the AO to enhance the assessment. Under similar facts and circumstances, the ITAT in the case of Triumph Securities (supra) following decision in the case of KNP securities P. Ltd (supra), held as under:- After hearing both the parties, we find identical is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 94 of the paper book. In view of these facts and circumstances, the assessee was not allowed to do its business activity in share on the stock exchange floor. 5.1 Not doing business activity was not on account of assessee s will but on account of forced circumstances; therefore, it cannot be said that the assessee has closed/discontinued us business activity its own. The establishments of the assessee were intact and they were to be maintained. Staff members were kept and salaries were paid to them Loans taken from various banks and others for the purpose of business activity in past were outstanding during the years under consideration; therefore, any interest accrued was to be paid during the year under consideration or was payable. The assessee is having valid BSE card which could not be used for the reason that SEBI has passed an order barring the assessee not to do any business activity. Therefore, it also cannot be said that the assessee could not use the BSE card its own which was ready to use. In these circumstances, we are of the considered view that the assessee s business does not come to an end or discontinued. 5.2 The meaning of discontinuation is explained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts before the Hon ble High Court were that the assessee was a private electric company. Its undertaking vested with the State Government by reason of the enactment of the Tamil Nadu Electricity Supply Undertaking (Acquisition) Act, 1973. After an unsuccessful attempt to challenge the validity of that Act in the High Court, the assessee had filed appeals before the Supreme Court which were pending during the relevant years i.e. AYs 1975-76 to 1979-80. The AO held that the assessee was not carrying on any business and limited the salary paid to the employees of the assessee to 10% and the audit fee was limited to 15%. That was affirmed by t he first appellate authority. However, the Tribunal held that the assessee was carrying on business and was entitled to the deductions claimed by the assessee. On reference, the Hon ble Madras High Court affirmed the view taken by the Tribunal. 6.2 The ratio of the decision of the Hon ble Madras High Court is squarely applicable on the facts of the present case as in the present case also the assessee was restricted by the order of the SEBI not to do any business activity, however, establishment of the assessee was maintained and various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound or observed by the High Court in appeal from the order in the proceedings u/s 45 of the Specific Relief Act or by the Privy Council but upon the findings of fact recorded by the Tribunal. Expenditure incurred to resist in a civil proceedings the enforcement of a measure, legislative or executive, which imposes restrictions on the carrying on of a business, or to obtain a declaration that the measure is invalid, would, if other conditions are satisfied, be admissible as a deduction u/s 10(2) (xv) 7.1 The ratio of the decision of the Apex Court also goes in favour of the assessee as the litigation expenses incurred in respect to its business were held as business expenditure. 7.2 In the present case also all the expenses incurred are connected with the business of the assessee only; therefore, the expenses claimed by the assessee are allowable. 8. In the case of M/s Marine Labour Supplying Co, decided in ITA No. 6048 6049/Mum/07 vide order dated 2.12.2008, the Tribunal by following the decision in the case of Ruia Shelters Ltd in 10 SOT 157 (Mum) and in the case of Chunilal Co in 4 SOT 309 (Mum(TM) held that if for the reason due to dullness of business no bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s sent t the file of the AO. The assessee has contended that depreciation and interest have been allowed by the Tribunal as allowable while passing order for Assessment Year 2000-01. The AO will take into consider the order of the Tribunal and if it is found that facts are similar then of course, in view of the decision of the Tribunal, the claim of the assessee on account of depreciation and interest has to be allowed." 17.1 Since the facts of the impugned appeal are identical to the facts in the case of the sister concern of the assessee i.e. KNP Securities P Ltd; therefore, respectfully following the decision of the Tribunal, we hold that the assessee is entitled to claim various expenses debited in the P L Account. We hold and direct accordingly. The ground raised by the assessee is accordingly allowed . 7. Since the issue under consideration is identical to that of the case decided by the Co-ordinate in the case of Triumph Securities Ltd.(supra), we respectfully follow the same and in the light of that this ground of the assessee is allowed. 22. In short the reasoning of the Tribunal is that the Assessee could not do business because of the ban imposed on its t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ues stand covered by the said decisions in favour of the assessee. The Ld.AR has further relied on the decisions in the cases of VST Industries Ltd. [41 SOT 415 (Hyd)], Goodlas Nerolac Paints Ltd [188 ITR 1 (Bom)] and Lords Dairy Farm [27 ITR 700 (Bom)] in support of the assessee s case. These decisions are relevant for the proposition that amounts written off of associate concern is allowable and courts will generally not interfere with the decision of the assessee to write-off. 3.2.1 On the other hand, the Ld. Counsel for the assessee has vehemently argued that the assessee has involved in circular trades and adopted colourable devices to reduce the total income as most of the debts are pertaining to the transaction of group concerns, associate concerns of group connected with the assessee company. Hence, the amount written off being stage managed losses/debts have been correctly disallowed by the AO and upheld by the Ld.CIT(A). He has also relied on the decision in McDowell s case reported in 154 ITR 148. In the facts and circumstances of the case, lifting of corporate veil and perusing the substance of the transaction would reveal that assessee has involved in circular trades ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision of Rs.97,27,368/-, it is submitted that the said amount is not strictly a provision created in this year. Perusal of the order of the Ld.CIT(A) is found that the same is not a speaking order on this issue. In view of that matter, we set aside these issues i.e. bad debt of Rs. 1,42,56,769/- and other bad debt of Rs.97,27,368/- to the files of the AO for fresh examination. Needless to further emphasis that the assessee to be given proper opportunity of being heard. Accordingly, this ground of appeal is partly allowed. 4. Ground no. 2 relates to the disallowance made by the AO and the same confirmed by the Ld.CIT(A) a sum of Rs.15,25,996/- being written off of sundry advances on the basis that the same is capital loss and not on account of any trading activities. 4.1 Briefly stated, the assessee had, in the computation of total income reduced an amount of Rs.15,25,996/- given as loan/advances to franchisees for their business, on becoming irrecoverable, written off the same as bad loan. However, in the assessment completed, the AO disallowed the claim of the assessee as the same is a capital loss and not on account of any trading activity. On appeal the Ld.CIT(A) confirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adras in CIT Vs. Brilliant Tutorials (P) Ltd., it has been held in the said case that the assessee having written off the dues from its franchisees after the latter closed down their business in the wake of sleep fall in the receipts, the claim for deduction under section 36(i)(vii) is allowable. The relevant head notes of the decision are extracted hereunder: Business expenditure- Bad debt- Closure of business of franchisees- Following steep fall in the receipts of the assessee s franchisees, a commercial decision was taken by them to close down the business and the dues from the franchisees were written off- There is nothing for the Revenue to suspect the motive of the assessee in writing off the debt- Question as to whether a debt has become bad or doubtful is a factual one- Honest judgment made at the time when the assessee wrote off the debt, in the light of the events leading to that stage, could not be found fault with- Claim for deduction under s. 36(1)(vii) could not be rejected. The above decision is applicable only when the assessee proves that there is/are dues from the franchisees which have become irrecoverable, whereas, in the instant case, since the said el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO or before the Ld.CIT(A) as to the physical loss of the shares. Also, we find merit in the reasoning of the Ld.CIT(A) that if the shares are lost, the assessee could have obtained duplicate for the same. It is pertinent to state that the cases relied on by the Ld.AR are not applicable to the facts of the present case as the first two decisions are pertaining to the damage to the property due to war the non-use of the office space due to the occupation of Japanese during the war respectively. The third decision relied on by the Ld.AR is also out of the context of the facts of the present case. In view of that matter, we do not find any infirmity in the decision of the Ld.CIT(A) on this count and the same is upheld. Thus Ground no.3 is dismissed. 6. Ground no.4 relates to the disallowance regarding the adjustment (reduction) of a sum of Rs.6,07,078/- from prior period income as the assessee is following mercantile system of accounting. 6.1 Briefly stated, in Annexure J to the statement of account accompanying the return of income, the assessee had shown a prior period income of Rs.13,98,128/-. The assessee had debited the expenses amounting to Rs.6,07,078/- after crediting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On appeal before the first appellate authority, the Ld.CIT(A) directed the AO to tax the said income separately under the head income from other sources as there was nothing to show that the income from FDRs were having any nexus with the business carried on by the assessee. Aggrieved by the impugned decision, the assessee has raised this ground in the appeal before us. 7.2 Before us, the Ld.CIT(A) has stated the case of the assessee is squarely covered in its favour in the identical set of facts by the decisions of the ITAT in the cases of NH Securities Ltd, ITA No. 6312/M/09 for the A.Y. 2006-07, Classic Shares and Stock Broking Services Ltd, ITA No 191 1135/M/2008 for the AYs 2002-03 2003-04 and V N Parekh Securities Pvt Ltd, ITA Nos 6876, 7047 7048/M/2007 for the AYs 2002-03, 2003-04 2004-05. 7.2.1 On the other hand, the Ld. Counsel for the Revenue has relied on the decisions in the cases of Allied Construction [105 ITD 1(DEL)], South Indian Shipping Corporation [240 ITR 24 (Mad)] Dr. V.P. Gopinathan [248 ITR 449(SC)] and contended that the impugned income has to be assessed under the head income from other sources as rightly directed by the Ld.CIT(A). 7.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43B being delayed payment to ESIC for the month of March 2004 beyond the due date. Aggrieved by the decision of the Ld.CIT(A), the assessee has raised this ground in the appeal before us. 8.1 Before us, the Ld. AR has stated that though the payments have been made beyond the due dates, the same have been paid before filing the return of income and the same are allowable in view of the Supreme Court decision in the case of Alom Extrusions [319 ITR 306(SC)] and Vinay Cements [213 CTR (SC) 268]. On the other hand, the counsel for the Revenue has relied on the orders of the AO and Ld.CIT(A). 8.2 We have heard both the parties on this ground and perused the material on record. It is not disputed that the assessee has paid a sum of Rs.2,058/- to the ESIC for the month of March 2004 before filing the return of income. It is a settled principle of law that in so far as the Income Tax Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed as per the principle laid down by the Apex Court in Vinay Cement case. In view of that matter, we delete the impugned addition of Rs.2,058/- made on account of delayed payment to the ESIC. Ground no. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the head income from other sources . Aggrieved by the impugned direction, the assessee has raised this ground in the appeal before us. 11.1 Before us the Ld.AR and the Ld.Counsel for the Revenue have placed the same arguments that they have placed on ground no 5 of the appeal which are stated in para 7.1 7.2 above and hence need not be reproduced again. 11.2 We have heard the rival submissions and perused the material on record. Following the same reasoning given in para 7.3 in the similar set of facts, we are of the view that it would meet the ends of justice if this issue is remanded back to the AO to verify the nature of the investment, source of investment and the purpose for which the investments are made after giving reasonable opportunity to the assessee to defend the case thereafter accordingly tax the impugned receipt under the relevant head of income. We direct and order accordingly. Ground no. 6 is treated as allowed for statistical purpose. 12. Ground No. 9 (c) relates to the direction given by the Ld.CIT(A) to the AO to tax the dividend income of Rs.10,799/-. 12.1 At the outset, it is pertinent to mention that the dividend income is exempt under the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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