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Karnataka Instrade Corporation Ltd. Versus Assistant Commissioner of Income-tax, Circle -2 (2)

2015 (10) TMI 1769 - KARNATAKA HIGH COURT

Denial of expenditure incurred in computation of income of the appellant-assessee - Tribunal denied the expenditure solely on the ground that the business activities are closed in view of the transfer of cement factory, plant and machinery - Held that:- As per the agreement, the assessee has to fulfill other obligations, for which they have to incur expenditure and these are the revenue expenditure. Hence, the assessee is entitled for deduction in respect of expenditure incurred in relation to t .....

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orney, mining lease was allowed to operate. In fact, the MCL themselves have admitted that the first payment of royalty for mining was made on 2-9-2000 itself. In the absence of any material with regard to expenditure on royalty, all the authorities concurrently held that the assessee has not incurred any expenditure in respect of royalty. Hence, the assessee is not entitled for the deduction towards royalty. - Decided in favour of the Revenue.

Denial of setting off of unabsorbed depr .....

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ure on maintenance of corporate office - whether is not deductible from the income of written back - Held that:- The Revenue has not challenged the deduction allowed by the Assessing Officer as well as the First Appellate Authority. However, the Tribunal disallowed the said allowance made by the authorities below which is contrary to law. The Hon'ble Supreme Court in a judgment reported in Mcorp Global Pvt. Limited [2009 (2) TMI 5 - SUPREME COURT] relying upon Hukumchand Mills v. CIT [1966 (9) T .....

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OF 2009 (IT) - Dated:- 9-10-2015 - VINEET SARAN AND B. MANOHAR, JJ. For The Appellant A. Shankar and M. Lava, Advs. For The Respondent : K.V. Aravind and G. Kamaladhar, Advs. JUDGMENT The assessee preferred this appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act' for short) being aggrieved by the order dated 6-2-2009 made in ITA No.855/Bang/2008 passed by the Income Tax Appellate Tribunal, Bangalore Bench-A, Bangalore (hereinafter referred to as & .....

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the balance sheet filed along with the return, the assessee had declared other income of ₹ 34,68,126/- which consists of interest income of ₹ 66,482/- and balances written back amounting to ₹ 34,01,644/-. In Schedule-13 which was titled as "Notes to the accounts", it was stated that depreciation was not provided during the year on the assets since the Unit is dormant and there is no production during the said year. Notices were issued under Sections 143(2) and also 1 .....

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Cement factory and also another power of attorney for operating mining lease for a sale consideration of ₹ 19.00 crores subject to fulfillment of terms and conditions mentioned in the agreement of sale. In pursuance of the said agreement of sale and power of attorney, the MCL took possession of the Cement Plant and started commercial production on 03-09-2000. The first payment of royalty for mining was made on 02-09-2000. As per the Annual General Meeting of the assessee-company held on 23 .....

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as to why the books of account shall not be rejected invoking Section 145 of the Act. 3. In pursuance of the notice issued, the authorized representative of the assessee filed his reply contending that though the assessee-Company entered into an agreement dated 25-08-1999 with the MCL, the physical possession was handed over during the financial year 2000-01 relevant to assessment year 2001-02. The agreement of sale contains stipulations such as, passing of title over all the properties includi .....

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f the agreement of sale will be violated, or in the alternative, if the Assessing Officer is of the opinion that these expenditures are not revenue expenditures, the Company may be allowed to deduct these expenses, out of sale consideration received from M/s.Madras Cement Limited and adjust the sale consideration accordingly. 4. The Assessing Officer after considering the matter in detail and taking into consideration all the relevant facts, denied all the expenditure claimed by the assessee exc .....

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and maintenance ₹ 25,389 (e) Royalty ₹ 71,71,643 Further, no claim has been made towards the rates and taxes to the Department of Mines and Geology for the assessment year 2002-03. The alternative claim with regard to capitalization of expenditure was also rejected by the Assessing Officer on the ground that the expenditure has been claimed as revenue expenditure. Out of the other declared income of ₹ 34,68,126/-, the Assessing Officer assessed the total income at ₹ 28,8 .....

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48,45,881/- paid to the Government and directed the Assessing Officer to verify the challans and if the proof of payment is produced, the same has to be allowed. Further, directed the Assessing Officer to examine the issue with regard to carry forward of loss and depreciation and allow the same from the income. However, the First Appellate Authority rejected the prayer insofar as ₹ 34,68,126/- and declared as income from other sources. No relief has been granted insofar as the royalty is c .....

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efore the Income Tax Appellate Tribunal, Bangalore. 6. The Revenue mainly contended that allowance of expenditure on traveling and conveyance, legal and professional expenses, repairs and maintenance amounting to ₹ 41,26,897/- even though no business activity was carried on, is contrary to law. When the business of the appellant-Company has already been transferred, the question of incurring of expenditure for the business does not arise. Further, allowing carry forward of business loss an .....

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) of the Act. The assessee is entitled to claim deduction of the expenses of the previous year. Hence, sought for setting aside the order passed by the First Appellate Authority by allowing their appeal. 8. The Tribunal, by its order dated 06-02-2009 allowed the appeal filed by the Revenue denying the deduction in respect of expenditure of ₹ 41,26,897/-and denied the deduction in respect of royalty. Further, the Tribunal has clearly held that the assessee is not entitled for set-off of bro .....

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penditures incurred in the computation of income of the appellant on the facts and circumstances of the case? (2) Whether the Tribunal was justified in law in not allowing the expenditure incurred by the Appellant-Company, which expenses have all been incurred wholly and exclusively for the purpose of earning income? (3) Whether the Tribunal erred in law holding that the appellant is not in the activity of business and consequently not entitled to (2) the allowance of expenses as an allowable de .....

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in not holding that the above expenditure ought to have been allowed in the computation of income on the sale of the assets of the appellant? 10. Sri. A.Shankar, learned counsel appearing for the appellant contended that the order passed by the Tribunal denying the deduction of various expenditure incurred in computation of the income of the appellant is contrary to law. Though the appellant entered into an agreement to sell the land, building, plant and machinery of the Cement Factory along wi .....

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2004-05 and 2006-07. The appellant has to incur expenditure for passing over clear title of all the properties including mines owned by the Company after complying with the conditions of the agreement. To perfect various titles of the properties, the appellant has to spend lot of money. During the relevant year, the Company has to incur various expenses in the form of payment of rates and taxes to the Department of Mines and Geology, traveling and conveyance expenses, legal and professional fees .....

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77; 34,68,126/- towards income from other sources, out of which, ₹ 66,482/- is the rental income. Though the Tribunal held the said income as "income from business", however, refused to grant set-off of brought forward unabsorbed depreciation from the heads of Profit and Gain from business, which contrary to law. In view of deeming fiction under Section 41(1) of the Act, the Tribunal ought to have taken the deeming fiction to its logical end and allowed the expenditure against su .....

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uring the assessment years 2001-02, 2003-04, 2004-05. The payment has been made in a phased manner and as and when the payment was made, it was brought to tax under the capital gain. In order to keep the cement factory in workable condition, the assessee had to incur expenditure and these expenditure are allowable. The order passed by the Tribunal runs contrary to the law laid down by the Hon'ble Supreme Court in the case of Commissioner of Income Tax v. M/s.Virmani Industries Pvt. Limited r .....

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ar of actual payment and not on accrual basis. The Assessing Authority denied the said deduction solely on the ground that the assessee has not carried on business for the assessment year 2002-03. The said order was confirmed by the First Appellate Authority. However, the Tribunal has not taken into consideration the statutory expenditure. Though the Assessing Authority has granted the expenditure in respect of maintenance of corporate office of the appellant-Company, the said deduction was uphe .....

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the respondent-Revenue argued in support of the order passed by the Tribunal and contended that as per the agreement dated 25-08-1999, cement factory, land, plant and machinery has been sold to M/s. MCL along with the irrevocable power of attorney for operating cement plant as well as the mining lease. The MCL also acknowledged that it has taken the cement plant and started commercial production on 3-9-2000. Further, first payment of royalty for mining was made on 2-9-2000. In view of the transf .....

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estion of incurring expenditure does not arise. He relied upon Section 28(1) and 41(1) of the Act in this regard. Further with regard to depreciation is concerned, the assessee declared the income of ₹ 34,68,126/-, which consists of interest income of ₹ 66,482/- and balances written back of ₹ 34,01,644/-. The assessee themselves have admitted in Schedule-13 that the unit is dormant and there is no production during the relevant assessment year. Hence, there is no question of de .....

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d the matter to the Assessing Authority insofar as rates and taxes is concerned. The Tribunal set aside the expenditure incurred with regard to traveling and conveyance, legal and professional fees, repairs and maintenance. No document has been produced to show that the assessee had incurred any expenditure with regard to payment of royalty. In support of his contention, he relied upon the judgments reported in (East Asiatic Company (India) Private Ltd. v. Commissioner of the Income tax) and [19 .....

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was under the rehabilitation scheme of Board of Industrial and Financial Reconstruction (BIFR). They could not continue the production from the year 1995. In order to come out of the clutches of BIFR, they entered into an agreement with M/s. MCL to sell the cement factory, along with plant and machinery including the mining lease as per the agreement dated 25-8-1999 subject to certain conditions. Initial payment of ₹ 4.75 crores has been made to M/s. MCL on 25-08-1999 and the remaining am .....

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ere was an agreement to sell on 25-08-1999, the actual transfer of the cement factory took place only in the subsequent assessment year. There is no transfer of business to M/s. MCL. All that the appellant has agreed to sell was only business assets consisting of land, building, plant and machinery of cement factory along with mining lease right. The appellant has claimed expenditure to an extent of ₹ 41,26,987/- in respect of traveling and conveyance, legal and professional fees, repairs .....

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ire property of the assessee for the assessment year 2000-01. The capital gain earned by selling of the cement factory was assessed for the assessment years 2004-05 and 2006-07. The department has accepted the same. However, the Tribunal disallowed the said expenditure holding that the assessee had closed the business in the year 1995 itself and no document has been shown that they had incurred any expenditure during the relevant period, though the plant and machinery has been transferred in the .....

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venue expenditure. Hence the assessee is entitled for deduction of the same. Though the assessee has not earned any income, to perfect the title to the properties the expenditure incurred are allowable deductions against the balances written back of ₹ 34,01,644/-, which is assessable as business income. This Court in a judgment reported in [2011] 203 Taxmann 200 (Kar) (Commissioner of Income-Tax, Bangalore v. Lawrence D'souza held that though the business was stopped in the year 1994, .....

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nue expenditure. Hence, the assessee is entitled for deduction in respect of expenditure incurred in relation to transfer of plant and machinery to M/s. MCL. As stated earlier, the Assessing Officer has accepted the expenditure for the assessment year 2004-05 and 2006-07. Hence, issues Nos. 1 and 2 are held in favour of the assessee and against the Revenue. 16. With regard to disallowance of deduction on royalty expenditure is concerned, the assessee has not produced any documents to show that t .....

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spect of royalty. Hence, the assessee is not entitled for the deduction towards royalty. We find there is no infirmity or irregularity in the said finding. Hence, issue No.3 is answered in favour of the Revenue and against the assessee. 17. Issue Nos.4 and 5 are with regard to denial of setting off of unabsorbed depreciation against the income is concerned. The assessee while filing the return declared interest income of ₹ 66,482/- and ₹ 34,01,644/- in respect of balances written bac .....

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hat when once the income on written back is assessed as business income by virtue of Section 41(1) of the Act, the expenditure incurred has to be allowed as deduction in arriving at business income. 18. Section 28 of the Income Tax Act, 1961 provides that the profit and gain of any business or profession carried on by the assessee, at any time during the previous year shall be chargeable to income tax under the head "Profits and Gains" of business or profession. Section 29 of the Act p .....

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ub-Section (2) of Section 41 of the Act, notwithstanding the fact that the assessee was not carrying on any business during the relevant assessment year, the provision contained in sub-Section (2) of Section 32 become applicable and consequently, the set-off has to be given for unabsorbed depreciation allowances of previous year brought forward in terms of that provision. 19. The Hon'ble Supreme Court in Virmani Industries case (supra) examined Section 32(2) of the Act and held that while av .....

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th carry forward and set-off of business loss. The proviso to clause (i) of sub-Section (1) Section 72 expressly provides that such a course is permissible only where "the business or profession for which the loss was originally computed continued to be carried on by him in the previous year relevant for that assessment year". In the absence of any words to that effect, it must be held that for availing of the benefit of Section 32(2), it is not necessary that the business carried on i .....

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ion that the business must have been carried on by the assessee during the relevant assessment year. Therefore, the Tribunal was right in accepting the claim of the assessee and confirming the orders of Additional Commissioner of Income Tax applying the ratio of judgment of Allahabad High Court in Rampura Timber and Turnery Company case. 21. Sri. K.V.Aravind, learned counsel appearing for the Revenue contended that for claiming benefit under Section 32(2) of the Act, the assessee has to establis .....

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in view of the authoritative pronouncement of Hon'ble Supreme Court in Viramani Industries case. 22. The Hon'ble Supreme Court in a judgment reported in (CIT v. Jaipuria Chaina Clay Mines (P) Limited [1966] 59 ITR 555) held that unabsorbed depreciation can be carried forward and would be set-off even against the profit under the head other than the "business income". The relevant paragraph reads as under: "It is, therefore, clear that effect must be given to depreciation .....

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s only if some part of the depreciation allowance still remains unabsorbed that it can be carried forward to the next assessment year…… But where any part of the depreciation allowance remains unabsorbed after being set off against the total income chargeable to tax, it can be carried forward under proviso (b) to clause (vi) to the following year and set off against that year's income and so on for succeeding years. The method adopted by the statute for achieving this result is .....

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