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TMI Blog2024 (7) TMI 499X X X X Extracts X X X X X X X X Extracts X X X X ..... s & circumstances of the case. (b) The authorities below ought to have appreciated that even though the business was discontinued, the appellant had to incur expenditure such as professional fees, consultancy charges towards pending income tax litigations, labour law compliances, bank charges etc., pertaining to erstwhile business which was neither extravagant nor excessive and therefore the business loss of Rs. 11,28,766/- needs to be allowed under the facts and circumstances of the case. 3. (a) The action of the authorities below in ignoring the tax rates adopted by the appellant as per DTAA between India - New Zealand on the interest income of Rs. 4,87,50,072/- and adopting the slab rates applicable to a Resident Individual is bad in law. (b) The authorities below failed to appreciate that the interest income of Rs. 4,87,50,072/- earned in India by a Non-Resident may be taxed in India subject to a maximum rate of 10% of the gross amount as per Article 11 of DTAA between India and New Zealand under the facts and circumstances of the case. 4. (a) The action of the authorities below in ignoring the tax rates adopted by the appellant as per DTAA between India - New Zealand o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant as regard to the rate, period and method of calculation of interest under the facts and circumstances of the case. 2. Ground No.1 (a) & (b) is general in nature, which do not require any adjudication. 3. The ground No.2(a) & (b) for our consideration is with regard to disallowance of business loss of Rs. 11,28,766/-. In this regard, the ld. A.R. submitted that the assessee was engaged in the business of rendering outsourced housekeeping services in the name and style of 'The Peoples Choice'. This business was transferred to M/s. Quess Corporation Ltd. on 06.02.2017. During the year under consideration, the assessee had incurred an expenditure of Rs. 11,29,290/- towards professional charges, consultancy charges and other expenditure such as ESI arrears and bank charges. 3.1 He submitted that it is pertinent to note that as per the provisions of Rule 6F(5) of the Income Tax Rules, 1962, r.w.s. 44AA of the Act, the assessee was required to maintain the books of account and other documents specified in sub-rule (2) and sub-rule (3) for a specified number of years. Further, considering the nature, size and complexity of the assessee's erstwhile business, he was required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee has already discontinued the business for many years back and the expenditure incurred in the assessment year under consideration cannot be considered as an expenditure wholly and exclusively incurred for the purpose of business. As such that expenditure cannot be allowed as deduction. The ld. D.R. relied on the following decisions: a) CIT Vs. Gemini Cashew Sales Corporation (65 ITR 643) b) Judgement of Madras High Court in the case of M. Seshadri Iyengar & Sons 152 ITR 734 (Madras) 5. We have heard the rival submissions and perused the materials available on record. The assessee pleaded that in the assessment year under consideration, assessee has incurred various legal expenditure to defend its cases and for the basic needs of the assessee, which is already discontinued in many years back and according to him this expenditure is incurred towards professional and legal charges to defend the litigation relating to the discontinued business and it is to be allowed. In our opinion, to allow any deduction of discontinued business, the business to be carried on by the assessee in the assessment year under consideration. 5.1 We gone through the decision relied by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of CIT v. Rampur Timber & Turnery co. [1981] 129 ITR 58 (All.) it was held that the expenditure incurred in retaining the status of the company, namely miscellaneous expenses, salary, legal expenses, travelling expenses and the like would be expenditure wholly and exclusively for the purpose of making or earning income, in the instant case the assessee was entitled to &duction under section 57(iii) in respect of the salary paid to its employee. The Tribunal was not justified in disallowing the assessee's claim." 5.3 Contrary to this, the ld. D.R. relied on the judgement of Hon'ble Supreme Court in the case of CIT Vs. Gemini Cashew Sales Corporation cited (supra), wherein held as under: "Two persons, 'W' and 'R', carried on business cashewnuts as partners in a firm. The partnership was dissolved on the death of 'R', and the business was taken over and continued by 'Won his own account. The services of the employees were not interrupted and there was no alteration in the terms of employment of the employees of the establishment. In proceedings for assessment of tax it was urged on by the assessee-firm that an amount of Rs. 1,41,506 taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the taxable profits of a trader, even if in certain conditions the obligation may cease to exist because of forfeiture of the right. Where, however, the obligation of the trader is purely contingent, no question of estimating its present value may arise, for to be a permissible outgoing or allowance, there must in the year of account be a present obligation capable of commercial valuation. As already observed, the liability to pay retrenchment compensation arose for the first time after the closure of the business and not before. It arose not in the carrying on of the business, but on account of the transfer of the business. During the entire period that the business was continuing, there was no liability to pay retrenchment compensation. The liability which arose on transfer of the business was not of a revenue nature. Profits of a business involve comparison between the state of the business at two specific dates. Normally the liability which occurs after the last date, unless its source is in a pre-existing definite obligation, cannot be regarded as a pan of the outgoing of the business debitable in the profit and loss account. A deduction which is proper and necessary for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business was actually closed. For the assessment year 1973-74, the assessee's claim for deduction of the amounts paid towards gratuity, retrenchment compensation and notice pay was disallowed by the ITO on the ground that the said sum was not deductible under section 36(1)( v). On appeal, the AAC confirmed the ITO's order. On second appeal, the Tribunal held that the amount paid towards the gratuity liability was deductible, but the amounts paid towards retrenchment compensation and notice pay were not deductible, as the amounts paid towards retrenchment compensation and notice pay on the closure of the business of the assessee could not be held to be a business expenditure. On reference, it was contended by the assessee that it closed down only a part of the business and not the whole of the business in the assessment year 1973-74 and that the whole business was closed only in the next year and that the retrenchment compensation claimed by the assessee related to that part of the business which had been closed in the year of account. HELD Except for a casual reference to the closure of part of the business in the statement of the case, none of the authorities be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pensation cannot be termed as expenditure wholly or exclusively for the purpose of the business. Thus, even if the assessee had followed a mercantile system of accounting and the credit entries in favour of the workmen and the debit entries against the assessee-firm could be taken as the basis for the assessee's claim for exemption in respect of retrenchment compensation, that claim was liable to be rejected on the grounds that the liability to pay retrenchment compensation arose only in the next assessment year when the business was closed and the credit or the debit entries, as the case may be, could only be in respect of a contingent liability during the relevant assessment year and such a contingent liability could not be taken as business expenditure to be charged against the profit. It was held by the Supreme Court in CIT v. Gemini Cashew Sales Corpn. [1967] 65 ITR 643 that the liability to pay retrenchment compensation arises only after the closure of the business and not when the firm is actually carrying on business and as such the same cannot be allowed as a business expenditure. Even assuming that the closure of the business took place in the relevant assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case and disallowed the same. We do not find any infirmity in the finding of the lower authorities and the same is confirmed. This ground of appeal of the assessee is dismissed. 6. With regard to next ground No.3(a) & (b) read with ground No.5(a) & (b): Tax rates on Interest income: 6.1 The ld. A.R. submitted that as the assessee stayed in New Zealand for 359 days during the year under consideration, he was a Resident of New Zealand and accordingly, his global income was taxable in New Zealand. Further, as per Article 11 of DTAA between India - New Zealand, the interest income earned by an assessee being a resident of the other Contracting State may also be taxed in India subject to a maximum rate of 10%. 6.2 Accordingly, while filing the return of income, the assessee declared the interest income amounting to Rs. 4,87,50,072/- in his return of income as per the above-mentioned DTAA. However, the learned assessing officer has stated that the assessee is not eligible to claim lower tax rates as per the DTAA and therefore, the interest income earned by assessee is taxable at slab rates as per the provisions of the Act. 6.3 He submitted that on perusal of the draft order of asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch attracts residence type taxation, the status of being a Resident of the contracting state is independent of the actual levy of tax on that person by that state. Therefore, taxability in one country is not sine qua non for availing relief under the DTAA from taxability in another country. 6.9 He placed reliance on the decision of Mumbai Tribunal in the case of ADIT(IT) vs. Green Emirate Shipping & Travels reported in 100 ITD 203. 6.10 He also placed reliance on the parity of reasoning in the decision of Jurisdictional High Court in the case of CIT vs. R.M. Muthaiah reported in 202 ITR 508. 6.11 Further, he submitted that the statement of the learned assessing officer that the assessee has not included his Indian income in his New Zealand's return of income is incorrect for the reason that the assessee was a "Transitional Tax Resident" of New Zealand for the year under consideration and consequently, the overseas interest income earned by such Transitional Tax Resident was eligible for temporary tax exemption in New Zealand for a period of 4 years. Therefore, he submitted that the said interest income earned in India was not included in the income tax return filed in New Zealan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) for the avoidance of double taxation of income under this Act and under the responding law in force in that country or specified territory, as the case may be, without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in the said agreement for the indirect benefit to residents-of any other country or territory), or ..................... 8. We have heard the rival submissions and perused the materials available on record. As rightly pointed out by the ld. A.R of the assessee, the assessee is a non-resident of India and resident of New Zealand and assessee's global income is taxable in New Zealand. As per the Article 11 of DTAA between India and New Zealand income earned by the assessee being a resident of New Zealand may be taxed subject to at a maximum rate of 10%. Admittedly, DTAA has overriding effect over the Income Tax Act. The department is denying the benefit of lower rate of tax as per Article 11 of DTAA on the reason that assessee's income is not subject to tax in New Zealand. It is to be noted that this income is not taxable in New Zealand a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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