Goodearth Engines (P) Ltd. vs Assistant Commissioner Of Income ...
1998 Latest Caselaw 213 Del

ORDER

U.B.S. BEDI, JIM.

U.B.S. BEDI, JIM.

This is a bunch of six appeals by the assessee relating to different assessment years i.e., 1980-81 to 1982-83, 1984-85 to 1986-87 involving identical issues, hence consolidated and being disposed of by single order for the sake of convenience.

2. The first two common grounds read as under:

1. That the CIT(A)-XVIII, New Delhi has grossly erred on facts and in law in holding that the business of the appellant company has been discontinued during the year.

2. That the CIT(A)-XVIII, New Delhi has grossly erred on facts and in law in upholding the action of the AO in treating the interest income of Rs. 42,206 as "Income from other sources" instead of business income.

3. In ground No. 2 in all these appeals, the interest income involved was to the extent of Rs. 42,205, Rs. 31,940, Rs. 41,543, Rs. 60,426, Rs. 37,965 and Rs. 16,259 for the asst. yr, 1980-81, 1981-82, 1982-83, 1984-85, 1985-86 and 1986-87 respectively.

4. Facts relating to these grounds for asst. yr. 1980-81 are like that assessee is a closely held private limited company deriving income from manufacturing and sale of agricultural pumping sets including engines and spare parts. For the assessment year under consideration, the assessee furnished its return of income returning a loss of Rs. 2,82,904 (including brought forward loss of Rs. 2,79,910) against which assessment was completed by the AO at an income of Rs. 71,250 by making several additions, disallowances and without giving benefit of carry forward or brought forward losses, which was challenged in appeal. The CIT(A) set aside the order of the AO to be framed de novo after verifying whether the assessee had business income during the year under consideration or not. The AO in the order passed pursuant to the set aside order of the CIT(A) computed the total income of the assessee at Rs. 71,250 i.e. on the same basis and at the same figure at which original assessment was completed.

5. In appeal, the CIT(A) confirmed the order of the AO allowing relief only of Rs. 660 for expenses incurred on sale of assets.

6. In further appeal, the Tribunal, Delhi Bench set aside the issue, whether the assessee has carried on business in the year under consideration or not, to the file of the AO, relying on its order in assessee's own case for asst. yr. 1981-82 and 1982-83. The AO in the order passed pursuant to the set aside order of Tribunal framed the assessment at an income of Rs. 70,590 which has been challenged before the CIT(A) on various grounds.

7. Similarly facts relating to asst. yr. 1981-82 are like this that for the year under consideration the assessee furnished its return of income declaring an income of Rs. 30,923 before set off of unabsorbed losses against which assessment was completed at an income of Rs. 45,153. Unabsorbed losses brought forward for earlier years were allowed to set off against the income of the year under consideration by the AO. In appeal the CIT(A) confirmed the order of the AO but directed the AO to allow expenses amounting to Rs. 9,515 to the assessee. The Tribunal in further appeal, set aside the issue, whether the assessee has carried on the business during the year under consideration or riot, to the file of the AO. The AO in the order passed pursuant to the order of the set aside after allowing a relief of Rs. 9,515 for expenses incurred by the assessee as directed by CIT(A) computed the total income of the assessee at Rs. 35,618 without allowing set off of unabsorbed losses brought forward from earlier year. The impugned order was challenged in appeal on various grounds.

8. Facts relating to asst. yr. 1982-83 are like this that the assessee filed the return of income on 25th June, 1982, declaring a net loss of Rs. 2,04,827. This was after adjusting the carry forward losses and depreciation of Rs. 2,51,980 from the current year's income of Rs. 47,154. The assessment was completed on 1st Jan., 1985, determining the total income of Rs. 55,586 under head "Income from other sources". In arriving at the above sum, the AO did not allow expenses debited to the P&L a/c and unabsorbed losses and depreciation brought forward from various years. Against the above order, the assessee filed an appeal before the CIT(A) who gave a relief of Rs. 8,277 towards the business expenses and did not allow the accumulated carry forward loss of earlier years. The assessee- company filed an appeal before the Tribunal, New Delhi, who while restoring the matter to the file of the AO had observed that, "Now we would like to emphasise at this stage that the business of the assessee that is to be considered not its existence or otherwise is manufacturing and sale of engines and pumping sets and components thereof. Therefore, the cessation of business of the assessee to an end so as to deny the assessee right of carry forward of losses and depreciation and set off of the same against other heads for the year under consideration. If the stock which is with the assessee is of the components of engines and pumping sets which were being manufactured and that the stock is being sold, the business of the assessee will be continuing and question of not bringing forward and set off of loss under the head would not arise. It would have to be granted to the assessee. But unfortunately, there is no enquiry on this aspect of the matter. "The AO while reffering and reexamining the issue held that there was no business conducted by the assessee at all during the year under consideration and disallowed the claim of carry forward and set off of brought forward losses and depreciation and reliance was placed on Seth Banarsi Das Gupta vs. CIT (1977) 106 TTR 559 (All), Brooke Bond & Co. Ltd. vs. ClT (1970) 77 ITR 220 (Cal), CIT vs. Jaipuria China Clay 1VIines (P) Ltd. (1966) 59 TTR 555 (SQ) and CIT vs. Virmani Industries (P) Ltd. (1974) 97 TTR 461 (All) and determined the income assessed originally. After giving deduction of expenses allowed by CIT(A) at Rs. 8,277 (Rs. 55,586 - Rs. 8,277 = 47,309) vide order, dt. 26th Dec., 1990, against which assessee preferred appeal.

9. In appeal, the learned CIT(A) while upholding the action of Asstt. CIT that the business of the assessee was discontinued and thus assessing the income of the assessee assessable under the head "other sources" on the basis and reasoning given in appellate order for asst. yr. 1980-81. So far as action of Asstt. CIT regarding brought forward losses of the earlier years were concerned, this issue was also upheld on the basis and reasoning as given in the appellate order for asst. yr. 1980-81. But so far as set off of unabsorbed depreciation was concerned, it was held that since for asst. yr. 1980-81, it had already been held that the assessee is entitled for unabsorbed depreciation against the income for asst. yr. 1980-81, here that question became academic and ground was dismissed. So, assessee is in second appeal against issues decided by the first appellate authority.

10. For the asst. yr. 1984-85 return of income was filed on 24th April, 1984, declaring a loss of Rs. 1, 14,330 against which assessment was completed at an income of Rs. 60,426 vide order, dt. 27th Feb., 1986. The assessee preferred appeal and learned CIT(A) partly allowed the same and on further appeal Tribunal Delhi Bench 'SMC', vide order, dt. 22nd March, 1991 set aside the matter back to the AO to be made afresh. The learned AO in pursuant to the order of Tribunal passed fresh order, dt. 4th Sept., 1992 and assessed the income of the assessee at Rs. 57,280, and while doing so the learned Asstt. CIT disallowed the brought forward loss of Rs. 1,73,865 and also treated the interest income of Rs. 60,426 received by the assessee- company on investment of surplus fund under the head 'income from other sources' and in further appeal the action of AO was almost confirmed by CIT(A). Hence, second appeal.

11. Facts relating to asst. yr. 1985-86 are like that the return of income was filed by the assessee- company on 5th June, 1985, declaring a loss of Rs. 80,350. The original assessment was completed at an income of Rs. 37,910 vide order dt. 31st March, 1986. The assessee- company preferred an appeal before CIT(A) which was partly allowed and on further appeal, the Tribunal vide their order, dt. 22nd March, 1991, set aside the matter back to the AO for making fresh assessment and pursuant to that, fresh assessment was made on 4th Sept., 1992, whereby income was assessed at Rs. 34,940. In doing so, learned AO disallowed the brought forward loss of Rs. 1, 14,330 and also treated the interest income of Rs. 37,965 received by the assessee- company on investment of surplus funds under the head 'income from other sources' and further restricted the allowance of business expenditure to Rs. 3,030 as against the total expenditure of Rs. 3,980 incurred by the assessee- company. While doing so, the learned AO held that assessee- company had discontinued business. The assessee preferred appeal against the assessment so framed and action of AO was confirmed in appeal. Hence, assessee is in second appeal.

12. Facts relating to asst. yr. 1986-87 are like this that assessee- company filed return of income on 28th May, 1986, declaring a loss of Rs. 66,760 and original assessment was completed by the AO at an income of Rs. 13,585 vide order, dt. 30th Nov., 1988. The assessee- company preferred an appeal before the CIT(A), who confirmed the order and on further appeal before the Tribunal who vide their order, dt. 22nd March, 1987, set aside the matter back to the AO to be passed afresh and learned AO vide his order, dt. 4th Sept., 1992, pursuant to the order of the Tribunal assessed the income at Rs. 13,595 and in doing so he disallowed the brought forward loss of Rs. 80,34E, and also treated the interest income received by the assessee- company on an investment of surplus funds under the head 'income from other sources'. It was also held that assesseecompany has discontinued business. Assessee preferred appeal against the order of AO and CIT(A)-XVHI, New Delhi vide his order, dt. 20th Sept., 1994, upheld the action of the AO and dismissed the appeal of the assessee. Hence, assessee is in further appeal before the Tribunal.

13. So far as first two grounds are concerned for all the years under appeal, the facts are almost identical and grounds of challenge are also similar. For all these years assessee's representative reiterated the submissions as made before the learned first appellate authority and further submitted that AO has wrongly held that no business was carried on by the assessee during the years under consideration solely on the ground that assessee has sold land and machinery in the year 1977 and no manufacturing or sale activity has been carried out since then by the assessee. It was further submitted that though the manufacturing activity was discontinued by the assessee, the assessee was engaged in the activity of selling the goods lying unsold irl its godowns. In fact such sale took place in 1978 and 1979 and was assessed as business income in those years. During the asst. yr. 1980-81, the assessee sold stock worth Rs. 88,229 which was shown as reduction from opening stock in the assessee's books. This was treated as sale was in respect of goods sent to the processor for processing. Though this amount was not shown as sale in the audited P&L a/c yet the same represents sale of goods which were lying with the processor.

14. It is to be appreciated that assessee recovered the whole amount against such goods from the processor and it was pleaded that this transaction goes on to prove that assessee did carry on trading activity during the year under consideration. The Tribunal Delhi Bench in assessee's own case for asst. yrs. 1981-82 and 1982-83 held that business of the assessee is to be considered in e.)dstence or otherwise is manufacture and sale of engine and pumping sets and components thereof. Therefore, the mere cessation of the manufacturing activity would not bring this composite business of the assessee to an end so as to deny the assessee's right of carry forward of loss and depreciation and set off the same against the other heads of income for the year under appeal. The stock which is with the assessee of the components of engines and pumping sets which were being manufactured and that stock is being sold, the business of the assessee will be continuing and question of not bringing forward setting off loss and depreciation would not arise. It was emphasised that it would have to be granted to the assessee. Further pointed out that treatment given in books of accounts to a transaction is not determining of its treatment under the Act. Reliance is placed in this regard on the decision of the Supreme Court in the case of Kedar Nath Jute Manufacturing Co. vs. CIT (1971) 82 ITR 363 (SC). The assessee has also derived income from hiring out its assets and interest as amounts outstanding on sale of machinery, etc. to companies, which constitutes business income and further proves that the assessee was carrying on the business during the relevant previous year.

15. It was also submitted that during the years under appeal assessee had received different amounts of interest for all these years as mentioned in the grounds of appeal which comprised of interest on moneys receivable from Eicher Tractors Ltd. for machinery/stock sold to them by the assessee in earlier years. The AO has treated the same as income from other sources instead treating it as business income. It was submitted that amount payable to Eicher Tractor was in respect of machinery and stock sold by the assessee in regular course of its business. The interest income on balance outstanding from Eicher Tractors arose as a result of sale of assessee's stock. Therefore, it constitutes income of the assessee and not income from other sources as assessed by the AO. It was further clarified that interest income so derived can be taken to the lease rental/hire charges received by the assessee for the use of assets leased to the party. In the present case also, what the assessee is getting in the form of interest is nothing but the charges for the use of machinery/stock sold by the assessee to Eicher Tractors, the payment of which is outstanding. The only difference is that in present case the machinery sold has taken form of moneys payable.

16. It was also emphasised that assessment of an income under the head 'income from other sources' is not a decisive test to determine whether the same constitute income from business or not. Reliance was placed on the decision of Gujarat High Court in the case of CIT vs. Mod Lal 1Kra Lal Spinning & Weaving Mifls 1977 CTR (Guj) 674 : (1977) 113 ITR 173 (Guj) wherein it was held that interest earned on advance by manufacturing company which was closed, is to be treated as business income and not income from other sources.

17. It was also submitted that in earlier years the whole of the interest income earned by the assessee (including interest on amount receivable from Eicher Tractors for sale of machinery) was assessed as business income of the assessee. Since there is no charge in the nature of income so received, there is no reason for the AO to treat the interest received differently that is as income from other sources, rather than business income.

18. It was also submitted that assessee received Rs. 4,198 as hire charges on fixed assets for asst. yr. 1981-82, which has also been assessed as income from other sources, Whereas as per settled position of law income earned on lease of assets to tide over a bad phase is to be treated as business income. Reliance was placed in this regard on Supreme Court decision in the case of CIT vs, Vikrarn Cotton Mills (1988) 67 CTR (SQ) 259 : (1988) 169 ITR 597 (SQ). It was pleaded that interest income, hire charges on fixed assets constitute business income of the assessee which are to be set off against unabsorbed loss carry forward in earlier years.

19. It was also submitted that assessee was engaged in realisation of dues outstanding from its debtors as also had given the fixed assets on hire to earn some income and was in the process of selling its unsold stock. Though no manufacturing activity was being carried on by the assessee yet keeping in mind the composite nature of assessee's business, i.e., manufacture and sale of engines, it could not be said that no business was carried on by the assessee during the relevant previous year, The Tribunal, Delhi Bench in assessee's own case for asst. yrs. 1981-82 and 1982-83 has held the business of the assessee that is to be considered in its existence or otherwise is manufacturing and sale of engines, pumping sets and components thereof. Therefore, mere cessation of manufacturing activity would not bring this composite business of the assessee to an end so as to deny the assessee to carry on loss and setting off the same against other heads of income for these years under appeal. The stock which is with the assessee is of components of engines and pumping sets which were being manufactured and that stock is being sold. The business of the assessee will be continuing and question of not bringing of setting off of loss and depreciation could not arise and same needs granted.

20. For the asst. yr. 1981-82 it was pleaded that AO has not allowed deduction of depreciation for this year amounting to Rs. 29,759 while calculating the income of the assessee though hire charges of such pumping sets had been brought to tax. It was prayed that depreciation for the said year has to be allowed deduction irrespective of the fact whether the assessee's business was continued or not or whether the assessee had any business income or not. It was also held by Delhi Bench in assessee's own case that depreciation for current year has to be allowed deduction either under the head business or under the head 'other sources'. Reliance was also placed on Ahmedabad Bench decision in the case of Dy. CIT vs. New Commercial Mills (1994) 48 TTJ (Ahd) 662 wherein the decision of CIT vs. Deepak Textile & Industries Ltd. (1987) 66 CTR (Guj) 34 was followed.

21. It was thus pleaded that action of the CIT(A) upholding the action of the AO that business of the assessee- company has been discontinued during these years and in allowing interest income for all these years as the income from other sources without allowing brought forward losses of earlier years against the interest income of outstanding amount due from Eicher Tractors Ltd. for sale of goods. It was urged that orders of the authorities below should be reversed and claim of the assessee be accepted for all these years.

22. The learned Departmental Representative while opposing the move of the assessee and relying upon the order of the authorities below pleaded that in view of the facts and circumstances, it cannot be said that either the business is continuing or there is any income from the business which has or is due by selling the plant and machinery outstanding in 1977. It was urged for confirmation of orders of the authorities below.

23. Since there is no business of the assessee in either of the years under consideration, interest cannot be held to be business income as such it was rightly treated as income from other sources and similarly, there cannot be allowed brought forward losses of earlier years against the interest income earned on outstanding amount due from the purchase of the plant and machinery.

24. We have heard rival submissions, perused the record and looking into the facts and circumstances and going through the orders of the authorities below and considering case law as cited, are of the view that the case law relied upon by the assessee's representative is distinguishable on facts and in the case of New Commercial Mills (supra) it was specifically recorded "facts show that assessee never intended to close its business permanently". Similarly, other cases relied upon by the assessee are distinguishable on facts and ratio laid down therein is not applicable in the case in hand. While upholding the order of authorities below on the basis and reasoning as given in the orders of lower authorities, we are of the considered opinion that neither it is a case where it can be held that assessee is continuing with the same business because the plant and machinery stood sold as early as in 1977 and there is no business activity being carried on by the assessee during the years under consideration, nor from the facts it can be inferred that assessee had any intention of continuing with the same business. It is also observed that some amount was, however, recovered from the stock which was held with the processor but who were also found out to be interested parties and in fact no actual sale of any component was ever made. No sale was even shown in the trading account except adjustment of closing stock by showing amount recovered from the processor. Keeping in view all these facts and circumstances, we uphold the action of the authorities below and dismiss these grounds for all the years so far as treating the assessee to have discontinued business and interest income as income frorn other sources and disallowing setting off of brought forward losses of earlier years against the other income on outstanding amount due from Eicher Tactorst ltd. for sale of plant and machinery. This disposes of first three grounds of all the appeals.

25. Now we deal with ground No. 4 for the asst. yr. 1980-81 whereby the assessee challenges confirmation of disallowance of assessee's claim for bad debts amounting to Rs. 52,368 against the business income of the assessee.

26. Facts relating to this ground are that the AO disallowed granting of allowance for bad debts amounting to Rs. 52,368 and assessee preferred the appeal and pleaded before the first appellate authority that during the year it had written off its claim comprising of small amounts and the assessee had to receive from the various parties. Further pleaded that assessee wrote off these amounts after making adjustments and failing to recover the amount. As this amount was receivable from 25 parties and they were not turning up to make the payment and despite assessee's best efforts and various attempts made, this amount was written off and claimed deduction which was not allowed. Appeal was filed against this claim which was not allowed. It was pleaded for allowing the same. The learned CIT(A) observed that since assessee's business has ceased to exist so assessee's claim of bad debts cannot be allowed and assessee preferred appeal against such confirmation of disallowance made by him.

26. Facts relating to this ground are that the AO disallowed granting of allowance for bad debts amounting to Rs. 52,368 and assessee preferred the appeal and pleaded before the first appellate authority that during the year it had written off its claim comprising of small amounts and the assessee had to receive from the various parties. Further pleaded that assessee wrote off these amounts after making adjustments and failing to recover the amount. As this amount was receivable from 25 parties and they were not turning up to make the payment and despite assessee's best efforts and various attempts made, this amount was written off and claimed deduction which was not allowed. Appeal was filed against this claim which was not allowed. It was pleaded for allowing the same. The learned CIT(A) observed that since assessee's business has ceased to exist so assessee's claim of bad debts cannot be allowed and assessee preferred appeal against such confirmation of disallowance made by him.

27. Before us, it was pleaded that since amount was irrecoverable despite making best efforts, it is an allowable expenses against business income as claimed by the assessee. It was pleaded for allowing the said claim.

28. The learned Departmental Representative relying upon the order of the CIT(A) pleaded that since business has ceased to exist, therefore, claim of bad debt is not allowable. The CIT(A) was justified in not allowing the same. It was urged for confirmation of the order.

29. We have heard the rival submissions, perused the record and considered the submissions made by both the sides and are of the view that the claim of the assessee of business being in existence, has not been accepted in our order as given in earlier paragraphs, thus claim of bad debt which could be allowed against business income cannot be allowed. So while confirming the order of the CIT(A), we dismiss this ground of the assessee.

30. Ground No. 5 in appeal for asst. yr. 1980-81 and ground No. 4 in appeal for asst. yr. 1985-86 relates to confirmation of disallowing the amount of business expenses to the extent of Rs. 12,432 for asst. yr. 1980-81 and Rs. 950 for asst. yr. 1985-86.

31. Facts are like this that for asst. yr. 1980-81, assessee claimed business expenses to the extent of Rs. 24,865 and after considering the facts and circumstances CIT(A) disallowed it, thus assessee is in appeal against balance of 50 per cent amounting to Rs. 24,865. Similarly for the asst. yr. 1985-86 claim of such business expenses was made to the extent of Rs. 3,980 and CIT(A) on appeal allowed Rs. 3,030 and confirmed the addition to the extent of Rs. 950. Assessee is in appeal against these two amounts for these two years. It was pleaded that assessee is a company and certain formalities have to be observed even if no business activity was carried on. No doubt, assessee did not carry out any manufacturing activity or sale during the year under consideration. However, by means it should be proved that the assessee- company had continued business. There may not be allowing of trading activity and business may be quite or dormant for the same period. This, however, does not imply that assessee has not incurred expenses, therefore, the expenses in running the office expenses, commission on landing and legal and professional expenses which is not related to running of business are to be necessarily incurred and no disallowance out of these expenses is called for. It was pleaded that disallowance made out of these expenses needs to be deleted.

32. The learned Departmental Representative on the other hand, pleaded that since no business is being carried on as no manufacturing activity is there so these expenses are not allowable.

33. We have heard rival submissions, perused the record and are of the considered view that while allowing half of the expenses for the asst. yr. 198081, the nature and necessity of this expenditure had duly been looked into and in view of facts and circumstances, we do not feel any further allowance is required to be made and as regard disallowance of Rs. 950 is concerned, it has been made by the AO by relying upon the order of the CIT(A) in earlier proceedings against which assessee has not filed any appeal. This action of the AO, based on the order of the CIT(A), called for no interference.

34. As a result ground No. 5 for asst. yr. 1980-81 and ground No. 4 for asst. yr. 1985-86 gets rejected.

35. In the result, all the appeals of the assessee are dismissed.