Delhi High Court

Cit, Delhi-Ii vs Khosla Indair Ltd. on 7 July, 2005

Equivalent citations: 2005 147 TAXMAN 602 Delhi

Author: S Kumar

JUDGMENT

Swatanter Kumar, J.

Vide its order dated 25-8-2003, the Income Tax Appellate Tribunal dismissed the appeal preferred by the Joint Commissioner of Income-tax, Range-II, New Delhi, holding that the income of the assessed had to be treated as income under the head 'business' and not ,other sources'. It also held that there was no cessation of business, and at best it would only be a lull or a temporary cessation, and affirmed the order passed by the Commissioner of Income Tax (Appeals). While relying upon the judgment of this court in the case of Indraprastha Steel Industries Ltd v. ITAT (1973) 88 ITR 138 (Del), it was argued that the set of carry forward losses of earlier years was not available to the assessed in the present case as there was cessation of business and also that mere realisation of some income on account of interest, could not be treated as income from business. On this premise, the challenge is raised to the correctness of the order of the Tribunal, which according to the appellant has fallen in error of law giving rise to the question of law for consideration of this court as framed in paragraph 2 of the present appeal under section 260A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act').

2. Before we proceed to discuss the merit or otherwise of these contentions raised before us, reference to the basic facts would be necessary. The assessed had filed return of the income declaring net loss of Rs. 69,385 on 1-11-1996. Apart from these losses being of current year, the assessed also claimed brought forward losses of Rs. 1,47,04,081, unabsorbed depreciation of Rs. 1,24,09,462 and investment allowance of Rs. 95 572. The return was processed initially under section 143(1)(a) of the Act where after it was selected for scrutiny and notices under section 143(2) of the Act was issued on 17-9-1997, in response to which the representative of the assessed bad attended the proceedings. The assessing officer formed an opinion that there was no organized course of activities because assessed sold all its assets during the year and only some spare parts continuing from earlier years were sold during the relevant year. Receipts by way of service charges received by the assessed-company could not be said to be a distant and new activity. Referring to various judgments which were cited before the assessing officer, the assessing officer disallowed expenditure and while holding that the assessed was carrying no business, declined the allowance on account of depreciation and finally the assessed was assessed at income of Rs. 67,26,820 vide order dated 9-11-1998. This order was challenged by the assessed before the Commissioner of Income Tax (Appeals), who vide his order dated 11-2-1999 partly allowed the appeal of the assessed and held as under :

"As I have held that the appellant's income is assessable under the head 'profit and loss account of business and profession' the assessing officer shall examine the appellant's claim for deduction under section 43B, bad debts written off, deduction for unabsorbed depreciation by treating the same as profit of current year depreciation and other similar claims shall be considered by the assessing officer after examining the books of account of the appellant and company documents, in support of such claims. The appellant shall file the details along with evidence of its claim before the assessing officer so as to enable him to deduce its income properly under the head 'profit and loss account of business and profession'.

Thus so far the appellant's claim for being assessed within the meaning of section 28 of the Income-tax is concerned, this contention is accepted. So far its claim for deduction of expenses are concerned the matter is set aside and as observed earlier the assessing officer shall decide such claim in accordance with law after allowing the appellant a fresh, opportunity to substantiate its claim.

In the result, the appeal is partly allowed."

3. It may be useful to notice here that the Commissioner of Income-tax passed a detailed judgment while relying upon the judgment of the Supreme Court in the case of CIT v. Virmani Industries (P) Ltd. (1995) 216 ITR 607 (SC). In its detailed discussion, the Commissioner of Income Tax (Appeals) specifically noticed that during the relevant assessment year, the appellant had earned Rs. 58,000 on account of service charges and it had earned service income of Rs. 3.45 lakhs which includes erection and commissioning charges for the services rendered to MAX GB and NTPC in respect of compressors supplied by outside parties. The assessed had contended before the authorities that activity of providing various services in connection with installation; erection and commissioning of compressors, maintenance thereof, and the activity of manufacturing and sale of compressors constitute one and the same business. The Appellant was not merely a manufacturer. Even in the earlier years it was specified in the statement of computation of total income from 1-4-1995 to 31-31996, Le., the assessment year 1996-97., It had shown profit and loss account of Rs. 1,99,143 and it claimed deductions and investment allowances. It was upon noticing all these facts relevant to the material produced before the authorities that the, Commissioner had partly allowed the appeal of the assessed. Being dissatisfied with the order of the Commissioner of Income Tax (Appeals), an appeal was preferred by the department before the Income Tax Appellate Tribunal. As already noticed, the Tribunal had dismissed the appeal by holding as under:

"We have carefully considered the rival submissions. From the facts on record and on the basis of the orders placed before us, it is not denied that the assessed sold the land, the plant and machinery etc., during the year for which capital gains was duly assessed by the assessing officer also. It is also an admitted fact that the assessed continued to sell stores and spare parts and also render services to the customers for which the income under the head 'service charges' was shown at Rs. 5 8,000. The assessed, therefore, claimed the income under the head 'business income' and claimed deduction of depreciation including losses brought forward from earlier years. The assessing officer, therefore, held that the business of the assessed has already ceased after the sale of the land and the plant and machinery etc. He, therefore, denied the claim of depreciation including deduction of carried forward losses from the earlier years. The learned Commissioner of Income Tax (Appeals), however, found that in the case of the assessed, it cannot be held to be cessation of business as the assessed continues to render services and also continue to sell stores and spare parts which are part of the objects of the assessed-company. He accordingly allowed the claim as per the order extracted above.

We are of the view that there is not much debate on this point. The revenue in this case raised objection for this assessment year only and assessed the income under the head 'other sources'. It is, however, seen that in the subsequent assessment years right up to assessment year 2001-02, the claim of the assessed has been accepted and the income has been assessed under the head 'business'. The claim of depreciation and carry forward of-brought forward losses also has been allowed. In such a case, it cannot be said that the business of the assessed ceased during the year. Even if it is admitted that there has been no activity during the year, it will be only a lull or a temporary cessation and cannot be said to be complete discontinuance of the business. We, therefore, see no reason to interfere with the order of the learned Commissioner of Income Tax (Appeals). It is accordingly upheld.

In the result, the appeal fails and is dismissed."

4. Challenge in the present appeal is to this order and judgment of the Income Tax Appellate Tribunal.

5. 'Service and Maintenance Contracts' is a well accepted concept of modern business activity. It is neither factually incorrect nor would be absurd in terms of business if it is stated that a particular concern is carrying on the service and maintenance contracts and is not involved in the business activity.

6. Contract of maintenance can itself be an occupation squarely covered by the expression 'business'. It will have to be construed as 'business' with all its consequential or incidental repercussions. The Joint Commissioner of Income-tax during the assessment proceedings had observed and recorded in the order of assessment that in the case in hand it could not be said that there was any organized course of activity because the assessed sold all its assets, and during the year only some spare parts continuing from earlier years were sold. While the assessed had specifically pleaded that in addition to this activity they were carrying on the business of maintenance and were receiving charges not only from the customers to whom they had sold the compressors, but even from other customers. This factual controversy was accepted by the First Appellate Authority and fully affirmed by the Income Tax Appellate Tribunal. Once this finding of fact is recorded, that the assessed was carrying on the business of maintenance and was receiving service charges as its regular activity, there is no reason why the normal consequences of this being treated as 'business income' should not flow. Nothing has been placed on record before us to show that this finding of fact recorded by the authorities is palpably erroneous or illogical. As is clear from the above narrated facts, even the Commissioner of Income Tax (Appeals) in its order recorded that during the relevant assessment year the appellant had earned Rs. 58,000 on account of service charges and service income of Rs. 3.45 lakhs which include erection and commissioning charges for services rendered to its customers.

7. The reliance placed by the learned counsel upon the case of Indraprastha Steel Industries Ltd. (supra) is of no help to the revenue as it has no bearing on facts of the present case. In that case the court held that the assessed company could not be said to be engaged in any business during the relevant year merely because in Realizing its assets it had earned interest on the outstanding or some profits in selling its stores and spares, the company was not carrying on business and thus, was not entitled to deduction of any expenditure, and/or set of the business losses of the earlier years against the subsequent years. In the present case there is concurrent finding recorded by the authorities that the assessed-company was carrying on the business and had a direct income there from on account of service and maintenance charges. They had installed systems and had considerable income from the business itself. The learned counsel appearing for the assessed has rightly relied upon the judgment of the Supreme Court in the case of Produce Exchange Corpn. Ltd. v. CIT (1970) 77 ITR 739 (SC) and upon judgment of a Division Bench of this court in the case of CIT v. Neo Poly Pack (P) Ltd. (2000) 245 ITR 492. The business of maintenance carried on by the assessed resulting in payment of service charges under the common management, common accounts would not alter the status of a 'composite business' merely because the assessed-company has disposed of its assets. Reference in this regard can also be made to another judgment of the Supreme Court in the case of CIT v. Prithvi Insurance Co. Ltd (1967) 63 ITR 632 (SC).

8. We may also make a reference to a recent judgment of this court in the case of CIT v. Excellent Commercial Enterprises & Investments Ltd. (IT Appeal No. 521 of 2004, dated 12-5-2005) where the court held as under:

"7. Even in the case of Western States Trading Co. (P.) Ltd v. CIT (1971) 80 ITR 21 (SC), the Supreme Court was concerned with the question whether the appellant which owned a colliery and entered into an agreement to sell the colliery to another company with effect from September, 1954 pending completion of sale, the business was being carried on behalf of the purchaser company since the price fixed less than the book value of the assets, the appellant claimed a balancing allowance under section 10(2)(vii) of the Act for the assessment year 1956-57. For part of the year, apparently, the assessed had carried on business, while for the remaining part, it has not carried on business. The High Court had denied the admissibility of the allowance to the assessed. While reversing the judgment of the High Court, the Supreme Court answered both the formulated questions whether dividend income was to be taken as income, profit and gains of the business of the Company as well as set off against losses brought forward for the earlier years in favor of the assessed.

8. Applying the above settled principles, the Income Tax Appellate Tribunal had affirmed a finding of the Commissioner of Income Tax (Appeals) that the Company in the interest of its business and to earn additional profits arising from such stock-in-trade had invested its money which was earning dividends on shares held in stock-in-trade. This was thus and rightly so treated as income from business and not income from other sources. No distinctive features have been placed before us which could persuade the court to take a view different than the one which has been taken in the above orders. Even otherwise, it would be a finding of fact based and referable to the records which were produced before the Income-tax Tribunal."

9. Keeping in view the well-settled principles of law aforestated, there is no scope for this court to admit the present appeal, as the question sought to be raised in the present appeal has been well answered by catena of judgments. Thus, we dismiss the present appeal, while leaving the parties to bear their own costs.