P.C. Bhandari & Co. Pvt. Ltd. vs Asstt. Commissioner Of Income ...
2009 Latest Caselaw 5171 Del

*       IN THE HIGH COURT OF DELHI AT NEW DELHI

+       ITA 1272/2008
                              Date of Decision: 14th December, 2009
        P.C. BHANDARI & CO. PVT. LTD.
        45-GOLF LINKS,
        NEW DELHI                                ..... Appellant
                       Through: Ms. Sashi M. Kapila, Advocate

                   versus

        ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE: 14(1)
                                             ..... Respondent
                     Through: Mr. Subhash Bansal, Advocate

    %   CORAM:
        HON'BLE MR. JUSTICE A.K. SIKRI
        HON'BLE MR. JUSTICE SIDDHARTH MRIDUL

        1.    Whether reporters of local papers may be allowed to see
              the judgment?
        2.    To be referred to the Reporter or not?
        3.    Whether the judgment should be reported in
              the Digest?


                            JUDGMENT

A.K. SIKRI, J. (ORAL)

1. Admit.

2. Following substantial question of law arises for determination:

(i) Whether the ITAT has laid down an entirely erroneous

proposition in law by holding that unless each and every

item of expenditure is shown to have a direct, immediate

and proximate nexus to each source of income, it is not an

allowable expenditure?

3. With the consent of learned counsel for the parties, we have

heard the matter finally at this stage itself.

4. The appellant/assessee is a private limited company and is

engaged in the business of manufacturing and sale of tents, cotton

textiles, jute, flex, wool, silk, ready-made garments etc. As per the

object clause in the Memorandum of Association, one of the objects is

to deal in securities, stocks, shares as well.

5. In the assessment year in question the assessee had no trading

activity. However, according to the assessee it had incurred expenses

of Rs.14,38,099/-. Out of these an amount of Rs.8,00,000/- on account

of write off of bad debts relating to the tent business which was not

claimed as expenditure by the assessee itself in the year income tax

return filed. Balance amount of Rs.6,38,099/- was claimed as

expenditure. Out of this, a sum of Rs.1,22,795/- was disallowed under

Section 14A of the Act towards earning of exempted dividend income.

In sum and substance, the assessee had claimed deduction of

administration expenses to the tune of Rs.5,19,982/-. As mentioned

above there was no trading activity in this year. However, assessee

had shown gross receipts under the heads interest income, long term

capital gains and dividend income amounting to Rs.14,99,612.80. The

Assessing Officer did not allow the aforesaid expenditure from the

income shown by the assessee. The Assessing Officer was of the view

that since there was no trading activity in this year, thus no business

income, administrative expenses could not be allowed against the

income which was under the head 'capital gains' or 'income from

other sources'.

6. The assessee carried the matter in appeal before the CIT (A).

Submission of the assessee was that there was no trading activity in

that particular year. According to the assessee as per the object

clause in the Memorandum of Association, the assessee had a right to

deal in securities, stocks, shares etc. and, therefore, the dividend

income or the income from long term capital gain, which the appellant

earned from the sale of security stocks be treated as business income.

It was also submitted that, even if the aforesaid income is to be

treated as income from other sources, the assessee was entitled to

deduction of the aforesaid expenditure as it could set off the same in

terms of Section 71 of the Act. CIT (A) also did not go into this aspect

specifically and rejected the appeal on the ground that there was no

business activity and from this he jumped to the conclusion that there

was no 'cessation of business'. Further, the appeal preferred by the

assessee before the Income Tax Appellate Tribunal(ITAT) has met the

same result.

7. After going through the impugned order passed by the ITAT, we

observe that the contentions of the appellant are not appropriately

dealt with by the Tribunal. There is no specific finding or observation

of the Tribunal on the aspects highlighted by the appellant. In these

circumstances, the grievance of the appellant is that the approach of

the Tribunal in allowing the deduction of the aforesaid expenses is

clearly uncalled for, inasmuch as the Tribunal has gone on one to one

basis namely the expenditure could be allowed only against the

specific source of income.

8. Learned counsel for the appellant has also referred to the

decision of the Supreme Court in Commissioner of Income-tax,

West Bengal-III vs. Rajendra Prasad Moody, 115 ITR 519, and

Commissioner of Income-tax (Delhi Central) v. Bharat

Insurance Co. Ltd., 142 ITR 342. She has also pointed out that for

the assessment year 2005-06 the CIT (A) had in fact accept the

aforesaid proposition advanced by the appellant and on that basis

deleted the penalty levied against the appellant under Section

271(1)(c) of the Act. Order dated 23rd January, 2009 passed in this

behalf by the CIT (A) has been produced for our perusal.

9. We find substance in the aforesaid arguments raised by learned

counsel for the appellant. What was necessary for the Assessing

Officer to find out as to whether the claim of the appellant that the

appellant had not closed down the business and there was no

cessation of business is correct or not. Even if there was no trading in

that particular year, one cannot jump to the conclusion therefrom that

the business had been closed down. At the most, business would be in

dormancy. Merely because of this reason it cannot be stated that

there would not be any expenditure incurred. Test of commercial

expediency would be applicable to Section 57 (iii) as well as it applies

to Section 37(1) as held by Supreme Court in Eastern Investments

Ltd. vs. Commissioner of Income-tax, 20 ITR 1. In case it is found

that the business had only been suspended in that particular year and

had not been closed down, then the aforesaid expenditure would be

allowable as business expenditure. In such a case in the absence of

any income under the head 'business income' it could be treated as

business loss and the assessee was entitled to set off of this business

loss against the income from other sources as provided under Section

71 of the Act.

10. Since such an exercise has not been done by the Assessing

Officer or the other authorities, we set aside the impugned orders by

answering the question in favour of the assessee and against the

Revenue. The matter is remitted back to the Assessing Officer to

examine the matter in the aforesaid perspective and pass fresh

assessment orders.

A.K. SIKRI, J.

SIDDHARTH MRIDUL, J.

DECEMBER 14, 2009 mk