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J K Manu Ltd v. The Commissioner Of Income Tax - INCOME TAX REFERENCE No. 88 of 1990  RD-AH 4861 (20 March 2007)
Income Tax Reference No.88 of 1990
M/s J.K.Manufacturers Ltd., Kanpur v.
Commissioner of Income Tax, Kanpur
Hon'ble R.K.Agrawal, J.
Hon'ble Bharati Sapru, J.
(Delivered by R.K.Agrawal, J.)
The Income Tax Appellate Tribunal, Allahabad has referred the following question of law under Section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") for opinion to this Court:-
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was legally correct in confirming the order of Commissioner of Income Tax by holding that the various expenses like salary and wages bonus, rent, railway siding expenses, labour and welfare expenses, interest and law charges cannot be said to have been incurred to keep the status of the company as company alive?"
The reference relates to the Assessment Year 1978-79.
Briefly stated, the facts giving rise to the present reference are as follow:-
The assessee is a public limited company. Its accounting period in the assessment year under consideration ended on 30th September, 1977. In respect of the aforesaid assessment year, the assessee filed a return of income declaring loss of Rs.72,37,820/- on 1.8.1978 including the loss brought forward from the earlier years and unabsorbed depreciation amounting to Rs.62,95,690/-. The loss of the current year was shown at Rs.9,42,131/-, the aggregate of the two, thus, was Rs.72,37,821/-. The aforesaid loss is the difference of aggregate of expenditure of Rs.15,45,167/- and the income from sale of shares at Rs.6,03,036/-. The Income Tax Officer found that the assessee was not doing any business; it had rather closed its business long ago. He, therefore, refused to carry forward and set off the unabsorbed loss and depreciation amount to Rs.62,95,690/-. The income from capital gains was worked by him at Rs.859,850/- to that he added income from dividends at Rs.12,010/-. The expenditure of Rs.15,45,167/- which was claimed by the assessee in its profit and loss account was not allowed, as, in his opinion, no expenditure was incurred to earn the aforesaid items of income, namely, capital gains and dividend income. The assessee appealed before the Commissioner of Income Tax (Appeals) and pleaded before him that some expenditure should have been allowed to it in view of the decision of this Court in the case of Commissioner of Income Tax v. Rampur Timber and Tannery Co., 129 ITR 58. Accepting the above contention of the assessee, the Commissioner of Income Tax (Appeals) directed that Rs.10,000/- be allowed to the assessee to cover the expenditure to keep the status of the company as alive. The assessee appealed to the Tribunal. The Tribunal dismissed the appeal with the following findings:-
"On the facts of the present case, it is difficult to say that there was lull in business. For many past years the assessee company had done no business; it closed it down and gave its factory on leave and licence basis to J.K.Jute Mills. Since the aforesaid agreement ended till date, the assessee has not carried on any business. In the accounting period itself, there was no activity by way of business. In view of this setting of facts, both past and future, it is not possible for us to record the finding that the assessee was doing business during the accounting period under consideration or that there was lull in its business. In our opinion, it is a clear cut case of the cessation of business. Therefore, it is not possible for us to accept the assessee's claim that any expenditure is allowable to the assessee in terms of section 37 or Section 28. In fact, the giving up of ground nos.1 and 2 in the present appeal lends weight to the above appraisal of the facts, namely, that the assessee had discontinued its business, for otherwise the assessee would not give up its claim for carrying forward of unabsorbed losses or depreciation.
13. There being no business, and there being no claim u/s 48 of the I.T.Act, 1961, we have to examine the assessee's case in terms of Section 57(1)(iii) only. That is also the ratio of the judgment of the Hon'ble Allahabad High Court in the case of Rampur Timber and Tannery (129 ITR 58). In that case, their Lordships had pointed out that not only it is expenditure which is directly relatable to the earning of the income that has to be allowed, but even those expenses which are required to keep the status of the company alive, that have to be allowed u/s 57(1)(iii) of the I.T. Act, 1961. Let us, therefore, examine the various expenses claimed by the assessee from this stand point. Salaries and wages bonus etc. have been paid by the assessee to the Mill Supervisors, Clerks factory workers and head office staff to the extent of Rs.6,57,099/-. Rent etc. have been paid to the extent of Rs.43,490/-. Railway siding expenses aggregate to Rs.8,745/- labour and staff welfare expenses aggregate to Rs.10,233/-, interest payments aggregate to Rs.1,58,788/-. Various payments on account of low charges aggregate to Rs.38,857/-. There is hardly any expenditure as above which may be directly relatable to the dividend income earned by the assessee. Expenses indirectly relatable to it, viz. to keep its existence as company have been estimated by the learned Commissioner of Income Tax (Appeals) at Rs.10,000/- and have already been allowed. It has not been shown to us as to how this estimate is inadequate and as to how further expenditure should be allowed to keep the company alive as company. The various expenses are directly relatable with the up keep of the factory premises. The assessee has not let it out on record and, therefore, there was no occasion to allow the said expenses against such income. To regard those expenditure as necessary to earn dividend would, on the face of it, be incorrect nor are they necessary to keep the status of the company as company alive. We, therefore, confirm the order of the learned Commissioner of Income Tax (Appeals)."
We have heard Sri R.S.Agrawal, learned counsel for the assessee, and Sri A.N.Mahajan, the learned counsel appearing for the Revenue.
We find that the Tribunal has recorded a categorical finding of fact that the assessee did not carry any business in this year. Further, the leave and licence agreement had expired in 1976 and in the subsequent years also it had not carried on any business and in the Director's report, it was specifically mentioned that there is no likelyhood of business being revived. In these circumstances, when the assessee did not carry any business, the question of allowing deduction on account of salary, bonus etc. to the employees and other staff did not arise. The Tribunal has rightly disallowed the loss/expenditure claimed by the assessee.
We, therefore, answer the question referred to us in favour of the Revenue and against the assessee. There shall be no order as to costs.
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