ORDER
Pramod Kumar, A.M.
1. This is an appeal filed by the AO and is directed against the order dt. 19th Sept., 2005 passed by the CIT(A) in the matter of assessment under Section 143(3) of the IT Act, 1961, for the asst. yr. 2002-03.
2. In the first ground of appeal, the AO is aggrieved that the CIT(A) was not justified in deleting the addition of Rs. 6,36,210 on account of expenses claimed during the year, when no business was conducted by the assessee during the relevant previous year.
3. The material facts of the case are like this. The assessee is a domestic company and, in the relevant previous year, it had income only from interest and dividend. In the course of scrutiny assessment proceedings, the AO noticed that no business activities were carried out by the assessee. He thus required the assessee to show cause as to “why not the expenses of the assessee be disallowed as there was no business activity during the year” and “the income earned be brought to tax”. The assessee submitted that the expenses incurred by the assessee are only on account of salaries and conveyance to staff which was required to run the office, and on account of payment of property tax of the building from which office is run. It was pointed out that there was no sale and purchase of shares in the relevant previous year as the stock market was unstable and market conditions were not stable. There is no dispute about the fact that in the earlier years, the assessee was engaged in business of buying and selling shares and its income from this activity was brought to tax under the head “Business income”. The AO rejected the explanation of the assessee by observing that as admittedly there was no business activity during the relevant previous year, no expenses could be allowed. The loss claimed by the assessee was disallowed, and the business income was assessed at ‘nil’. Aggrieved, assessee carried the matter in appeal before the CIT(A). The CIT(A) held that the AO has not doubted genuineness of the expenditure, that the expenditure was necessary for running the organisation, that it was neither extravagant nor excessive, and that, therefore, the AO was not justified in disallowing the same. The AO is aggrieved of the relief so given by the CIT(A) and is in appeal before us.
4. Smt. Iyer, learned Departmental Representative, submits that the CIT(A) was influenced by the factors which were not relevant to decide whether or not the expenses in question should be allowed as deduction in computation of business income. She submits that genuineness of expenditure, on which emphasis is placed by the CIT(A), is wholly irrelevant in coming to the conclusion that the expenditure is to be allowed even as there is no business activity during the relevant previous year. It is also pointed out that reasonableness of expenditure also has no bearing on this issue. It is further pointed out that the reasoning of the CIT(A) is vague and lacks specific and cogent reasons, germane to the context, for deleting the disallowance of expenses. Learned Departmental Representative relies upon Tribunals’ order in the case of Adasoft (India) (P) Ltd. v. Dy. CTT (2006) 9 SOT 31 (Del) in support of the disallowance of expenditure when business is not in existence. She relies upon the order of the AO, justifies the same, and urges us to restore the order of the AO. Dr. Gupta, learned Counsel for the assessee, supports and justifies the order of the CIT(A). Dr. Gupta submits that the assessee is a company and the expenditure incurred by the assessee are minimal expenditure just to keep the company afloat. It is submitted that the assessee was not carrying out business activity due to adverse market conditions, but the assessee being an artificial juridical person, has to incur expenditure for maintaining its existence and for carrying out whatever little activities that the assessee is involved in. Our attention is invited to Hon’ble Calcutta High Court’s judgment in the case of CTT v. Ganga Properties Ltd. (1993) 199 LTR 94 (Cal) wherein it is held that even when company has only earnings income from other sources, the expenditure incurred by the company for its continued existence and for retaining clerical staff, secretary and accountant and other incidental expenses, are allowable deduction. Dr. Gupta then takes us through the judgment of Hon’ble Punjab and Haryana High Court in the case of Nakodar Bus Service (P) Ltd. v. CLT wherein it was held that even when the assessee’s business was discontinued, deduction in respect of salaries paid to employees was allowable deduction against interest income. The next judicial precedent he relies upon is a judgment of Hon’ble Allahabad High Court in the case of CTT v. Rampur Timber and Turnery Co. Ltd. . In this case, it was held that the expenditure incurred by a company, for retaining its status as company and for its continued existence as such, is allowable deduction, even after discontinuation of business in certain circumstances. On the strength of these precedents, he justifies the conclusions arrived at by the CIT(A). His next tier of defence consists of the proposition that only because no business activity is carried on in the relevant previous year, and in the absence of any categorical finding to the effect that business has closed for good, the AO cannot jump to the conclusion that the business has ceased. The distinction between closure of business and suspension of business activity is sought to be highlighted and the relevant judicial precedents cited. In rejoinder, Smt. Iyer accepts that there is no categorical finding about closure of business, but she adds that the lack of such a finding cannot mean that expenses are to be allowed even as there is no business in existence. She reiterates her submissions and urges us to restore the disallowance made by the AO.
5. Having given our careful consideration to the rival contentions and the material on record, we are inclined to uphold the conclusions arrived at by the CIT(A). As Dr. Gupta rightly contends, the assessee being an artificial juridical person, it needs to incur certain expenditure to keep itself afloat and have its continued existence. Unlike a natural person, a company can only operate through other natural persons–whether employees or others. It is not the case of the AO that the expenditure of the assessee company are excessive or unreasonable vis-a-vis its legitimate business requirements. The Hon’ble High Courts have consistently held that in the case of the corporate assessees such expenses have to be allowed as deduction irrespective of whether or not the assessee is engaged in active business and even if assessee has only passive incomes. The CIT(A) was, therefore, justified in his conclusions. That is, however, not the only reason why the disallowance made by the AO was unsustainable in law. We agree with Dr. Gupta’s second line of argument as well. We find that the whole cause of action of disallowance of expenses is in the background of AO’s observation that the assessee did not carry out any business transactions which at best was AO’s finding about an activity of business not being functional in the relevant previous year. In our opinion, not carrying on business activity in a particular period cannot be equate with closure of business as it takes an unsustainably narrow view of the scope of cessation of a business. In the case of L.VE. Vairavan Chettiar v. CIT , their Lordships of Hon’ble Madras High Court were in seisin of a situation where the assessee had obtained an import licence for doing arecanut business but due to adverse conditions in market, he temporarily suspended the arecanut business for the assessment year in question. Nevertheless, he was maintaining the establishment and was waiting for improved market conditions in arecanut. It was thus an admitted position that no activities were carried out so far as this part of the business was concerned. On these facts, their Lordships took note of the position that “There is nothing on record to show that he completely abandoned or closed the business forever. On the other hand, his books of account revealed that he was meeting the establishment charges and interest payments as detailed in the accounts in the year of accounts”. It was then observed that the question whether the business is being carried on must depend in each case on its own facts and not on any general theory of law. Their Lordships then referred to, with approval, Lord Summer’s observation in IRC v. South Behar Railway Co. Ltd. (1925) 12 Tax Cases 657 that business is not confined to being busy; in many businesses long intervals of inactivity occur….” The concern is still a going concern though a very quiet one.” After elaborate survey of judicial precedents on the issue, their Lordships concluded, in the light of, as noted above, the factual position that “there is nothing on record to show that he completely abandoned or closed the business forever. On the other hand, his books of account revealed that he was meeting the establishment charges and interest payments as detailed in the accounts in the year of account,” that the loss in arecanut business, in which admittedly no activity was carried out during the relevant previous year, was to be set off against; assessee’s business income in the year. As the ratio of the aforesaid judgment is summed up in the ITR headnotes at p. 115 of the report, “as the assessee was maintaining the establishment and waiting for the improved market conditions in arecanuts and there was nothing to show, that he completely abandoned or closed the business forever, the business must be deemed to be continuing”. In the light of this legal position, it would follow that unless there is some material on record to show that the assessee has completely abandoned the share dealing business, merely because there are no business transactions in the relevant previous year cannot be reason enough to come to the conclusion the business has come to an end. It could not thus be said ; as was the case before the Hon’ble Madras High Court, that the assessee had “completely abandoned or closed the business forever”. Unless the business is abandoned or closed and even if business is at a dormant stage waiting for proper market conditions to develop, the expenditure incurred in the course of such a business is to be allowed as deduction. For this reason also, the disallowance made by the AO was not justified, and the CIT(A) rightly deleted the same.
6. Ground No. 1 is thus dismissed.
7. In the second ground of appeal, the assessee has raised a grievance against the CIT(A) deleting the disallowance of Rs 1,04,740 on account of deemed dividend under Section 2(22)(e).
8. Learned representatives fairly agree that this issue is covered in favour of the assessee by Tribunal’s order dt. 29th Sept., 2006, in assesse’s own case for the asst. yr. 1996-97. The said Tribunal order has been confirmed by the Hon’ble Delhi High Court vide judgment dt. 2nd Nov., 2006 by dismissing Revenue’s appeal against the same. In view of this position, we see no reasons to take any other view of the matter than the view so taken by the co-ordinate Bench in assessee’s own case. Respectfully following the order of the co-ordinate Bench, we confirm the action of the CIT(A) and decline to interfere in the matter.
9. Ground No. 2 is also dismissed.
10. In the result, the appeal filed by the AO for the asst. yr. 2002-03 is dismissed. It was so pronounced in the open Court at the time of hearing itself.
TTA No. 4562/Del/2005 : Asst. yr. 2003-04
11. Learned representatives fairly agree that the grievances raised in this appeal will also meet the same fate as the grievances raised in the AO’s appeal for the immediately preceding year which we have dealt with in the preceding paras. As a matter of fact, the CIT(A) has merely followed his order for the immediately preceding year. The grievances are materially the same and on materially identical facts. As we have dismissed the AO’s appeal for the asst. yr. 2002-03 and for the detailed reasons set out in preceding paras, we see no reasons to take any other view of the matter for this year, i.e. 2003-04, either. Following our order for the asst. yr. 2002-03, we dismiss this appeal as well. The appeal is dismissed. It was so pronounced in the open Court at the time of hearing itself.