ORDER
K.S. Vishwanathan, Vice President
1. The assessee is a Private Ltd. Company and the main issue is the carry forward of the losses of the prior assessment years. For the year 1983-84, the assessee had filed a return declaring a loss of Rs, 61,933. The ITO found that there was no business activity at all of the assessee. No sale had taken place during this year. The opening stock, which was brought forward, had been carried forward to the next year. No purchases had been effected. The only receipt was the cash incentive received from the Government in respect of the export entitlement of the prior assessment years. The assessee had claimed expenditure shown in the Profit and Loss Account exceeding Rs. 75,000. In the absence of any business, the ITO was of the opinion that the assessee was not eligible for deduction of any expenditure. However, since there was receipt of cash incentives and the assessee must have incurred some expenditure in order to receive this amount, be allowed a deduction of 10% of the cash receipts. He brought to tax Rs. 84,250. In the prior assessment year, the loss of the assessee had been computed at Rs. 57,426. The benefit of carry forward of this loss was not allowed because the assessee had ceased doing business.
2. Against this order, the assessee came in appeal. The CIT(Appeals), after going through the facts of the case, came to a finding that the assessee had discontinued the business and, therefore, they were not entitled to any deduction. Since the business from which the loss of the prior years arose, was not in existence, the assessee was not eligible for the carry forward of the loss also. He dismissed the appeal.
3. The assessee is in further appeal before us. Shri Sampat, the learned Chartered Accountant for the assessee, submitted that the assessee was in the business of export of leather goods. Most of the exports were to Iran. Due to political disturbances in Iran, no exports could take place. That was why there was no purchase or sale during this year. However, he submitted that the business activities continued and, in the alternative, there was only a lull in the business transactions. Mere lull in the transactions does not amount to discontinuance of the business. He relied upon several case-laws to show that a lull in business does not disentitle the assessee from the business deductions. For the same reasons, he submitted that the assessee is entitled to the carry forward of the losses determined for the prior assessment years. Shri Sampat then pointed out that there was a receipt of cash incentive during this period. This is a business receipt. This is prima facie an indication that business was continued. So the expenditure connected therewith has to be admitted. In this connection, he referred to Section 176(3A), which reads as follows :-
176(3A) Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance.
4. Since, under this Section, an amount received would be deemed as the income of the recipient, it follows that the expenditure thereon would also be admissible. This is a legal fiction of continuation of business and that legal fiction must be given its full play. Shri Sampat then submitted that there was no reason for restricting the expenditure to 10%. The entire expenditure must be allowed as a deduction. He finally submitted that there is no evidence at all that the business had discontinued as held by the assessing authority as well as the ClT(Appeals).
5. Shri Sandeep Tandon, the learned Departmental Representative, pointed out that there is no material at all to show that the assessee continued business. He submitted that the ITO, in the course of the assessment proceedings, had requested the assessee to furnish material to substantiate the claim of continuance of business. The assessee could produce only three letters, which, on the face of it, does not support the assessee’s contention. The expenditure debited to the Profit and Loss Account also does not indicate the existence of any business. With reference to the cash incentive, he submitted that this had accrued in the earlier assessment year and only the receipt was deferred. The fiction in Section 176(3A), he submitted, was only to bring such receipts as income of the assessee. There was no further fiction that the income arose from any business. In contrast, he referred to the expressions used in Sections 41(1) and 41(2), where there was a fiction of continuance of business. He also referred to Section 71(1) proviso, which requires the continuance of business before the assessee could claim carry forward of losses.
6. We have considered the submissions. As Shri Sampat had submitted, it is not necessary that there should be continuous business activity throughout the accounting year in order to establish that the business is in existence. There could be a lull in business also. There would be circumstances, which would show that the business continues although there may not be any overt activity of the business like purchase, sale, manufacture, etc. In all cases, where there was such a lull in business, there was material to show that the business as such had continued. In other words, there was nothing to show that there was discontinuance of business. The assessee had relied upon the decision in the case of Inderchand Hart Ram v. CIT [1953] 23 ITR 437 (All.). In that case, the assessee had stopped business on account of sugar control order, which took away their substratum of business. The High Court actually found that the assessee had discontinued the business and they were not entitled to claim any deduction. In the case of CIT v. Bharat Nidhi Lid. [1966]60 ITR 520 (Punj.), the assessee had a banking business as well as money-lending business. After the passing of the Banking Companies Act, the assessee did not wish to continue its banking business. However, the money-lending business continued. The losses of the earlier years was not carried forward by the Department on the ground that there was no business subsisting after the banking business was stopped. But there was material to show that the assessee had maintained its capital with its assets, made realizations and discharged liabilities, retained its staff and continued to incur legal expenses and to pay Directors their fees. From these materials, the Tribunal could give a finding that the money-lending business continued. Thus, it will be noticed that there was some material to show that the money-lending business had continued in that case. A reference was also made to the decision of the Andhra Pradesh High Court in the case of CIT v. Sri Venkateswara Talkies [1985] 155 ITR 73, but that was a case of a cinema house being given on lease. Giving on lease itself was treated as a business activity. That may not be very relevant for us in determining the issue.
7. It will be seen from the above that what is required is evidence to show that the substratum of the business of the assessee continued during this period. So we should look into those materials which will disclose these. In the case of a Ltd. company, however, one should be cautious in appreciating the evidence on this point. The Ltd. company being a corporate body, it is necessary to incur some expenditure in order to maintain its corporate existence. The maintenance of the corporate existence by itself does not mean maintenance of business assets. A company could continue to exist without any business. So the evidence given by the assessee on this point has to be evaluated keeping this distinction in one’s mind.
8. On the basis of the above, we have to hold that the expenditure incurred by the assessee in audit fees, expenditure in filing before the Company’s Registrars, etc., are not really relevant. A company has to work through its employees or directors and, therefore, the remuneration paid to them would not show existence of business. Thus a salary paid to a Secretary to keep the corporation body alive, is not relevant for this purpose.
9. If we exclude such type of expenses mentioned in the earlier paragraph, there is nothing at all to show that the business subsisted during this year. The other expenditures are very very nominal. The major expenditure appears to be telephone expenditure. This also would not show that the business was in existence. Thus, there is no material at all to show that the assessee’s business was kept alive during this period.
10. We will now consider the submissions made on the basis of Section 176(3 A). As Shri Tandon had pointed out, there is no fiction at all in this Section for the existence of a business. Before the amendment brought in w.e.f. 1-4-1976 any sum received after the discontinuance of a business cannot be brought to tax. It was to get over this difficulty that Sub-section (3A) was introduced. This Section in substance says that, any sum received after the discontinuance would be deemed to be the income of the recipient. The second half of the Section is on the question of the rate at which this amount would be taxed. It does not refer to the head under which it would be taxed. The Section says that it would be taxed in the year of receipt in the same way as it would have been included in the total income of the person who had carried on the business, had such income been received before its discontinuance. The expression there “the person who carried on the business” is to qualify the inclusion of this amount in the total income. As Shri Tandon correctly pointed out, there is a difference in the treatment of these receipts with the receipts under Sections 41 (1) and 41(2). Under those Sections, there is a fiction that the business is continued. That fiction is lacking here.
11. The third element of Shri Sampat’s argument is based on thereceipt of the cash incentive. In this connection, he has referred to certain authorities in the case of CIT v. Wheel & Rim Co. of India Ltd. [1977] 107 ITR 168 (Mad.). The Madras High Court had held that cash subsidy received was income from business. But this decision was based on the rules for determination of export profits under Section 2(5)(d) of the Finance Act, 1966. So this decision may not be of help in a case of general nature like the one before us. The second decision relied upon is the case of Kesoram Industries & Cotton Mills Ltd. v. CIT [1978] 115 ITR 143 (Cal.). That case is nearer to the facts of the case before us. The assessee was a manufacturer of textile goods. In order to acquire foreign exchange, the Government had started an export promotion scheme. Under the Scheme, an exporter of cotton cloth was eligible for grant of import licences. The amount received by the assessee under this scheme was claimed to be a capital receipt, but the High Court held that it was a receipt arising to them in the course of carrying on of its business. In our opinion, this case would be applicable if the assessee was continuing in business. Then we could say that this was a receipt arising from business. But the question before us is, whether such a receipt after the business had been discontinued would be an indication of an existence of business. It is in this connection that the CIT(Appeals) had referred to the decision of the Supreme Court in the case of CIT v. Lahore Electric Supply Co. Ltd. [1966] 60 ITR 1. The Supreme Court had held that mere collection of outstandings after the business was taken over, would not amount to carrying on of the business. That case would be applicable squarely to the facts of this case. Shri Sampat. had pointed out that the case was distinguishable because therein there was a finding that the entire electricity undertaking was taken over by the Electricity Board. In our case, we have also a similar finding. The entire business of dealing in leather goods had stopped and there was no continuation of the business. Thereafter, the assessee had collected export incentives which is at par with the collection of the outstandings in Lahore Electric Supply Co. Ltd.’s case (supra).
12. Under these circumstances, we are satisfied that the assessee had stopped business. They are, therefore, not entitled to the carry forward of the losses.
13. With regard to the expenditure allowed, Shri Sampat submitted that there was no basis for allowing just 10% of the receipts. We agree that there is really no basis for merely allowing 10%. The ITO has to allow some further deductions. After all, the company must exist to receive the cash incentive and those expenses which are necessary to keep up the corporate entity, must be allowed as a deduction. Thus, we would agree that the assessee should be allowed the deduction in respect of the salaries, audit fees, printing and stationery and bank charges, postages and telegrams. The ITO is directed to work out the relief accordingly.
The appeal is partly allowed.