As per Section 28(i) of the Income Tax Act, it is a primary condition for determination of income under the head “Profits and Gains of Business or Profession”that the assessee should carry on business during the year. In case, no business is carried on by an assessee, provisions of the Income Tax Act relating to computation of taxable income under the head “Profits and Gains of Business or Profession” will not be applicable and any income earned during the relevant year will be taxable in any other head of income and expenses will also be deductible as per provisions of that head of income. In other words, computation under the head “Profits and Gains of Business or Profession” will not be made and no expenditure will be deductible as business expenditure. This position of law is quite clear from the language of Section 28(i) of the Act. Courts have confirmed this position in various judgements. Therefore, this legal proposition is not being elaborated further and no case law in support thereof is being referred.

An important legal aspect regarding the matter is that in case an assessee is not carrying on the business for certain period/years on account of specific circumstance but the assessee has intention to carry on the business, what will be the status? Courts have taken a consistent view that in such a circumstance it will be assumed that the assessee has been carrying on the business. Accordingly, notwithstanding that during the relevant period the assessee was not able to carry on actual activities of the business but for the purpose of Income Tax Act, it will be considered that the assessee has been carrying on the business and any income earned during this period will be considered to be business income and all the expenses incurred during the relevant period are allowable as business expenditure. Case law on this aspect is given hereinafter at later stage.

Still another aspect of the matter is that in case an assessee has been carrying on the business for part of the year but at the end of the year the assessee was not carrying on the business, what would be the legal position? On the basis of Section 28 of the Act it will be assumed that assessee has been carrying on the business. In regard to this legal proposition the Hon’ble Supreme Court in the case of Commissioner of Income Tax v. Bangalore Transport Company Limited (1967) 66 ITR 0373 (SC) while considering the issue has held that there is nothing in the Income Tax Act which supports the argument that business should be actively carried on for whole of the previous year or till the end of the previous year. In other words, the Hon’ble Supreme Court has taken a view that even if the business was being carried on for part of the year, it will be assumed that the assessee has carried on the business and accordingly, taxable income will be determined under the head “Profits and Gains of Business or Profession” for the relevant year. In this regard the Hon’ble Supreme Court observed as under: –

“4. There is no warrant for his argument in the scheme of the IT Act. Under s. 10(1) of the IT Act, 1922, tax is payable by an assessee under the head “Profits and gains of business, profession or vocation” in respect of the profits or gains of any business, profession or vocation carried on by him. There is nothing in the Act which supports the argument that for profits of the business to be taxable, the business must be actively carried on for the whole of the previous year, or till the end of the previous year. Under the scheme of the IT Act, whenever an assessee receives in the course of his business money or money’s worth, income embedded therein accrues or arises to him, and becomes subject to an ambulatory charge. If at the end of the previous year, on making up accounts, there is no overall income, the charge does not crystallize because there is no income on which the charge of tax may settle.”

In regard to the legal proposition that when the operations of the company have been suspended for various reasons but there was no intention to close down the operations, assessee will be considered to have been carrying on the business and income/expenses for the relevant period have to be determined as per provisions of Income Tax Act under the head “Profits and Gains of Business or Profession” reference can be made to following decisions. Observations made in each of following decisions by Hon’ble Appellate Authorities have also been reproduced in support of the legal proposition.

– Commissioner of Income-Tax versus Vellore Electric Corporation Ltd. (2000) 243 ITR 529 (Mad)

“The assessee is a private electric company. Its undertaking vested with the State Government by reason of the enactment of the Tamil Nadu Electricity Supply Undertakings (Acquisition) Act, 1973. After the unsuccessful attempt to challenge the validity of that Act in the High Court it had filed appeals before the Supreme Court which were pending during the relevant years. The assessment years are 1975-76 to 1979-80.

The Assessing Officer held that the assessee was not carrying on any business and limited the salary paid to the employees of the assessee to ten per cent. and the audit fee was limited to fifteen per cent. That was affirmed by the appellate authority. The Tribunal, however, held that the assessee was carrying on business and was entitled to the deductions claimed by the assessee.

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Here, it cannot be said that there was a permanent closure, as the validity of the Act was yet to be finally settled by the Supreme Court. In the event of the Act being struck down, the assessee could resume business. The fact that it had continued to maintain an establishment is the indication of its intention to resume business, if an opportunity for it arises by reason of the apex court holding in its favour. The expenses incurred by it while awaiting the decision of the apex court cannot altogether be regarded as unconnected with the business. that it had been carrying on by supply of electricity and that business was interrupted only by reason of the Act; the possible resumption of the business was dependent on the outcome of the appeal pending before the Supreme Court. The amounts claimed were also not very substantial. The Tribunal has taken a broad view of the matter and has held in favour of the assessee. We do not see any good grounds to differ.”

– Commissioner of Income Tax versus M/S. Kriti Resorts Pvt. Ltd. [2011] 243 CTR 341

“2. Briefly stated, the facts of the case are that the assessee was running a hotel at Manali till September 1995. On the night intervening 6th/7th September 1995 heavy floods took place in the river Beas and the hotel building was washed away in the floods. The assessee did not carry out any hotel business thereafter and advanced the surplus funds available with it to its sister concern on interest.

3. The assessee filed return for the year 1998-99 on 23.11.1998 and the interest income received by the assessee was declared to be income under the head ‘profits and gains’ of business and against this income the assessee claimed deduction of various expenses and depreciation on furniture and depreciation on vehicles against the income earned by way of interest. The assessee also claimed set off of unabsorbed deprecation brought forward from the assessment year 1996-

4. The Assessing Officer held that since the assessee had discontinued its business since 1995 the income was not income from business but income from other sources and therefore the expenses claimed and depreciation brought forward could not be set off against the said

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12. The first question which arises is whether the assessee can still be said to be in business or not. No doubt the hotel of the assessee was washed away and in that respect it can be said that it has not conducted any hotel business thereafter. However, the Company does not cease to exist. The Company is a juristic entity and incorporated under the Indian Companies Act. It will have to fulfill its obligations imposed upon it by the Companies Act till it is wound up. Therefore, some staff will have to be maintained. It cannot be said that the business has come to an In this behalf reference may be made to the judgment of the Madras High Court in Commissioner of Income-Tax v. Vellore Electric Corporation Ltd., (2000) 243 ITR 529 and a judgment of the Calcutta High Court reported in Commissioner of Income Tax v. Karanpura Collieries Ltd. (1993) 201 ITR 498.

13. Therefore, once the Company is in existence the assessee can seek Reliance placed by the Revenue on the first proviso of Section 32(2) is totally misplaced. Therefore, as far as question No.1 is concerned the same is answered in favour of the assessee and against the Revenue.

Hindustan Fertilizer Corporation Ltd. v. DCIT, T.A. No.-409/Del/2013 decided on 25.04.2014 – ITAT Delhi. A.Y.2009-10

“2. Brief facts of the case are that the assessee company was earlier engaged in the business of manufacturing and marketing of fertilizers. However, since the year 2002,the company was not manufacturing any fertilizers and Government of India had ordered for closure of the company and winding up the same. The return was filed, declaring total loss of Rs. 380,78,34,033/-. The AO noticed that assessee had claimed huge amount of depreciation amounting to Rs. 2,51,51,000/-.

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4. The ld. CIT (A) confirmed the AO’s action inter alia observing that in the case of assessee, the business had been ordered to be closed forever and the building were not put to use during the year.

5. We have considered the rival submissions and have perused the record of the There is no dispute that assessee had only been ordered to be closed down by the Government of India but had not gone into liquidation. It is pertinent to note that claim in respect of voluntary separation scheme expenses of Rs.12,87,200/- had been allowed by ld. CIT (A). Therefore, it cannot be denied that for implementing the scheme necessary infrastructure must have been maintained by assessee. Hence, merely on the ground that the company was directed to be closed down, it could not be inferred that till the time of final closure, no activities were being carried out by the assessee.

6. From the submissions of the assessee, as noted earlier, it is evident that minimal staff had to be kept for proper survival and security of all the assets of the company. The assessee company being a juristic entity incorporated under the Companies Act, did not cease to exist, merely on passing of the order by Government of India for closure of the company. It had to fulfill all the obligations imposed by the Companies Act till it was finally dissolved. Necessary staff had to be maintained. Under such circumstances, depreciation had to be allowed though assessee had discontinued its business. We find that this issue is covered by the decision of Hon’ble, H.P. High Court in the case of CIT v. Kirti Resorts (P.) (2011) 60 DTR 138/243 CTR 341 wherein it has been held that as long as the company is in existence, it is entitled to depreciation though it has discontinued its business.

7. In view of above discussion, we direct the AO to allow assessee’s claim of ”depreciation.”

 MulaPravara Electric Co-op. Society Ltd.v.DCIT, ITA No. 1776/PUN/2016 decided on 28.09.2018 – ITAT Pune.

“3. Briefly stated relevant facts of the case are that the assessee is a society engaged in the business of Distribution of Electricity-a service provider. Assessee filed the return of income declaring loss of Rs. 16.23 crores (rounded off). Subsequently, the return was revised by revising the loss at Rs. 43.04 crores (rounded off). During the scrutiny proceedings, AO noticed that the assessee reflected the rental income of Rs. 1,59,831, scrap sales of Rs. 5,29,950/- and miscellaneous receipts of Rs. 22,630/- totaling to Rs. 7,12,411/-. Against this income, assessee claimed various expenses including VRS expenditure of Rs. 41.90 crores (rounded off). As such, no income on account of the core activity of “distribution of electricity” is reported by the assessee in the year under consideration.

3.1 Regarding the electricity distribution business, assessee was engaged in the business for the past 20 years under the license issued by Government of Maharashtra under the provisions of Indian Electricity Act, 1910. The license was renewed from time to time. Eventually, the said license granted to the assessee expired on 31-01-2011. The Maharashtra Electricity Regulatory Commission (MERC)issued license to the Maharashtra State Electricity Distribution Company Limited(MSEDCL) for distribution of electricity to the specified areas. Thus, the assessee was ordered to hand over the infrastructure and database of clientele etc. of the assessee to MSEDCL.”

After detailed discussion in the order recording the arguments of both sides and the case law, the Hon’ble Tribunal concluded the issue regarding continuance of business as under:

“Summary: Therefore, to sum up, it is a settled legal proposition that the existence of“intention” to continue business and its demonstration by the assessee assumes significance in matters relating to decision on the cessation of business. The judgment in the case of Lahore Electric Supply Co. Ltd. (supra) is relied. In this regard, we considered the undisputed facts of (i) demonstration by way of passing of Resolution by AGM of assessee for continuation for fighting for renewal of license (ii) approaching the State Govt. MERC, APTEL, Supreme Court etc. for renewal of license, (iii) opposing the takeover bid of the MERC for MSEDCL with or without consideration; (iv) compliance to the legal orders of Supreme Court/ APTEL without prejudice to the demand for renewal of license; (v) assessee never entertained the idea of sale of assets and infrastructure to MSEDCL, (vi) assessee did not entertain the idea of lease of assets too; (vii) assessee did not resort to liquidation or insolvency, (viii) assessee receives compensation ofRs. 1 crore plus every month from MSEDCL and reports to income tax office every year; (ix) no authority/ executive/judiciary ever rejected the demand for renewal of license till date. Further, various committees recommended for grant of renewal of license to the assessee along with MSEDCL along with subsidy if any.

Therefore, all these undisputed facts, in our view, support the existence of “intention”to do business of power distribution. Unlike in the case of Lahore Electric Supply Co. Ltd. (supra) where mere clearing of outstanding liabilities is only defense from ‘Revenue’ in support of intention for continuation of business activity, the case on hand and its facts distinguishes the facts of other case. Further, we find the judgment in the case of Vellore Electric Corpn. Ltd. (supra) is very close to the facts of the present one under consideration so long as the takeover decision of the Court is concerned. But the basis of actions of the present assessee keeps the assessee on a different pedestal. Therefore, the business of the assessee cannot be held to be discontinued one. All the administrative expenses have to be allowable as business expenditure.

Therefore, we find it difficult to conclude that the assessee does not have any intention to continue the business of power distribution. Accordingly, the Ground No.1 raised by the assessee is allowed.”

On the issue regarding allowability of expenses incurred by the company and also for set off of loss of earlier years the Hon’ble Tribunal remanded the matter to AO as specific findings had not been given.

-Chase Bright Steel vs. Income Tax Officer (2009) 25 DTR 0049 (Mum.)

“9. In the annual report for asst. yr. 2001- 02, directors have mentioned that there was no production and related business activity during the assessment year of the assessee for 2002-03. The assessee however had declared business income and has been assessed on such business income. The AO has also allowed carry forward loss for asst. yrs. 1994- 95 till 2001-02. Thus, even according to the Revenue business of the assessee continued to carry on business even in asst. yr. 2002-03. In the director’s report for year ending 2002-03, directors have acknowledged the fact that there was no production in the company’s plant and that the company’s property at Thane was sold to discharge debts due to the Allahabad Bank. Background under which, the assessee decided to sell its property at Thane, where it was carrying on manufacturing activity was explained by the assessee as follows. The assessee wanted to shift its factory from Thane and did not seek permission for closing factory at Thane. Fact that the assessee wanted to shift his factory also goes to show its intention not to abandon its business totally. The assessee has explained that shifting of factory was necessary to sell land and liquidate liability of the assessee and locate its factory in another area so that it can continue its business. Later event of the assessee shifting its factory to Navi Mumbai and starting its manufacturing activities also shows that the assessee never intended to close down its business.”

-Assistant Commissioner Of Income Tax-(2) (2) Versus New Era Mercantile Private Ltd. and Vice Versa I.T.A. No.3033/ Mum/2017, CO. No. 40/Mum/2019

“2.1 Fact in brief are that the assessee being resident corporate entity stated to be engaged in manufacturing of soaps and detergents was assessed in scrutiny assessment u/s 143(3) of the Income Tax Act, 1961 on 24/03/2015 by Ld. Deputy Commissioner of Income Tax, Circle- 7(3) (1), Mumbai [AO] wherein the income of the assessee was determined at Rs. 3.11 Lacs as against loss of Rs. 79.28 Lacs filed by the assessee on 28/09/2012.

2.2 During assessment proceedings, it transpired that the assessee has not carried out any manufacturing activity during the year. The assessee reflected other income of Rs. 6.42 Lacs in the profit & loss which consisted of profit on sale of assets, interest on FDRs, misc. income, insurance premium refund and sundry balances written-off. The misc. income of

Rs. 1.25 Lacs and insurance premium refund for Rs. 0.75 Lacs treated by the assessee as Business Income was treated as Income from Other Sources for want of details.

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5. e have carefully heard the rival submissions and perused relevant material on The undisputed position that emerges is that the assessee has not carried out any business activity during the impugned AY but claimed expenditure in the nature of employees’ expenses, depreciation and other expenditure which has been disallowed by Ld. AO for want of business activities / business receipts. In our considered opinion, so long as the assessee’s business is in existence, actual business receipts in not a sine qua non to claim the business expenditure. The assessee was a corporate entity and its business could come to an end only upon its being wound up as per due process of law. The corporate entity has to incur expenditure so as to maintain its corporate personality and day-to-day existence. Other notable feature is the fact that the assessee has claimed depreciation which demonstrate that its fixed assets were in existence and were not sold- off during impugned AY. The perusal of other expenses as placed on record reveal that the same are in the nature of electricity, water charges, rent, duties & taxes, travelling,telephone expenses, legal expenses & other routine expenditure. So far as the treatment of misc. income and insurance premium refund is concerned, the complete details of the same was already filed by the assessee before Ld.

AO and the same were found to be arising out of liquidation of old stock and refund of excess premium paid by the assessee and therefore, the same were clearly business income in nature. The revenue is unable to rebut the factual matrix as well as case laws being relied upon by first appellate authority. This being the case, no infirmity or perversity could be found in the impugned order. Accordingly, the revenue’s appeal stands dismissed which makes assessee’s cross-objections infructuous.

6. The appeal as well as cross-objection stand dismissed.”

Assistant Commissioner of Income Tax vs. Master Stores (2002) 75 TTJ 0452 (Kol. )

“5. The crux of the problem seems to be whether there was a permanent closure of the business of the assessee and in that way the payments to the workers were made after the said closure. The evidence on record and as discussed in detail by the learned CIT(A) in his appellate order as well as by us also as above, clearly show that there was merely a temporary cessation of business and not a permanent closure of the same. The business of milling wheat continued in the two subsequent years. Even during the year under consideration also milling operations were there and sale of already milled flour was there even after discontinuance of the milling operations. In view of these positions, we are of the opinion that the expenditure must be considered to have been incurred during the course of the business of the assessee. There cannot be any doubt about the fact that the expenditure had to be incurred wholly and exclusively for the purpose of the business of the assessee, inasmuch as, no personal element can be considered to have crept in. By being able to retrench a large section of the work-force of the assessee, it was, no doubt, in a position to get some benefit of enduring nature, so far as its business operations were concerned. That by itself, however, cannot lead to the conclusion that the nature of expense was capital. The judgments as cited above clearly go in favour of the propositions that what the assessee secured by incurring the expense was running of the business in a smooth and perhaps healthier manner. Therefore, we agree with the learned CIT(A) that the expenses under consideration are required to be allowed as deductible business expenditure. We uphold the order of the learned CIT(A) in deleting the disallowance.”

General Corporation  v. Commissioner Of Income Tax (1935) 3 ITR 0350 (Mad.)

“2. The facts are these: The assessee is a company incorporated under the Indian Companies Act. The company carried on business in motor accessories at Madras, Bombay, Coimbatore and Ootacamund, and in mica mine at Nellore. In this reference before us we are concerned with a sum of Rs. 5,420 which the company claims it is entitled to deduct for expenses incurred in carrying on the mica business. The mining business was started at Nellore in 1926. It was worked till Nov. 1927 when the production was stopped on account of a cyclone. With a view to resume the production the company did some prospecting work and incurred an expenditure of Rs. 5,420 in 1928-29. The amount was made up of the expenses on account of salary, wages, legal expenses, depreciation etc. It may be mentioned here that production was not resumed by the company. Till 1930-31 the company was assessed to income tax by the ITO of Bombay as it had its principal place of business at Bombay. In that year the principal place of business was changed to Madras and the duty of assessing the company to income tax for 1930-31 fell to the ITO in Madras. In 1928-29 the Bombay ITO allowed the sum of Rs. 5,420 being the loss of the mica business at Nellore against the profits of the company’s other business. When the assessment for the year 1930-31 was taken up the Madras ITO took action under s. 34 of the IT Act and assessed the company for a total income of Rs. 18,932 disallowing the sum of Rs. 5,420 on the ground that the loss was of a capital nature and not loss incurred in the course of business as the company did not do any business in the year of account. This order was confirmed by the Asstt. CIT.

3. On the previous occasion when this Court was moved under s. 66(3) of the IT Act, a finding was called for on the point with what intention the assessee company incurred the expenses during the year of assessment? The finding returned was that ‘the company intended to resume the business of the mica mining if conditions and prospects proved favourable and that the expenditure had been incurred with that intention’. After the receipt of this finding this Court directed the CIT to refer the point stated at the beginning of this

4. The question for decision is whether the assessee in the circumstances of the case may be said to have been carrying on the business of the mica mining, during the year in question, for it is clear that the loss to be allowable must result from the carrying on of a business (s. 10). It is argued on behalf of the CIT that the mica mining business originally carried on by the company as one of its businesses came to an end in 1927, that it was not resumed at all, and that in the circumstances the expenses incurred with a view to resume the business must be considered to be loss of a capital nature incurred by the company and not a loss incurred in the course of business as the company had admittedly not done any business in 1928-29. In our opinion this argument cannot be accepted. According to its memorandum one of the objects of the company was to search for, win, work and get mica. When production was stopped by a cyclone, the company started prospecting to find out whether the business can be carried on, and incurred, the expenses in question, with a view to resume production. How can it then be said that the business had stopped? It is admitted that the old staff of the company doing the mica business was maintained by it on a reduced scale, the work of prospecting was done by that staff, and that the expenses were incurred in trying to see whether the production can be resumed. It appears to us that the fact that there was some period of inactivity in the carrying on of the business does not really affect the question, nor is the question affected by the consideration that the business was not resumed after the expenses had been incurred. The case relied on, Mahalakshmi Textile Mills Ltd., In re 6 ITC 83 in the CIT’s reference is not to the point, for in that case, the company started a new business altogether. Expenses incurred in connection with the restarting of an old business as in the present case though it was not resumed afterwards, should be treated on a different footing. It is not necessary to discuss the various illustrative cases brought to our notice as the decision whether the business was being carried on must depend in each case on its own facts and not on any general theory of law. Having regard to the circumstances of the present case we think the expenditure incurred by the company in 1928-29 was with respect to the carrying on of the mica business which it carried on along with its other business and the amount is therefore allowable as a deduction against the profits and gains of the assessee’s other business. We answer the question accordingly. The assessee will get Rs. 250 for his costs and he will also get refund of the Rs. 100 deposited by him.”

–  L.VE. Vairavan Chettiar v. Commissioner of Income Tax (1969) 72 ITR 0114 (Mad.)

“8. It is common case that, after the assessee became the sole proprietor of the two businesses, he was maintaining two separate sets of accounts, one for the rice mill and the other for the areca nut business. It is also common case that he obtained an import licence for doing areca nut business. He also borrowed large sums of money for doing areca nut business. But due to adverse conditions in the market, he temporarily suspended the areca nut business for the assessment year in question. Nevertheless, he was maintaining the establishment and was waiting for improved market conditions in areca nuts. There is nothing on record to show that he completely abandoned or closed the business for ever. 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. In such circumstances, is the Tribunal right in giving a finding that the assessee had closed his areca nut business and that the loss claimed by the assessee had not been proved?

9. 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 Jessel M. R. in Erichsen Last (1881) 8 QBD 414: 4 TC 422 has observed:

“(I do not think) There is not, I think, any principle of law which lays down what carrying on a trade is. There are a multitude of things which together make up the carrying on of a trade, but I know of no one distinguishing incident . . . . it is a compound fact made up of a variety of things.”

In IRCs v. South Behar Railway Co. Ltd.(1925) 12 TC 657, Lord Sumner observed:

“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.”

10. In Kirk and Randall Ltd. v. Dunn (1924) 8 TC 663, a company was formed to take over “contractors” business which was not in good circumstances. Though they did not get business all the time, the directors drew their fees and the secretary drew his fees and they also paid the typing bill and the bill for legal services. The question was whether the company was carrying on business or not. Justice Rowlatt observed:

“I do not think that could be said for a moment. Because in the middle of a great career a company, or still more an individual professional man, might have a year when he was holding himself out for business, or the company was holding itself out for business, but nothing came, yet that would not effect a break in the life of the company for income-tax purposes.”

11. In our own High Court, a similar question had to be considered in General Corporation Ltd. v. CIT (1935) 3 ITR 350 (Mad). The assessee in that case carried on business in motor accessories and also in mica mining. The mica business was stopped on account of a cyclone. With a view to resume the production, the company did some prospecting work in the year of account keeping a reduced staff and incurred some expenses. The question for decision was whether the assessee, in the circumstances of the case, might be said to have been carrying on the business of mica mining, during the year in question. The learned judges observed:

“When production was stopped by a cyclone, the company started prospecting to find out whether the business can be carried on, and incurred the expenses in question, with a view to resume production. How can it then be said that the business had stopped?             It

appears to us that the fact that there was some period of inactivity in the carrying on of the business does not really affect the question, nor is the question affected by the consideration that the business was not resumed after the expenses had been incurred.the decision whether the business was being carried on must depend in each case on its own facts and not on any general theory of law.”

12. The company may not obtain or be able to execute a single business contract for months and yet it may be deemed to carry on its business, if during the period of lull and inactivity it is kept alive and if it retains its registered office and holds meetings. It is not necessary that a business to be in existence should have work all the time. There may be long intervals of inactivity and a concern may still be a going concern, though it may for some time be quiet and dormant. The mere fact that a businessman has not been able to obtain a contract and the business has for some time been in that sense dormant would not mean that it has ceased to exist, if the assessee continues to maintain an establishment and incur expenses in the expectation that work would come and the business would be successful. How long he shall remain in the hope and in what manner he must carry on his work to gain success is primarily his own concern. The mere fact that for some time he is not able to secure a contract or do the work which he set out to do should not disqualify him from pleading that the expenditure that he had incurred was expended for the purpose of his business: see Inderchand Hari Ram v. CIT (1953) 23 ITR 437.

13. Thus, on a review of these authorities, we think that the ITO was right in allowing the loss of Rs. 13,559.

-Commissioner of Income Tax v. Cachar Native Joint Stock Ltd.(1993) 109 CTR 0291/ (1992) 198 ITR 0289 (Gau.)

“3. The assessee is a company incorporated in the year 1876 with various subjects including acquiring of land for tea plantation, manufacturing of tea, etc., having 3 tea estates. The assessee-company suspended its manufacturing operation of tea due to unavoidable market condition and also financial condition of the company from the accounting year 1974, although it continued to maintain tea plantation and other assets including plants and machineries for manufacturing of tea. Subsequently, in the Annual General Meeting of the company held on 30th June, 1977 it was decided to resume manufacturing operation, but could not do so till the accounting year 1977. The assessee claimed for setting off of earlier unabsorbed loss for tea manufacturing business which was disallowed by the ITO. However, the Commissioner(A) noted that the company had godown for storing manufactured tea and garden stores, etc., and the company let out some of the commercial assets for having an additional source of business income and the company was also assessed to income-tax on aggregate income of different branches of business. According to Commissioner, letting of commercial assets, viz., godown, office, etc., was assessable as income from business and mere suspension of manufacturing of tea for various reasons did not mean that the company has discontinued its business. The Commissioner also noted that the plants and machineries of the company had to be maintained, so also the employees for starting manufacturing of finished tea in future. It was also noted that the company was running its tea garden by selling green leaves and maintaining its plants and machineries. On these facts the Commissioner held that the company had neither abandoned nor discontinued its business as recorded by the ITO. Relying on the decision of the apex Court it was also held that mere substituted use of commercial assets does not change or alter the nature of that assets. According to Commissioner, the assessee was entitled to get unabsorbed previous losses and the depreciation to be determined as per the Acts and the Rules.

4. The Tribunal accepted the views of the Commissioner and on facts and materials on records was of the opinion that the Commissioner was justified in accepting the claim of the assessee. Hence, the present reference.

5. We have heard D.K. Talukdar, learned counsel for the Revenue and Mr. N.M. Lahiri, learned senior advocate for the assessee.

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For the reasons stated above, we hold that the provisions of s. 72(1) were fully satisfied in the case in hand and that there was no discontinuance of business of the company. We, therefore, answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue. No costs.”


In view of above legal position the conclusion is that facts of each case have to be examined to determine whether assessee is carrying on the business or not. On the basis of facts intention of an assessee to carry on the business or closed down the business has to be gathered. If intention is to carry on the business but assessee is not able to carry on the same on account of circumstances which are of temporary nature and may not exist in future, it will be assumed that business is being carried on. In case facts lead to a conclusion that assessee has intention not to resume business, it will be assumed that he has closed down the business.

(Source: This article is published in souvenir of National Tax Conference which was held on 6th & 7th August, 2022 at New Delhi)

“To give pleasure to a single heart by a single act is better than a thousand heads bowing in prayer.”

— Mahatma Gandhi

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