Castor Oils & Derivatives P. Ltd, Indore vs Assessee

The present appeal has been preferred by the assessee against the order dated 22.03.2012 of the Commissioner of Income Tax [(hereinafter referred to as CIT] relevant to assessment year 2007-08.

2. The assessee has agitated the reopening of the assessment by the Ld. CIT under section 263 of the Income Tax Act (hereinafter referred to as the Act). The brief facts of the case are that the assessment in the case ITA No.2412/M/2012 2 M/s. Castor Oils & Derivatives Pvt. Ltd.

of the assessee was completed by the Assessing Officer under section 143(3) of the Act computing the total loss at Rs.3,16,174/-.

3. The Ld. CIT, however, observed from the assessment order that the assessee company had debited various expenses under the head 'out of office and administrative expenses' to the tune of Rs.3,09,981/-. He further observed that during the year under consideration, the assessee did not carry any business. The only income returned in the return of income was interest income. He observed that the expenditure like vehicle running and maintenance, legal and professional fees, directors' remuneration etc. should have been disallowed as those had not been incurred wholly and exclusively for earning of interest income. He therefore held that the order under section 143(3) of the AO was erroneous and prejudicial to the interest of the Revenue and reopened the assessment under section 263 of the Act. It was contended by the Ld. A.R. of the assessee before the Ld. CIT that though no business activity was carried out by the assessee during the year due to the bad market conditions in the real estate business, however, the business of the assessee was not closed. It was a temporary lull in the business and the expenditure incurred was in relation to keep the business activity alive. The surplus funds were invested for the short time to get interest income and reduce the administration cost of the company. The assessee, later on, had commenced the business and had purchased new land at Jabalpur for the development project. The Ld. CIT, however, was not satisfied with the explanation given by the assessee. He therefore held that the assessment order passed under section 143(3) of the Act was erroneous and prejudicial to the interest of the Revenue and therefore set aside the ITA No.2412/M/2012 3 M/s. Castor Oils & Derivatives Pvt. Ltd.

file to the AO for the denovo assessment. Aggrieved by the order of the Ld. CIT, the assessee has come in appeal before us.

4. The Ld. A.R. of the assessee has submitted before us that the assessee had returned the interest income as business income and had claimed expenditure of Rs.5.73 lakhs. The AO, however, issued notice to the assessee as to why the interest income be not treated as 'other income' and the expenditure claimed be not disallowed. The assessee in response to the show cause notice, submitted its reply dated 15.12.09 which was duly considered by the AO. After considering the reply of the assessee, the AO rejected the contention of the assessee that the interest income be treated as business income and held that the interest income was to be treated under the head 'income from other sources'. He also considered the matter regarding the allowability of the expenditure. After examining the details of the expenditure, he, out of the total expenditure of Rs.5.73 lakhs, disallowed the expenditure of Rs.1.82 lakhs. The Ld. A.R. has further invited our attention to the P & L account and the schedule-XII to the P&L account showing the details of expenditure claimed of Rs.5.73 lakhs. The AO, considering the submissions of the assessee, held that the interest income claimed by the assessee was income from other sources. So the finding of the Ld. CIT in his order passed under section 263 that the AO had allowed the impugned expenditure as relating to the earning of interest income is not correct. The AO has not allowed any expenditure for earning of interest income rather the AO, after due application of mind, got himself satisfied to the contention of the assessee that there was temporary lull in the business. He, after application of his mind, considered the expenditure of Rs.1.82 lakhs as not allowable. So the facts are that the AO has taken the view ITA No.2412/M/2012 4 M/s. Castor Oils & Derivatives Pvt. Ltd.

after due application of mind and after making proper enquiries, had disallowed some of the expenditure out of the total expenditure claimed by the assessee. Merely because there was a temporary lull in the business, it does not mean that the assessee had closed its business activity. The Ld. A.R., before us, has produced a chart showing business activity in subsequent years. He has further submitted that the assessee in the assessment year 2011-12 had returned the income of Rs.6,80,911/- as business income and during the assessment year 2012-13 a sum of Rs.22,89,466/- has been offered as business income. Even the assessee, subsequent to the year under consideration, had purchased property which was reflected as inventories. Those inventories were further sold and the income earned was returned. The assessee had also incurred construction expenses in the subsequent years and the returns filed by the assessee have been accepted during the subsequent years.

5. We have gone through the copy of the balance sheet submitted by the assessee for the assessment years 2011-12 and 2012-13. In the year 2011-12, there is shown a closing stock of 2,28,01,261/- and in the year 2012-13, there is a closing stock of Rs.2,07,85,291/-. The above facts show that the business activity of the assessee had commenced in the subsequent years. Moreover, the AO had applied his mind to the issue under consideration and the view taken by the AO was one of the possible views. Under such circumstances, we do not find any justification on the part of the Ld. CIT in setting aside the assessment order passed under section 143(3) of the Act while invoking his jurisdiction under section 263. The order of the Ld. CIT, thus, is set aside and that of the AO is restored.

ITA No.2412/M/2012 5 M/s. Castor Oils & Derivatives Pvt. Ltd.

6. In the result, the appeal of the assessee is hereby allowed.

Order pronounced in the open court on 04.03.2015.

Sd/- Sd/- (R.C. Sharma) (Sanjay Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 04.03.2015.

* Kishore, Sr. P.S.

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench

//True Copy// [

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.