Business Expenses Deductible Despite Zero Sales and No Production: ITAT Kolkata Rules in Favour of Assessee

Overview of the Case

The Income Tax Appellate Tribunal, Kolkata, rendered a significant ruling in DCIT Vs Presidency Exports and Industries Ltd., concerning Assessment Year 2018-19, wherein the core question before the Tribunal was whether nil sales and production in a given year could be treated as conclusive proof of business closure, thereby justifying the disallowance of business expenditure and reclassification of lease rental income.

The Revenue had challenged the order passed by the Commissioner of Income Tax (Appeals) – NFAC, Delhi, dated 13.11.2025, which had ruled in favour of the assessee by deleting the disallowance of business expenditure amounting to ₹3,50,04,017 and also deleting the addition of ₹1,10,07,745 that arose from reclassification of rental income as income from house property.

Material Facts at a Glance

Presidency Exports and Industries Ltd. is a company engaged in the export business. For AY 2018-19, it filed its return of income on 29.09.2018 declaring total income at Nil. The case was subsequently selected for limited scrutiny under CASS, and statutory notices under Section 143(2) and Section 142(1) of the Income Tax Act, 1961 were duly issued and complied with by the assessee.

During the scrutiny proceedings, the Assessing Officer noted the following critical facts:

  • The assessee had reported zero sales for the financial year ending 31.03.2018, as well as for the preceding year ending 31.03.2017.
  • The assessee had earned lease rental income of ₹1,57,25,350 and had claimed a set-off of business expenditure of ₹3,50,04,017 against this income.
  • The claimed business expenditure included administrative costs, personal expenses, finance charges, and depreciation.

The Assessing Officer's Position

Based on the absence of any sales or production activity, the Assessing Officer concluded that the assessee had effectively ceased business operations. Accordingly, he took the following steps:

  • Disallowed the entire business expenditure of ₹3,50,04,017 on the ground that the same could not be permitted in the absence of any business activity.
  • Reclassified the lease rental income of ₹1,57,25,350 as "Income from House Property" rather than treating it as business income.
  • Allowed a standard deduction of 30% on the rental income and assessed the total income at ₹1,10,07,745.

The assessment was framed under Section 143(3) read with Section 144B of the Income Tax Act, 1961, vide order dated 21.04.2021.

Assessee's Submissions Before CIT(A)

The assessee approached the CIT(A) and placed on record detailed written submissions dated 16.04.2025, along with audited financial statements, profit and loss account, balance sheet, and relevant supporting schedules. The key contentions advanced were as follows:

Continuity of Business

The assessee submitted that its export operations had come to a temporary halt solely on account of adverse conditions in international markets and a reduction in overseas demand. Crucially, this was a temporary suspension and not a formal closure. The assessee continued to: