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Issues Involved:
1. Whether the expenditure incurred for setting up a new sugar manufacturing unit should be classified as revenue or capital expenditure. 2. Whether the depreciation claim on certain assets should be allowed. Detailed Analysis: 1. Classification of Expenditure for Setting Up Sugar Manufacturing Unit: Facts and Assessee's Argument: The assessee set up a sugar manufacturing project in Muzaffarnagar with an installed capacity of 2500 TCD, which started production in March 1996. The project cost was Rs. 56.74 crores, raised through term loans, rights, and public issues. The assessee claimed that the expenditure of Rs. 5,66,79,270 was revenue in nature as it did not represent any tangible asset and should be allowed as a deduction. The assessee argued that the sugar project was an extension of its existing business, having unity of control, interlacing of funds, and interdependence. Assessing Officer's View: The Assessing Officer (AO) contended that the sugar project was a new and separate business, and the expenditure incurred was capital in nature. The AO cited the Supreme Court's decision in Waterfall Estates Ltd. v. CIT, emphasizing that whether businesses constitute the same business is a question of fact. The AO concluded that the sugar project did not meet the judicial tests for being considered the same business as the existing ferro-alloys business. CIT(A) Decision: The CIT(A) allowed the assessee's claim, holding that the sugar project was part of the same business fold as the ferro-alloys business. The CIT(A) referred to several judicial pronouncements, including the Supreme Court's decisions in Setabganj Sugar Mills Ltd. v. CIT and Produce Exchange Corpn. Ltd. v. CIT, which emphasized unity of control as a decisive test for determining whether different ventures constitute the same business. Tribunal's Analysis: The Tribunal examined the interconnection, interlacing, interdependence, and unity of control between the ferro-alloys and sugar manufacturing units. It noted that the assessee had a common management, common share capital, and common business accounts for both units. The Tribunal also observed that the finances were controlled from a common pool of funds. The Tribunal concluded that there was unity of control, common management, and interlacing of funds, making the sugar manufacturing plant an extension of the existing business. Conclusion: The Tribunal held that the sugar division was in the same line of business as the ferro-alloys division. The expenditure of Rs. 3,50,83,472 on financial charges was allowed as a deduction under section 36(1)(iii) of the Income-tax Act. However, the Tribunal remanded the matter to the AO for fresh examination of other expenditures to determine their nature as capital or revenue. 2. Depreciation Claim on Certain Assets: Facts and Assessee's Argument: The assessee claimed 100% depreciation on flameless induction furnaces purchased in the assessment year 1995-96, with 50% depreciation already claimed in that year. The AO disallowed the claim, questioning the genuineness of the transaction and the market worth of the assets. CIT(A) Decision: The CIT(A) allowed the claim, noting that the assessee had provided complete documentary evidence, including purchase bills and lease deeds. The CIT(A) found that the assets were purchased from a reputed company, M/s. Inductotherm (India) Ltd., and the transaction was genuine. Tribunal's Analysis: The Tribunal observed that the genuineness of the transaction had been accepted by the revenue in the previous assessment year. The assets were purchased from a credible supplier, and the assessee had provided sufficient evidence to support the claim. The Tribunal upheld the CIT(A)'s decision to allow the depreciation claim. Conclusion: The Tribunal upheld the CIT(A)'s decision to allow the depreciation claim on the assets, finding no reason to interfere with the order. Final Decision: The appeal filed by the revenue was partly allowed for statistical purposes, with the issue of other expenditures remanded to the AO for fresh examination.
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