2006 (7) TMI 536 - AT - Income Tax

Issues Involved:
1. Disallowance of revenue expenses incurred after setting up of business.
2. Disallowance of provision for doubtful debts and advances.
3. Allowability of expenses claimed in assessment year 1996-97 but disallowed on the ground that it pertains to assessment year 1995-96.
4. Allowability of interest expenses under section 36(1)(iii).
5. Allowability of cash discount and job work expenses relating to the previous year under the mercantile system of accounting.
6. Disallowance of provision for bad debts.
7. Disallowance of prior period expenses.

Detailed Analysis:

1. Disallowance of Revenue Expenses Incurred After Setting Up of Business:
The assessee contested the disallowance of Rs. 64,54,784 as revenue expenses incurred after setting up the business. The Assessing Officer (AO) had disallowed these expenses, considering them related to bringing fixed assets into existence. Both counsels agreed to restore the matter to the AO with directions to ascertain if the expenses were incurred prior to or after the business setup. If post-setup, they should be allowed as revenue expenditure; if pre-setup, they should be included in pre-operative expenses allocated over fixed assets.

2. Disallowance of Provision for Doubtful Debts and Advances:
The assessee did not press this ground during the hearing, leading to its dismissal for lack of prosecution.

3. Allowability of Expenses Claimed in Assessment Year 1996-97 but Disallowed on the Ground that it Pertains to Assessment Year 1995-96:
An additional ground was raised concerning the allowability of expenses of Rs. 20,37,132 claimed in 1996-97 but disallowed as they pertained to 1995-96. Both counsels agreed to restore this matter to the AO to examine and allow these expenses in 1995-96 if found allowable by law.

4. Allowability of Interest Expenses Under Section 36(1)(iii):
The revenue appealed against the CIT(A)'s relief of Rs. 77,58,014 under section 36(1)(iii), arguing it represented pre-operative expenses for fixed assets and should not be allowed as revenue deduction. The assessee argued that the manufacturing unit was an extension of the existing business, with inter-lacing and inter-dependence between trading and manufacturing activities, thus qualifying for interest deduction under section 36(1)(iii). The Tribunal examined various case laws and concluded that the manufacturing unit was a separate business from the trading activity. Therefore, the interest expenses related to the new unit should be capitalized and not treated as revenue expenditure, reversing the CIT(A)'s findings.

5. Allowability of Cash Discount and Job Work Expenses Relating to the Previous Year Under Mercantile System of Accounting:
The revenue contested the CIT(A)'s deletion of disallowances of Rs. 14,44,104 (cash discount) and Rs. 74,856 (job work expenses) relating to the previous year. The CIT(A) had deleted these disallowances, noting they were included in the overall disallowance of Rs. 20,37,172. Since this overall disallowance was restored to the AO for re-examination, the Tribunal found no merit in the revenue's appeal and dismissed it.

6. Disallowance of Provision for Bad Debts:
The assessee did not press this ground during the hearing, leading to its dismissal for lack of prosecution.

7. Disallowance of Prior Period Expenses:
The assessee's appeal for 1996-97 included a ground against the disallowance of Rs. 20,37,132 as prior period expenses. Both counsels agreed these expenses should be considered for 1995-96. The Tribunal restored the matter to the AO to examine these expenses for 1995-96, upholding the disallowance for 1996-97.

Conclusion:
- The assessee's appeal for assessment year 1995-96 is partly allowed for statistical purposes.
- The assessee's appeal for assessment year 1996-97 is dismissed.
- The revenue's appeal for assessment year 1995-96 is allowed.
- The revenue's appeal for assessment year 1996-97 is dismissed.

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