1993 (4) TMI 35 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee commenced its business for the new unit when it started booking orders for the product of the new unit.
2. Whether the Tribunal was justified in allowing the claim of deduction of expenditure of Rs. 1,85,460 as revenue expenditure.

Issue-Wise Detailed Analysis:

1. Commencement of Business:
The primary issue is whether the business for the new unit commenced when the assessee started booking orders. The Tribunal held that a prudent businessman would explore markets before production commences. Booking orders and exploring the market for future products was deemed essential. The Tribunal concluded that the business had commenced when the assessee started booking orders for the new unit.

The Department argued that since no raw material was purchased and the unit was still under construction, the business had not commenced. They contended that the Tribunal's view was incorrect as per the provisions of law. The Department cited several cases to support their argument, including CIT v. Sarabhai Management Corporation Ltd., Prem Conductors Pvt. Ltd. v. CIT, Hotel Alankar v. CIT, CIT v. Ralliwolf Ltd., CIT v. Shah Theatres (P.) Ltd., and CIT v. Hindustan Machine Tools Ltd. (No. 1). These cases generally supported the notion that business activities such as securing orders before actual production could be considered as commencement of business.

2. Deduction of Expenditure as Revenue Expenditure:
The second issue revolves around whether the expenditure of Rs. 1,85,460 should be allowed as revenue expenditure. The Income-tax Officer initially disallowed the expenses, considering them either preliminary or capital in nature. The Commissioner of Income-tax (Appeals) upheld this view, stating that the Palghat unit was still under construction and thus, the expenses were of a capital nature.

The Tribunal, however, allowed the deduction, reasoning that booking orders before production was a necessary business activity. They acknowledged that if this activity started post-production, it would lead to unsold stock piling up. Thus, they considered the expenditure as revenue in nature due to commercial expediency.

The Department's counsel argued that the Tribunal's decision was not aligned with the law, as the unit was not set up during the relevant year. They emphasized that the expenses were incurred before the business was set up and thus should be capitalized.

The court noted that the Tribunal had not examined the details of the expenditure to determine if it was directly related to booking orders. They highlighted that the matter was first raised before the Commissioner of Income-tax (Appeals) without detailed examination. The Tribunal should have either examined the details or remanded the matter to the lower authorities for a thorough investigation. The court emphasized that the burden of proof was on the assessee to demonstrate that the expenditure was directly related to booking orders for the Palghat unit.

Conclusion:
The court returned the reference unanswered, directing the Tribunal to record a finding on whether the expenditure of Rs. 1,85,460 was directly related to booking orders for the Palghat unit and pertained to salaries, wages, and traveling expenses for that purpose. The Tribunal was instructed to give both parties an opportunity to present their case before making a determination. No order as to costs was made.