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2013 (10) TMI 162 - HC - Income TaxDisallowance of revenue expenditure - Non commencement of business - Construction of DAM and canal - whether the appellant company was of preoperative nature and the commencement of the business would start only when the appellant company starts exploitation of the project - Held that - activities mentioned in the object clause of Memorandum of Association do not contemplate a single activity. Under the fiscal legislation when it is vital to determine what is the business of the assessee and what are the activities which constitute such business, it can be noted that execution of the Sardar Sarovar Project comprises of a dam across the river Narmada, canal system as also the power house at the foot of the dam and at the canal head and all other works. It can not be said that such objects could be achieved without contemplating different stages of completion. It would be wholly wrong to uphold the contention of the revenue that only on completion of work of entire canal, the assessee' business can be said to have set up. In a project like Sardar Sarovar, there are bound to be different stages where different activities take place and those activities being integral parts of the business and when they are set up phase vice, assessee cannot be deprived of benefits of fiscal legislation in disregard to well settled principles on the issue by adopting over technical approach. For determining as to when the business can be said to have been set up, the flow of the water from Narmada Canal in the given circumstances needed to be viewed as an integral and inseparable activity of the business of the assessee. - It is apparent from the record that the assessee supplied water through its main canal, one of the purposes of setting up the company is to supply the water through the canal & even if the entire stretch of canal is yet to come into existence, in a project of this big a size, it will surely be not right to hold that the business of the assessee respondent has not been set up. The construction of dam and canal are essential and inseparable parts of the activity which would necessarily precede other activities - Those of the activities which form integral part of entire term business when preceded other activities - deduction of expenses allowed - decided against the revenue.
Issues Involved:
1. Whether the ITAT Special Bench was correct in holding that the assessee's business had commenced on 21/02/2001 with the flow of drinking water despite ongoing canal construction. 2. Whether the President of ITAT was correct in referring the full appeal to the Special Bench despite a prior decision on the same issue by a Division Bench and pending appeals before the High Court. Issue-wise Detailed Analysis: Issue 1: Commencement of Business - The assessee, a company established by the Government of Gujarat for the Sardar Sarovar Project, claimed that its business commenced in the Assessment Year 2001-2002 when it started supplying drinking water through the partially completed Narmada Main Canal. - The Assessing Officer and CIT(Appeals) disagreed, stating that the business could only be considered commenced when the canals were fully operational and/or power houses started generating electricity. - The Tribunal, however, distinguished between "commencing a business" and "setting up a business," citing the Bombay High Court's decision in Western India Vegetable Products vs. CIT, which held that expenses incurred after setting up but before commencing business are deductible. - The Tribunal also referred to the Supreme Court's decision in CWT vs. Ramaraju Surgical Cotton Mills Ltd., which supported the view that a business is set up when it is ready to commence operations. - The Tribunal concluded that the business was set up on 21.02.2001 when water was supplied through the main canal, allowing revenue expenditures post this date as deductions. - The High Court agreed with the Tribunal's findings, noting that the business of the assessee involved multiple integrated activities, including the construction of the dam, canal system, and power houses. The flow of water was an integral part of the business, and the Tribunal's approach was logical and reasonable. Issue 2: Constitution of Special Bench - The revenue challenged the constitution of the Special Bench, arguing that the issue of commencement of business was already pending before the High Court in earlier appeals. - The Tribunal addressed this by stating that the question of whether the business was set up is a mixed question of law and fact, which depends on the specific facts of each assessment year. - The High Court upheld the Tribunal's decision, stating that the Tribunal was correct in examining the facts for the Assessment Year 2001-2002 independently, despite prior decisions and pending appeals. The constitution of the Special Bench was found to be appropriate, and no error in law or fact was committed. Conclusion: - The High Court dismissed the Tax Appeal, affirming the Tribunal's decision that the assessee's business was set up on 21.02.2001 when water started flowing through the canal, and the expenses incurred post this date were deductible. - The Court also upheld the constitution of the Special Bench, finding no substantial question of law in the revenue's challenge. The appeal was dismissed with no questions of law arising.
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