1983 (12) TMI 103 - AT - Income Tax

Summary

Issues Involved:
1. Whether the interest paid on borrowings for establishing a separate unit at Nagercoil was allowable as business expenditure.
2. Whether the assessee was entitled to development rebate under section 33 of the Income-tax Act, 1961, for the machinery in the Nagercoil unit.

Detailed Analysis:

1. Allowability of Interest Paid on Borrowings:
The first issue was whether the interest paid on borrowings for the purpose of establishing a separate unit at Nagercoil was a business expenditure allowable from the business income of the assessee for the assessment year 1975-76. The Income Tax Officer (ITO) found that both the units at Alleppey and Nagercoil were controlled from Alleppey, commonly managed and administered, and that sales and purchases were effected only from the head office at Alleppey. This indicated unity of control, and therefore, there was dovetailing or interlacing between the businesses of mechanized production of coir at Nagercoil and manual production at Alleppey. The ITO concluded that the new factory at Nagercoil formed part of the sole business in Alleppey.

2. Entitlement to Development Rebate:
The second issue was whether development rebate under section 33 of the Income-tax Act, 1961, could be allowed in respect of the machinery in the Nagercoil unit. The Tribunal had earlier directed the ITO to determine whether the units at Alleppey and Nagercoil constituted the same business and to consider the allowance of development rebate based on this determination. The ITO found that the Nagercoil unit had worked only for the last two months during the year ended 31-12-1975 and that the installation of machinery was completed only during the previous year relevant to the assessment year 1976-77. Consequently, he denied the allowance of development rebate for the assessment year 1975-76.

The Commissioner (Appeals) accepted the submissions of the assessee, noting that the directors' report indicated that the machinery had been installed in temporary sheds and trial runs had been taken. The Commissioner (Appeals) concluded that the installation of the machinery had been completed for the purpose of granting development rebate and directed the ITO to allow the rebate.

Revenue's Appeal:
In the appeal before the Tribunal, the revenue contended that the Commissioner (Appeals) erred in not deciding the appeal in accordance with the specific directions of the Tribunal. The revenue argued that the trial production did not amount to real installation of the machinery for the purpose of granting development rebate and that the machinery had not been used in the business of the assessee. They also pointed out that the assessee had not claimed depreciation on the machinery for the assessment year, indicating that the machinery had not been used.

Assessee's Defense:
The assessee argued that the machinery had been installed and was capable of producing finished products, and that the trial production was for the purpose of manufacturing samples for export orders. They contended that the machinery had been installed according to the interpretation given to the term 'installed' in the Supreme Court decision in Mir Mohammad Ali's case. The assessee also pointed out that three tons of coir products had been produced during the previous year, indicating that the machinery had been installed and used.

Tribunal's Decision:
The Tribunal found that the directors' report was categorical about the installation of the machinery and that the term 'installed' had been interpreted by the Supreme Court to mean placing an apparatus in position for service or use. The Tribunal concluded that the machinery had been installed and used during the previous year, as evidenced by the production of three tons of coir products. The Tribunal also noted that the production of a limited quantity was for the purpose of producing samples for export orders and was part of the assessee's business activities. The Tribunal held that the machinery had been wholly used for the purposes of the business of the assessee and upheld the order of the Commissioner (Appeals), dismissing the revenue's appeal.