9911796707
TMI Blog2005 (8) TMI 333X X X X Extracts X X X X X X X X Extracts X X X X ..... loss. While completing the assessment under s. 143(3) of the Act, the AO noted that the assessee had incurred the following expenditure during the relevant previous year: Rs. (1) Payment made to MSEB for 220 KV 4,00,00,000 power supply at Ratnagiri to manufacture PVC resin (2) Cost of poles used for laying said 6,31,611 power supply line (3) Expenses towards construction of 12,12,000 approach road and culvert (4) Expenses towards construction of 1,57,500 Thorli Nala ------------ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Ratnagiri which was approximately 2.5 kms from the highway. It was also submitted that the land on which the road was laid did not belong to the assessee. 6. As regards the expenditure of Rs. 1,57,500 incurred towards construction of Thorali Nala, it was explained that the amount was paid as engineering consultancy fees towards the construction of dam at river Kolambe near the project site. The State Government had granted permission subject to the condition, inter alia, that the assessee will have to incur all construction expenditure and that the people around the river shall not be prohibited from drawing water from the dam. It was explained that the assessee was neither the owner of the dam nor of the water. The following authorities were cited in support of the above submission: (1) Lakshmiji Sugar Mills Co. (P) Ltd. vs. CIT (1971) 82 ITR 376 (SC); (2) L.H. Sugar Factory & Oil Mills (P) Ltd. vs. CIT (1980) 19 CTR (SC) 185 : (1980) 125 ITR 293 (SC); and (3) Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113: (1980) 124 ITR 1 (SC). 7. The AO examined the facts and perused the judgments cited above and found that the expenditure was allowable as revenue expenditure as cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . He has also stated that a separate debenture issue was made raising the funds for Ratnagiri unit and separate plant and machinery were being imported from Germany with a separate agreement for technical collaboration with Uhde GmbH, West Germany. He has further observed that the expenditure in question was not debited to the P&L a/c nor claimed in the return of income but was claimed as deduction only in the course of the assessment proceedings. He has further noted that in the printed annual report, the expenses were capitalized as capital work-in-progress. According to the CIT, if the Ratnagiri project was an extension of the existing business, the expenditure would have been debited to the P&L a/c. He. therefore, came to the conclusion that the expenditure should be disallowed as pre-operative expenses as the business had not been carried on by the assessee during the relevant accounting year, which is the requirement under s. 28 of the Act. In support of the above conclusion, the CIT relied on the judgment of the Supreme Court in the case Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC). 9. The assessee is in appeal before the Tribunal challenging t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss. It is not necessary to multiply authorities on this point since it is now well-settled that the aforesaid tests are the relevant tests. 11. One more important factor which is to be noticed in the present case is that the assessee had adopted what is called backward integration, in the sense that, it had put up the Ratnagiri unit for the manufacture of PVC resins which is the raw material for the manufacture of PVC pipes. When a company, which is importing the raw material, puts up a unit for the purpose of manufacturing raw material on its own so that this raw material would be used for manufacturing the finished products, it is a case of backward integration. The present case is a case of backward integration. In such a case, it is very difficult to hold that the unit which manufactures the raw material should be considered as a separate business from the existing business of manufacturing PVC pipes. We may refer to only a few authorities in this behalf. In Kanhiram Ramgopal vs. CIT (1987) 66 CTR (MP) 207 : (1988) 170 ITR 41 (MP), the assessee was carrying on a rice and Dal mill and borrowed money for setting up a factory for the manufacture of straw boards by using waste fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pervision and control of the board. He has 20 years of managerial and technical experience in the plastic industry. He, along with Dr. A.S. Kane, the executive director would look after the various managerial aspects of the company and the PVC resins project. Dr. Kane is a directorate in mechanical engineering and holds a diploma in administration and management. Thus, there is only one board of directors which controls both the pipes unit at Chinchwad and PVC resins unit at Ratnagiri which furnishes the common management and unity of control as propounded by the judgment of the Supreme Court in the case of B.R. Ltd. vs. V.P. Gupta, CIT 1978 CTR (SC) 82 : (1978) 113 ITR 647 (SC). The CIT has refuted the theory of common management on the that (basis) the prospectus says that the company has drawn a recruitment plan to attract suitable talent to manage the PVC resin unit and the manpower requirement is 280. From this he has inferred that the Ratnagiri unit would be under a separate management. This is belied by the statement made by the prospects under the head "management" at p. 18 which refers to the same board controlling the PVC resins project also through Mr. K.P. Chhabria and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nagiri. All instructions and decisions will have to be communicated only from the board of directors located in Chinchwad. Further, it is seen that the PVC resin manufactured in excess of the requirement of the pipe factory could be easily marketed through the existing dealer network in respect of the pipes and this advantage has obviated the need to set up a separate dealer network for marketing excess PVC. This would not have been possible unless there is a common business organization. The dealer network is common to both the pipes as well as the excess PVC resins proposed to be sold. Therefore, the CIT was not right in saying that there is no common business organization. 15. As regards the existence of common place of business, the CIT has stated that there is no common place since the pipe unit is located in Chinchwad and the PVC resins unit is located at Ratnagiri. We do not think that this was what was meant when the Supreme Court laid down that there should be a common place of business. The PVC manufacturing unit had to be put up near a port so that the EDC could be imported at least during the initial years. It was therefore not feasible for the company to put up the PV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 70 TTJ (Mumbai) 805 : (2000) 72 ITD 1 (Mumbai) and it has been held in the aforesaid order that the judgment of the Supreme Court in the case of Challapalli Sugars Ltd. is not applicable where the expenditure is claimed in respect of a running concern and would apply only where the assessee has not started any business. Since we have held that the Ratnagiri unit is only an expansion of the existing business, the judgment of the Supreme Court in the case of Challapalli Sugars Ltd. is not attracted. 18. Shri Satya Prakash, the learned CIT - Departmental Representative, first submitted that the CIT had assumed the jurisdiction properly under s. 263. As regards the merits, he submitted that a new business has come into existence, on the basis of the findings of the CIT in paras 3 and 5 of his order. We have already held that the findings and conclusions recorded by the CIT cannot be upheld, for the reasons given by us earlier. Two judgments were cited by Mr Satya Prakash. The first is that of the Calcutta High Court in the case of Ashoke Marketing Ltd. vs. CIT (1994) 208 ITR 941 (Ca1). In this case, the assessee was manufacturing instruments and commenced manufacturing of mini compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. (2002) 175 CTR (Bom) 443 : (2002) 256 ITR 395 (Bom). It is understood that the SLP filed by the Revenue against the judgment of the Hon'ble Bombay High Court has also been rejected. We may also notice that with regard to the asst. yr. 1990-91, the expenditure of Rs. 21,99,000 representing payment made to MSEB for laying high tension power supply lines and the cost of poles in connection with the Ratnagiri unit was allowed by the CIT(A) vide order dt. 21st Jan., 1994 a copy of which has been filed in the paper book. It is seen that the CIT(A) has allowed the payment following the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Excel Industries Ltd. (1980) 14 CTR (Bom) 44 : (1980) 122 ITR 995 (Bom). Against the order of the CIT(A), no appeal was filed by the Department to the Tribunal, as stated before us on behalf of the assessee. Further, for the asst. yr. 1990-91 the AO himself allowed the interest paid on the debentures issued by the assessee in connection with the Ratnagiri project. Therefore, the Departmental authorities themselves, appear to have accepted the claim that the Ratnagiri project cannot be considered as a separate or new business of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 1,35,93,221 Fees paid to financial institutions and banks 52,00,000 Printing and stationary 40,72,077 Hotel stay bills of dealers & others and 9,69,491 travelling Payments to/for postage/contractor 9,58,523 Meeting for public issue 1,74,022 Dealers and brokers conference 1,51,639 Gifts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expenditure is of Rs. 10.29 croreS for raising debentures of Rs. 118.95 crore which amounts to 8.5 per cent of the debenture issue. He further noted from the papers relating to the debenture issue that 26 per cent of the debentures were to be converted into the equity in a period of 18 months and the balance of 74 per cent was to be redeemed after 10 years. According to him, the funds were raised for financing the Ratnagiri project for manufacturing PVC resin which was an entirely new product line embarked upon by the assessee. The assessee never manufactured PVC resin earlier. Under these circumstances, he considered the expenditure to be of capital account and disallowed the same. The assessee, would appear to have relied on Circular No. 56, dt. 19th March, 1971 issued by the Board wherein it was mentioned that the judgment of the Supreme Court in the case of India Cements Ltd. would continue to apply notwithstanding the provisions of s. 35B relating to amortization of the expenditure. The AO took the view that the debenture issue expenses were not allowable either under the ratio of the above judgment nor were they covered by any other provision of the IT Act. 26. The CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inciple that what is to be seen is the factual position at the time of incurring of the expenses. In the present case, 26 per cent of the debentures was to be converted in 18 months. The conversion of the debentures was to take place at the end of 18 months from the date of allotment of convertible debentures. This date does not fall in the previous year ended 31st March, 1990. Therefore, the order of the Bombay Bench of the Tribunal cited above as well as the judgment of the Calcutta High Court cited above, apply with greater force to the present case. 29. We, therefore, delete the disallowance of Rs. 10,29,98,005 and allow the first ground. 30. The second ground relating to the expenditure on entertainment is dismissed as not pressed. 31. The third ground relates to the expenditure of Rs. 5,776 incurred on gift articles. After considering the orders of the IT authorities and the smallness of the amount, we see no reason to interfere. 32. The ground NO.4 relates to the disallowance of the claim of deduction of the gross liability of Rs. 3,94,28,780 in respect of premium payable on redemption of redeemable non-convertible debentures. The assessee claimed the entire amount of pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in that appeal that the PVC resin project at Ratnagiri cannot be considered to be a new business or separate business and that it should be considered as part of the existing business of the assessee. The learned CIT, Departmental Representative, referred to the judgment of the Supreme Court in the case of Challapalli Sugars Ltd. This decision was in fact relied upon by the CIT in his order passed under s. 263. In our decision in the assessee's appeal against the CIT's order, we have held that the aforesaid judgment of the Supreme Court does not apply to the facts of the present case. 37. The learned CIT-Departmental Representative, further relied on the Expln. 8 to s. 43(1) of the Act which was introduced with retrospective effect from 1st April, 1974. Sec. 43(1) defines "actual cost" for the purposes of ss. 28 to 41 of the Act. The said section says that the actual cost means the actual cost of the assets to the assessee reduced by that portion of the cost which has been met directly or indirectly by any other person or authority. The Expln. 8 was introduced by the Finance Act, 1986 with retrospective effect from 1st April, 1974. It is as under: "For the removal of doubts, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the erection stage of the asset. However, once the production starts, no interest on borrowings for the purchase of such assets should be capitalized. In spite of these clear guidelines, as also the consistent view of the Department in this matter, some taxpayers had adopted a contrary stance and had capitalized such interest. The first decision in favour of this stance had been rendered on 13th May, 1974, in the case of CIT vs. J.K. Cotton Spinning & Weaving Mills Ltd. (1975) 98 ITR 153 (All). This decision as well as the subsequent decisions were contrary to the legislative intent. Hence, in order to enable the Government to collect the tax legitimately due to it for the earlier years, a clarificatory amendment to this provision has been made retrospectively from 1st April, 1974 and will, accordingly, apply in relation to the asst. yr. 1974-75 and subsequent years." 39. It will be seen from the above that the Explanation dealt with capitalization and prohibited capitalization of the interest after the asset is put to use. In the present case, we are not concerned with this situation. The question before us is whether the Ratnagiri project is a part of the assessee's existing b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of the interest. The ground is dismissed. 44. The second ground relates to the allowance of 20 per cent given by the CIT(A) in respect of entertainment expenses considering the employees' participation. After hearing both the sides, we see no reason to interfere. 45. The ground No.3 in the appeal is related to ground No.4 in the assessee's appeal. It relates to the allowability of the premium payable on reduction of redeemable non-convertible debentures. We have already held while dealing with the assessee's ground that the CIT(A) was right in directing the proportionate allowance which conforms to the judgment of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT. Accordingly, the decision of the CIT(A) is confirmed and the ground is rejected. 46. In the result, the appeal filed by the Department is dismissed. ITA No. 967/Pn/1995 for asst. yr. 1992-93 (assessee's appeal) 47. The first ground in this appeal is directed against the disallowance of the expenditure of Rs. 6,87,791 for commission and brokerage on underwriting and subscription of the debenture issue held in the financial year 1990-91. This issue has been decided by us i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the AO has disallowed the expenditure/payment by following the order of the CIT under s. 263 of the Act for the asst. yr. 1991-92. We have already noticed while disposing of the assessee's appeal against the order of the CIT under s. 263 of the Act for the asst. yr. 1991-92 that the CIT has taken a view that the expenditure represents pre-operative expenditure, i.e., they were incurred before the Ratnagiri unit commenced production and should therefore, be disallowed. This was based on the footing that the Ratnagiri unit was a separate business of the assessee. The CIT(A) does not appear to have gone into this question, viz., whether the Ratnagiri unit was a separate or new business of the assessee but appears to have rested his decision on the fact that the expenditure cannot be considered as capital expenditure. The Department has reiterated before us the ground that the expenditure should be disallowed for the reasons given by the AO. Be that as it may, since the reasons given by the AO for the disallowance are the same as those given by the CIT in his order under s. 263 for the asst. yr. 1991-92, our decision that the CIT(A) was right rests on the decision given by us in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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