9911796707
TMI Blog2005 (8) TMI 333X X X X Extracts X X X X X X X X Extracts X X X X ..... 31st Dec., 1991 declaring a 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 ------------ 4,20,01,111 ------------ 4. He further noted that the expenses were not debited to the P&L a/c and were not claimed as a deduction in the return but were claimed only in the course of assessment proceedings by letter dt. 10th March, 1994. Apparently, he had called upon the assessee to explain how the above items of expenditure were allowable as revenue expenditure. In response thereto, it was contended that so far as the laying of the high tension cables were concerned, for which the assessee paid Rs. 4,00,00,000 to the Maharashtra State Electricity Board (MSEB), the assessee was liable to incur the expenditure in terms of the agreement between it and the MSEB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue expenditure as claimed in the assessment. The relevant discussion is contained in pp. 10 to 12 of the assessment order. It has to be clarified here that the assessee had also claimed expenditure of Rs. 6,31,611 as cost of poles used for laying the power line. The AO did not discuss this item of expenditure separately. However, in the computation of the taxable income at p. 16 of the assessment order, it is seen that he has allowed the entire payment of Rs. 4,06,31,611 as deduction. Apparently, the AO was convinced that the cost of poles amounting to Rs. 6,31,611 was also of the same nature as the amount of Rs. 4,00,00,000 paid to MSEB for laying high tension power lines. 8. By notice dt. 2nd Dec., 1994 issued under s. 263 of the Act, the CIT called upon the assessee to show cause why the aforesaid expenditure aggregating to Rs. 4,20,01,111 should not be treated as pre-operative. expenses and disallowed since the Ratnagiri project for manufacture of resin has not commenced production as on 31st March, 1991. The assessee appears to have filed a very exhaustive reply to the notice objecting to the action under s. 263. However, by the impugned order, the CIT overruled all the obje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal challenging the assumption of jurisdiction by the CIT under s. 263 and also his decision on merits. 10. We have carefully considered the rival contentions and the facts of the case. In our view, the Ratnagiri unit cannot be considered to be a new business. It should be considered as an extension or expansion of the same business carried on by the assessee. The assessee was manufacturing PVC pipes in its Chinchwad unit in Pune since incorporation in the year 1981. The manufacture of PVC pipes involved substantial import of PVC resin which constituted 75 to 90 per cent of the finished products. It was, therefore, felt the assessee should itself manufacture PVC resin. That would also save substantial foreign exchange. The memorandum of association was, therefore, got amended after passing a special resolution in the general meeting of the company. Whereas even before the amendment, the memorandum of association did contain a broad object which included the manufacture of PVC resins, it was considered by the company that by way of abundant caution, the amendment including a specific object separately to enable the assessee to manufacture PVC resins should be made. This was ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds by using waste from the rice and Dal mill. The Madhya Pradesh High Court held that it was only a case of expansion of the business as it was a case of forward integration. In CIT vs. Shah Theatres (P) Ltd. (1988) 67 CTR (Raj) 120 : (1988) 169 ITR 499 (Raj), the assessee was carrying on business in exhibition of film and during the year it started construction of a theatre of its own for the purpose of exhibiting the films. The Rajasthan High Court held this to be a case of expansion of the same business. In CIT vs. Malwa Vanaspati & Chemicals Co. Ltd. (1998) 149 CTR (MP) 283 : (1997) 226 ITR 253 (MP), the assessee was manufacturing vegetable oils and chemicals and put up a new unit for the manufacture of a particular variety of acid which was to be used for the manufacture of dyes. This was considered to be a case of expansion of the business. 12. In the prospectus issued by the assessee-company for raising monies in respect of Ratnagiri unit for issue of redeemable convertible debentures, it has been stated that the setting up of the plant for the manufacture of PVC resins would mean backward integration for the company and make the company self-reliant in respect of supply o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. K.P. Chhabria and Dr. A.S. Kane. This gentleman was made in-charge of the project but only under the control of common board of directors headed by Mr. P.P. Chhabria. The fact that 280 people have to be recruited does not mean that they would constitute a separate source of power to manage the Ratnagiri unit. They would also have to act only under the control and supervision of the board of directors, which is one and Shri K.P. Chhabria and Dr. Kane. There is no indication in the prospectus or anywhere in the record to show that the staff to be recruited would be reporting to a different board or a different authority in the hierarchy. 14. So far as the common business organization is concerned, the CIT has rejected the assessee's claim that there is a common business organization on the ground that an independent infrastructure is being set up by the assessee in the new project in Ratnagiri. He has also stated that since there is no common administration, there can be no common business organization. We have already held that the CIT was not right in saying that there is no common administration, in the sense, of common management. Further, the mere. fact that an independent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany to put up the PVC resin unit in Chinchwad itself. These are decisions which are taken after considering several factors such as the financial implication, technical feasibility, environmental considerations, incentives given by the Government for locating industrial unit in backward area and so on. As already noted, the registered office of the assessee-company continues to be in Chinch wad, Pune, and it is from this office that the board of directors functions and. supervises and controls both the Chinchwad unit and Ratnagiri unit. We have already adverted to this aspect. Therefore, merely because the two units are situated at two different places, it cannot be said that there is no common place of business. The conclusion of the CIT to contrary cannot be upheld. 16. The CIT has mentioned that the assessee acquired a separate industrial licence for setting up of PVC resin plant. These are the requirements of the industrial policy of the Government of India and it was incumbent upon the assessee to follow the same and make the necessary application as per the regulations. No decisive inference can be drawn therefrom. The fact that a separate industrial licence has to be obta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acturing of mini computers and micro-processors based system. For this new activity, no licence had been received. Further, the assessee did not produce any material before the Tribunal or the IT authorities to show that the manufacture of new item was part and parcel of the. same business. There was only a mere assertion that there was unity of control between the different activities. The assessee was a small scale unit and the new item could be manufactured only in a large scale. The large scale unit required a licence which was not obtained by the assessee. Further, there was evidence to show in the directors report the mini computers division and instrument division did not carry out any business activity. It was on the basis of these facts that the Calcutta High Court held that the assessee had not established its case that the new units were part of the existing business. As regards the judgment of the Kerala High Court in Travancore Chemical & Manufacturing Co. Ltd. vs. CIT (1992) 102 CTR (Ker) 15 : (1993) 199 ITR 484 (Ker) the question was whether the business set up by the assessee during the relevant assessment year was a separate business or the same business so that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of the assessee. Their action in allowing the aforesaid expenditure indicates that they have accepted the position that the Ratnagiri project forms part of the existing or same business of the assessee. 20. For the above reasons, we are unable to accept the findings of the CIT that the expenditure of Rs. 4,20,01,111 should be considered as pre-operative expenses since the PVC resin project in Ratnagiri District did not commence production as on 31st March, 1991. The conclusion of the CIT that the pre-operative expenses cannot be allowed as a deduction emanates from the fundamental decision that the Ratnagiri project is new unit and constitutes a separate business of the assessee. Since we have held that the Ratnagiri unit must be considered as a part of the same business of the assessee and not a new business, the conclusion of the CIT that the amount of Rs. 4,20,01,111 should be considered as pre-operative expenses and to be disallowed on that basis cannot be upheld. 21. In the result, the order of the CIT passed under s. 263 is set aside the appeal is allowed. ITA No. 575/Pn/1995 for asst. yr. 1991-92 (assessee's appeal) 22. This appeal by the assessee relates to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factured 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) having confirmed the disallowance, the assessee is in further appeal before the Tribunal. 27. We have considered the rival contentions and the facts relating to the controversy. We have already held, in the assessee's appeal against the order under s. 263 passed by the CIT for the asst. yr. 1991-92 (the same assessment year) that the Ratnagiri project cannot be considered to be a separate or new business and that it should be considered as part of the exiting business of the assessee. We have given detailed reasons for our conclusion. Since the disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 premium payable at the time of reduction of the debentures (which is after 10 years) in the assessment year relevant to the accounting year for which the debentures were issued. The AO disallowed the same on the ground that it is not an ascertained liability. On appeal. the CIT(A) held, following the judgment of the Calcutta High Court in the case of CIT vs. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal) and the Madhya Pradesh High Court in the case of M.P. Financial Corporation vs. CIT (1986) 51 CTR (MP) 249 : (1987) 165 ITR 765 (MP) that the premiu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is hereby declared that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included and shall be deemed never to have been included, in the actual cost of such asset." 38. It will be seen from the above that the Explanation dealt with entirely a different situation. It was introduced to the art an attempt of some assessees to inflate the cost of assets by the amount of interest paid in respect of borrowing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trary 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 business, so that the interest paid on the debentures can be allowed as a deduction under s. 36(1)(iii). Under this section any interest paid by the assessee in respect of capital borrowed for the purposes of the business is allowed as a deduction. The only question, therefore, is whether the Ratnagiri unit constitutes a part of the business of the assessee. We have already held that this unit cannot be considered to be a separate business and should be considered only as an expansion of the existing business and part of the same business. There is no dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 in the appeal for the asst. yr. 1991-92 in ITA No. 575/Pn/1995. We have held that the expenditure is allowable as a deduction being revenue expenditure. Since the facts are same in respect of the controversy, following our decision for the asst. yr. 1991-92, we direct the AO to allow the expenditure as a deduction. The ground is allowed. 48. The second ground is directed against the disallowance of Rs. 18,508 being expenditure as presentation articles. After considering the rival submissions, and after going through the orders of the IT authorities, we s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee's appeal against the order passed by the CIT under s. 263, viz., that the Ratnagiri unit cannot be considered to be a separate or new business of the assessee. With this clarification, the ground No. 1 is dismissed. 53. The second ground is that the CIT(A) erred in deleting the disallowance of the interest paid on debentures issued for financing the Ratnagiri unit. The amount involved is Rs. 16,87,57,250. A reference is made in the ground to s. 36(1)(iii) r/w s. 2(28A) of the Act. We have already dealt with a similar ground in the Department's ..... X X X X Extracts X X X X X X X X Extracts X X X X
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