9911796707
TMI Blog2007 (7) TMI 427X X X X Extracts X X X X X X X X Extracts X X X X ..... TCD. It was claimed that this project started production in the month of March, 2006. The project cost stated by the assessee was Rs. 56.74 crores which was raised by way of term loans, right and public issue, etc. It was contended by the assessee that the project for manufacturing of sugar started production from 20-3-1996. It was stated before the Assessing Officer that the revenue expenditure capitalised to fixed assets was to the order of Rs. 5,66,79,270 the details of which were as under :-- (a)Material consumed in trial production -16,62,372 (b)Power and Fuel -28,99,256 (c)Salary, wages and amenities -70,02,410 (d)Admn. Expenses -1,11,34,625 (e)Financial charges -3,50,83,472 Less : Closing stock of finished goods and WDV -11,02,865 Total 5,66,79,270 3. The case of the assessee was that these expenses were revenue in nature since it did not represent any tangible asset and, therefore, it had been claimed in the computation of net assessable income as revenue expenses. The assessee submitted that as per the principle laid down in various judicial pronouncements all revenue expenses including interest incurred during pre-operative period even prior to trial run pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not the same business as that of manufacturing Ferro-chrome or trading in it. The Assessing Officer also held that even when the assessee had made out a case of interlacing, etc. in general terms, but did not stand any case when the tests mentioned above were applied to it. For the reasons given in the assessment order, the Assessing Officer concluded that the claim of the assessee was that of revenue expenditure was not admissible. Further, the Assessing Officer also sought to distinguish between as to when the business was ready to commence and when it was only set up. The Assessing Officer further held that expenditure incurred in the new project was not deductible as the same was incurred for the separate business as held in Travancore Chemical & Mfg. Co. Ltd. v. CIT [1993] 199 ITR 484 (Ker.), CIT v. Blue Mountain Estates & Industries Ltd. [1985] 151 ITR 616 (Mad.) and CIT v. K. Ravindranathan Nair [1985] 152 ITR 138. The Assessing Officer pointed out that different lines of business carried out by the assessee were held not constituting to be the same business. Thus, the Assessing Officer rejected the claim of the assessee. 6. Being aggrieved, the assessee preferred an appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding that the whole trading activity formed one business. The Hon'ble Supreme Court in appeal, reversing the decision of the High Court held that the decisive test for terming whether two lines of business constitute the same business was unity of control and not the nature of two lines of business. He has submitted that the Bombay High Court in the case of Calico Dyeing & Printing Works v. CIT [1958] 34 ITR 265 held that interest on capital borrowed for purchases and erection of additional plant and machinery in connection with expansion of the business was allowable deduction under section 10(2)(iii ) of the Income-tax Act, 1922 [corresponding to section 36(1)(iii) of 1961 Act] and it was not relevant whether the capital was borrowed in order to acquire a revenue or a capital asset. He has further mentioned that the Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 on the basis of the ratio of decisions of the Bombay High Court in Calico Dyeing & Printing Works's case (supra) and the decision of Supreme Court in the cases of India Cements Ltd. v. CIT [1966] 60 ITR 52 and Challapali Sugars Ltd. v. CIT [1975] 98 ITR 167 evolved the follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll the assessees did was to start manufacturing a new commodity. In a larger sense the business of the assessee remained the same viz., the business of manufacturing diverse items and a new item was added to this business. The Tribunal had found that there was complete unity of control and that there was a common fund which were most material for testing whether the business was the same. The Tribunal was justified in holding that the business of manufacturing special alloy wires and billets was and extension of the business and not a new business and expenditure incurred for raising loans by the issue of debentures was allowable as deduction. The ld. CIT(A) has further examined the issue as to whether the assessee's case of interlacing was in general terms or in specific terms. In this connection he has examined the submission of the assessee with regard to common place of business, employment of same set to run the business, the possibility of one unit being closed without affecting the other and that the assessee-company has a balance sheet common for both the units reflecting the financial health of the total business unit. Similarly, there is a consolidated Profit and Loss acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coming into existence during the previous year the accounts of that source are to be maintained from the date of coming into existence of the new source to the end of the previous year. In this case, admittedly, the sugar unit commenced trial production on 20-3-1996. Therefore, the Profit & Loss Account of new source has to be prepared only for the period starting from 20-3-1996 till 31-3-1996. All the expenses incurred during this period, admittedly, are to be allowed as per law. The necessary concomitant is that the expenditures up to 19-3-1996, whether capital or revenue in nature are classifiable as pre-operative expenditures qua the source of income. Once it is not disputed that the expenditure under consideration is pre-operative expenditure, the necessary consequences follow that it has to be capitalised in the books as per settled norms. He has further submitted that the Assessing Officer has held that there is a difference between business and various other sources of income comprised in that business. He has further submitted that the case laws relied upon before the CIT(A) are distinguishable as they were given in different context. However, he has further relied upon t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii)If the Tribunal thinks that the additional evidence is necessary to enable it to pass the order. 10. If any of the above situations occur, then the Tribunal can accept the additional evidence. However, in the instant case, neither this is a case where the ITAT required any evidence nor it is the case where opportunity of being heard was denied. The first two situations automatically become out. After looking to the facts of the case, it is clear that the sugar business and the business of the ferro-alloys is not interrelated or interdependent. The contention is only to establish that both the businesses have common management, control and funds. Thus, he has urged that the admission of additional evidence at the appellate stage is not justifiable. The ld. DR has further submitted that additional evidence now proposed to be filed are only in order to overcome the decision of the Tribunal in the case of Morepen Hotels Ltd. ( supra). Thus, he has urged that the application filed by the assessee under rule 29 of the Income-tax (Appellate Tribunal) Rules, 1963 be rejected. 11. The case of the assessee is that the existing activities of the assessee were indeed interdependent, int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. counsel has further referred to the details of incidental expenditure on erection and commissioning of sugar project to be allocated to fixed assets which are given in the said balance sheet at page 16 of paper book. These incidental expenditure have been claimed by the assessee as revenue expenditure. 14. The ld. counsel has submitted that the sugar project was a new line of business of the assessee having unity of control, interlacing of fund, interdependence. Thus, it was extension of existing business of the assessee. Therefore, revenue expenses incurred in connection with sugar project were allowable expenses. The ld. counsel has relied upon the following decisions wherein tests have been laid down for determining whether different lines of activities carried on by the assessee would constitute one and the same business :-- CIT v. Prithvi Insurance Co. Ltd. [1967] 63 ITR 632 (SC). Produce Exchange Corpn. Ltd. v. CIT [1970] 77 ITR 739 (SC). B.R. Ltd. v. V.P. Gupta, CIT [1978] 113 ITR 647 (SC). CIT v. Modi Industries Ltd. (No. 3) [1993] 200 ITR 341 (Delhi). 15. He has further submitted no single test can be devised as universal and conclusive. The question has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for sugar division is not correct. Reliance is placed on the case of Modi Industries Ltd. (No. 3) (supra). 17. The ld. counsel for the assessee has submitted that the Madras High Court in the case of CIT v. Veecumses [1985] 152 ITR 708 held that where closure of one activity of business has not affected the other business activities, there was no interconnection, interlacing or interdependence between the two activities of business of the assessee. However, the Apex Court in the case of Veecumsees v. CIT [1996] 220 ITR 185 has held this is not the decisive test. The ld. counsel has pointed out in this case that the Apex Court has reversed the decision of Madras High Court in the case of CIT v. Veecumsees [1985] 152 ITR 708 . He has further pointed out that the Madras High Court in Veecumsees' case (supra) has followed the decision in the case of CIT v. Blue Mountain Estates & Industries Ltd. [1985] 151 ITR 616. Thus, ratio laid down in Blue Mountain Estates & Industries Ltd.'s case (supra) is deemed to have been reversed. He has further submitted that the decision in the case of Blue Mountain Estates & Industries Ltd. (supra) has also been distinguished in the case of Kalyani Stee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y venture and whether different ventures were so interlaced and so dovetailed into each other as to make them into the same business. The aforesaid tests for determining whether different ventures constitute the same business have been reiterated in the case of CIT v. Prithvi Insurance Co. Ltd. [1967] 63 ITR 632 . In the said case the Hon'ble Supreme Court was considering a case where the assessee claimed carry forward and set off of losses suffered in share business against profits from transaction of other commodities viz., sugar, molasses, etc. The Tribunal found that there was complete unity of control and shares were one of a number of commodities in which the company dealt in the ordinary course of business and that there was no element of diversity or distinction or separateness about the transaction in shares and, accordingly, upheld the assessee's claim. On a reference, the High Court held that the essential matter to be considered was the nature of the two lines of business and not merely their unity of control and that, therefore, the Tribunal erred in holding that the whole trading activity formed one business. However, Hon'ble Supreme Court has held that the decisive t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as complete unity of control and that there was a common fund, the Court held that the Tribunal was justified in holding that the business of manufacturing special alloy wires and billets was an extension of the business and not a new business and expenditure incurred for raising loans by the issue of debentures was allowable as deduction. 23. In the recent decision in the case of CIT v. Relaxo Footwears Ltd. [IT Appeal No. 387 of 2007 dated 25-4-2000] (reported in Lex Reported) the Delhi High Court while following the decision of Modi Industries Ltd.'s (No. 3) case (supra) has held that expenses incurred by the assessee for setting up of a new unit which was a part of the existing business are, therefore, to be allowed as a revenue expenditure. 24. The Supreme Court in the case of Veecumsees (supra) was considering a case where the assessee, running a jewellery business, commenced business also in the exhibition of cinematographic films. In 1961, it obtained loans for building a cinema theatre which was built in 1962 and was run by the assessee until 31-7-1965 when it was transferred to another firm. For the years during which the assessee exhibited the films in the said theatre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. 28. It may be mentioned that while passing aforesaid judgment the Hon'ble Supreme Court has reversed the decision of Madras High Court in Veecumsees' case (supra). It may further be mentioned that Madras High Court in the case of Veecumsee ( supra) has followed its decision in the case of CIT v. Blue Mountain Estates & Industries Ltd. [1985] 151 ITR 616 wherein the court held as under:-- "Held, that the assessee in the instant case was originally carrying on business in tea and later began dealings in coffee and, ultimately began to carry on an industrial activity. In such circumstances, it could not be said that it was not possible to carry on one activity without reference to the other activity. Even though the test of unity of control was established as the finances and control were from the head office of the company, the new business undertaken by the assessee could not be taken to have any connection with the earlier business in tea and coffee. Further, fertilizers could not be said to be one of the commodities in which the company dealt with in the ordinary course of business in coffee or tea. It was not the case of the assessee that the manufacture of fertilizers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... banks in Delhi. There is a common pool of funds which is utilized for meeting the revenue and capital expenses of both the units. The assessee-company is having a common share capital with common shareholders. The submission that project cost of sugar activity is backed by right-cum-public issue and balance have come from loans and internal accrual of ferro-chrome division and the rights are given to existing shareholders of ferro-chrome has not been disputed by the revenue. Therefore, the source of fund is common for both the divisions. Thus, we are of the view that there is intermingling and interlacing of funds. The test for considering whether a particular unit is separate business from the business of other unit or not, is to see whether closure of one unit would affect the other unit or not, as contended by the revenue, the closure of any of the two units would surely affect the working and the business of the remaining business, for the simple reason that a larger liability of the whole business would obviously have to be borne by the other unit on closure of one unit. In view of above we are of the view that there is unity of control, common management and interlacing of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring nature, the expenditure was made for securing the use of money for a certain period, and it was irrelevant to consider the object with which the loan was obtained." 32. Further, in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj.) the Hon'ble High Court has held thus:-- "(ii)It was contended for the revenue that, since during the relevant account years, the unit at Bangalore had not started production, the payment of interest on the borrowing which was utilized for the purpose of establishing that new unit should go towards the cost of the new unit and, therefore, on the principle accepted by the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 this interest should be treated as a capital expenditure and not as a revenue expenditure. This contention was not correct. The ratio of the decisions of the Bombay High Court in Calico Dyeing & Printing Works v. CIT [1958] 34 ITR 265 and of the Supreme Court in India Cements Ltd. v. CIT [1966] 60 ITR 52 and Challapalli Sugars Ltd.'s case [1975] 98 ITR 167 is: (1) Where the borrowing is for the purpose of a business, the interest paid on such a borrowing becomes eligible for deduction contempl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and in the circumstances of the case ld. CIT(A) has erred in allowing the claim of depreciation to the extent of Rs. 1,43,06,062. 35. Briefly stated facts are that Assessing Officer had observed that the assessee has made a claim of depreciation @ 100 per cent on flameless induction furnace which it claim to have purchased in the assessment year 1995-96, 50 per cent of depreciation has already been claimed in that assessment year and the balance 50 per cent has been claimed in this assessment year. On 1-3-1999, the ARs of the assessee were requested to furnish the papers and documents evidencing the market worth of assets purchased and its evaluation by the company before its purchase from the Ahmedabad based party. The assessee in its reply has instead of furnishing the evidence regarding the genuineness of the transaction and the genuineness of the claim of the purchase had dealt with the financial soundness and health of the supplier. Assessing Officer further observed that under the Income-tax Act the onus squarely vests on the person making a claim to prove that the claim made was genuine supported by evidence in this regard. The default in the case of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was claimed by the assessee-company was filed during the course of assessment proceedings along with copy of purchase bills and copy of lease deed in respect of lease of such fixed assets by the assessee-company. Therefore, as complete documentary evidence in respect of leased out assets on which 100 per cent depreciation was claimed was filed during the course of assessment proceedings and therefore requested for allowing depreciation of Rs. 1,43,06,062 on such assets. 37. He has further submitted that the aforesaid fixed assets were purchased by the assessee-company in assessment year 1994-95 relevant to assessment year 1995-96 for a sum of Rs. 2,86,12,124. The depreciation on such fixed assets was claimed by the assessee-company @ 50 per cent amounting to Rs. 1,43,06,062 as the aforesaid assets were put to use for less than 180 days. However, the Assessing Officer vide order under section 147/143(3) disallowed the claim of the assessee-company on the grounds that the aforesaid assets were not put to use in financial year 1994-95 relevant to assessment year 1995-96 but were put to use in financial year 1995-96 relevant to assessment year 1996-97. The assessee-company filed an a ..... 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