9911796707
TMI Blog2008 (11) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.1. In order to dispose of the appeal, the following facts require to be noted:- 2.2 In 1991, the respondent/assessee had set up a Ferro Alloys Manufacturing Plant, in Raipur, which was, engaged in both, the manufacture of Ferro Alloys, as also, trading of Ferro Alloys. 2.3. In the year 1994-95 and 1995-96, the respondent/assessee set up a sugar manufacturing plant at Muzaffarnagar in the State of U.P. The said sugar plant had an installed capacity of 2500 TCD. The respondent/assessee's trial run in respect of sugar plant commenced on 20.3.1996. The total project cost for setting up of the sugar plant was a sum of Rs 56.74 crores. This amount was raised, inter-alia, by way of term loans, rights and public issue. The assessee has admittedly spent a sum of Rs 5,66,79,270/- as pre-operative expenses in respect of afore-mentioned sugar plant at Muzaffarnagar, U.P. The break-up of the said expenses as set out in the Assessment order is as follows:- Details Amount in Rupees 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 clo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both on facts and law, came to the conclusion that the expenditure in issue was in the nature of revenue expenditure since the sugar plant project was in the same business fold. The CIT(A) held as follows:- ''In the light of these submissions and Delhi HC decision in 200 ITR 341 it is to be held that the sugar project was in the same business fold that of the business of manufacture as that of ferro chrome or the trading in it. Similarly it is to be held as per the submissions and case laws that it was a case of interlacing not in general terms but in specific terms''. 4. The Revenue, aggrieved by the order passed by the CIT(A), preferred an appeal before the Tribunal. The Tribunal examined the matter at great length. On examining the issue, it posed a question to itself, which was, whether the sugar plant of the assessee constituted the 'same business' as against a different or a distinct business of the assessee. In other words, whether the new line of business, i.e., setting up of the sugar plant when the assessee was already in the field of manufacture and trading of ferro chrome, would constitute a business in the same business fold. It is important to note that the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maining business, for the simple reason that a larger liability in respect of the entire business would have to be borne by the plant which remains functional. It thus concluded that the sugar plant was a mere extension of the existing business of ferro alloys. According to the Tribunal, the respondent/assessee was engaged in the same business as the decisive test is unity of control and not same line of business. 4.3 It is, however, important to note that while returning the aforesaid findings of fact, in respect of the respondent/assessee, the Tribunal allowed deduction of only that expenditure which was incurred towards financial charges, being a sum of Rs 3,50,83,472/- incurred for the purposes of setting up of sugar plant, as revenue expenditure under Section 36(1)(iii) of the Act. In respect of the balance amount in the sum of Rs 2,15,95,798/-, out of total expenditure amounting to Rs 5,66,79,270/-, the Tribunal restored the matter back to the Assessing officer to ascertain whether the expenditure was of capital or revenue nature. 5. The Revenue, being aggrieved by the impugned judgment, as mentioned above, has preferred the present appeal. 5.1 Having heard the learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court in the case of Commissioner of Income Tax v. Prithvi Insurance Co Ltd: (1967) 63 ITR 632. In this case, while holding that life insurance business and general insurance business were the 'same business', it observed that in determining whether two or more lines of businesses may be regarded as 'same business' or 'different business', what has to be looked at is, the nature of businesses, the nature of their organization, management, source of capital fund utilized, method of book keeping used and other related circumstances which stamp the businesses as the same or distinct. The Supreme Court concluded that both life insurance and general insurance came within the fold of 'same business'. It took into account the fact that both businesses were attended by the Branch Managers and agents without any distinction and there was one common administrative organization, and the expenses incurred in connection with the business, both for administration and for heads of expenditure such as salary of the staff, postage, staff welfare fund and general charges, were common. 5.7 The Supreme Court, however, in this case explained the exact scope of tests employed in the earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in respect of export of cotton textiles . The Supreme Court in the said case, approved the ratio of the judgments of its own court in the case Prithvi Insurance (supra), and Produce Exchange (supra). In doing so it also noted the observations made in the decision of the Supreme Court in the case of Standard Refinery and Distillery Ltd v. Commissioner of Income Tax: (1971) 79 ITR 589 and finally concluded that, tests for ascertaining whether the two lines of businesses were the same business was not dependent on determination of the nature of goods dealt with. The decisive test according to the Supreme Court was the unity of control and not the nature of two lines of businesses. It further held that even though the fact that one business cannot be conveniently carried on after the closure of the other business may furnish a strong indication that the two businesses do not constitute the same business, but as already held in Prithvi Insurance (supra) no decisive inference can be drawn from the fact that after the closure of one business the other cannot be conveniently carried on. 6.1 Based on the aforesaid tests, let us examine the findings returned by Tribunal in coming to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of the aforesaid two assessment years. The Income Tax Officer was also of the view that the Bangalore unit was not a branch of the assessee factory at Baroda and was, therefore, a new business and since, this new business had not started production, the payment of interest could not be taken as revenue expenditure. The Gujarat High Court was called upon to answer the following questions:- '(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the Whitefield Factory at Bangalore did not constitute a separate undertaking but was only an establishment of a new unit of the existing factory at Baroda. (ii) Whether, on the facts and in the circumstances of the case, the interest, miscellaneous expenses, and travelling expenses incurred by the assessee referable to the Bangalore unit are wholly and exclusively for the purpose of the assessee's business'' 6.3 In respect of the first question, the Gujarat High Court held that whether the establishment of new unit at Bangalore can be treated as new or separate business of assessee did not present much difficulty in view of the test laid down by the Supreme Court as referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalized and added to the cost of fixed assets which have been created as a result of such expenditure.' 6.4 The Gujarat High Court, after analyzing the decision of the Bombay High Court in Calico Dyeing and Printing Works v. Commissioner of Income Tax: (1958) 34 ITR 265 and of the Supreme Court in India Cements Ltd v. Commissioner of Income Tax: (1966) 60 ITR 52 and in Challapalli Sugars Ltd v. Commissioner of Income Tax: (1975) 98 ITR 167, concluded as follows:- ''. It is no doubt true that in the case of Challapalli Sugars Ltd the Supreme Court has unequivocally observed that interest paid on the borrowing utilised to bring into existence a fixed asset which has not gone into production goes to add to the cost of installation of that asset. But these observations have been made with reference to a situation wherein it was not possible to contend that the borrowing on which interest was paid was made for the purpose of any business. The company which had made the borrowing in that case had not yet started production, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new asset which brings that asset into existence. Since the transaction of borrowing is not the same as the transaction of investment, the Supreme Court has observed in India Cements Ltd vs Commissioner of Income Tax that, for considering whether payment of interest on a borrowing is revenue expenditure or not, the purpose for which the borrowing is made is irrelevant. Thus, the decisions of the Bombay High Court in Callico Dyeing and Printing Works and of the Supreme Court in India Cements Ltd were given with reference to the borrowings made for the purposes of running businesses, while the decision of the Supreme Court in Challapalli Sugars Ltd was given with reference to the borrowings which could not be treated as made for the purposes of business, as no business had yet been commenced. Thus, there is no incompatibility between these decisions. The Supreme Court itself had distinguished its earlier decision in India Cements Ltd in the following terms in Challapalli Sugars Ltd: 'This case too is of no assistance to the revenue. The appellant-company in that case at the time it raised the loan was a running concern. Unlike the assessees in the present appeals, the loan ra ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
