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TMI Blog1996 (7) TMI 165X X X X Extracts X X X X X X X X Extracts X X X X ..... there was no actual purchase. As the very basis of purchase of assets and liabilities of SVR Aromatics P. Ltd. was not proved the AO rejected the claim of expenses of Rs. 3,49,017 claimed to have been incurred by SVR Aromatics on behalf of the assessee. The AO also disallowed the claim for interest of Rs. 19,650 payable to KSSIDC as there was no manufacturing activity carried out and the factory premises were not used. 3. On appeal it was claimed what assets and liabilities of SVR Chemicals were taken over by the assessee for a consideration of Rs. 8.50 lakhs as per agreement dt. 23rd May, 1987. As the assessee-company was not in a position to depute its staff it was agreed that from 23rd May, 1987, SVR Aromatics Chemicals would continue to manage the affairs of the business taken over. SRV Aromatics Chemicals thus incurred expenses of Rs. 4,71,782 during the period from 23rd May, 1987 to 31st March, 1988, on behalf of the assessee-company. It was also claimed that all the company were not taken over. The net worth of the assets taken over was at Rs. 14,06,338 excluding the liability of cash credit account with the bank of Rs. 9,75,222 which was settled separately. It was also c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and, therefore, the question of allowing any expenses prior to its take over have to be totally ruled out. The appellant has not given the correct details either before the AO or before me of the actual expenses incurred after the take over. In view thereof the total disallowance of expenses incurred by SVR Aromatics Chemicals is fully justified. This is also justified because the entire assets of the SVR Aromatics Chemicals have not been taken over. I am informed that assets worth over Rs. 45 lakhs including plant and machinery or secured loans on plant and machinery have not been taken over. The sum of Rs. 19,650 which was paid directly by the appellant after the shed was transferred again will have to be disallowed on account of loan on factory building and not being a revenue expenditure. Moreover, perusal of the details of expenses incurred by the SVR Aromatics Chemicals indicates that these include not only expenses for the period prior to the take over but also insurance paid to cover the building, plant and machinery which have not been taken over by the appellant. Other expenses like postage and telegraph, bank charges, advertisement, etc., also do not justify the allowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit in working condition and on behalf of the assessee-company and these expenses were ultimately borne by the assessee-company while settling the purchase consideration. The assessee has legitimately claimed these expenses as deductible. 4.1. As regards the interest it has been explained that the interest expenses have been divided into two heads, i.e., interest on cash credit account and interest on KSSIDC loan. The interest on cash credit account is in respect of bank borrowing of SVR against hypothecation of goods valued at about Rs. 15 lakhs. These goods were held by SVR on behalf of the assessee as the same were to be transferred on completion of all formalities. The interest on cash credit account from 1st Dec., 1986, to 31st March, 1988, comes to Rs. 1,81,074 and the same is included in the expenses claimed at Rs. 3,49,017 above. Regarding the interest on KSSIDC loan, it has been explained that SVR paid Rs. 66,537 and the same is also included in the total expenses claimed at Rs. 3,49,017. These were subsequently reimbursed by the assessee-company. The assessee however, directly made payment to KSSIDC after the factory shed was transferred in November, 1987, of an amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of CIT vs. Tea Producing Co. of India Ltd. (1963) 48 ITR 200 (Cal) wherein a new company formed on 29th May, 1951, agreed to take over a tea estate as a going concern from 1st Jan., 1951, but the loss claimed by the company for the period from 1st Jan., 1951, to the date of commencement of business 23rd June, 1951, was not held allowable. He also cited in support the decision of the Hon'ble Allahabad High Court in the case of Shri Thakurji Engg. Works P. Ltd. vs. CIT (1968) 67 ITR 515 (All) wherein the business of HUF was converted to that of a limited company and the remuneration paid to the members of the HUF before the formation of the company was not held allowable in the case of the company. The learned Departmental Representative submitted that the ratio of the aforecited decisions fully covers the issue at hand against the assessee and accordingly no interference is called for in the order of the first appellate authority. 6. We have carefully considered the facts and rival submissions. We have also gone through the orders of the lower authorities and paper book filed by the assessee running into 64 pages. The undisputed facts are that SVR was earlier running the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was made and delivery and possession of the goods was taken over. According to the assessee it was an understanding between the assessee-company and the SVR Aromatic that the assets and liabilities as on 30th Nov., 1986, were to be taken over and the assessee was also required to reimburse the expenses incurred by SVR from 1st Dec., 1986, onwards for maintenance of the unit in working condition. However, there is no such stipulation made in the agreement entered into on 23rd May, 1987, nor there is any material or evidence produced in support of such understanding or commitments made by the assessee-company for reimbursement of the expenses incurred by the SVR before taking over the assets. 6.1. The assessee-company originally filed a return on 27th July, 1987, declaring therein loss of Rs. 1,89,658. The assessee then filed a revised return on 27th Nov., 1988, claiming the loss at Rs. 3,60,210. It is mentioned in this regard that as per the assessee initially the accounts were prepared on cash basis taking into account only actual commission income received and expenses incurred and it was on that basis that the original return was filed. Thereafter in the course of audit it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ov., 1986, was of Rs. 1,01,551 and the same increased to Rs. 5,55,107 as on 31st March, 1988, and such manufacturing activities was carried on as per the earlier understanding. In this regard we have noted that the assessee for the current year has declared income receipt of Rs. 4,76,225 on account of commission on accrual basis, i.e., of Rs. 2,52,619 on account of export orders procured and of Rs. 2,23,606 on account of import orders taken. The assessee has not filed any manufacturing/trading account nor the assessee has declared any profit from manufacturing activity. Such omission is on account of the fact that the assessee had not purchased the said goods during the current year. Admittedly the same were purchased and possession taken in the following assessment year and the payment was also made in the next accounting year. Thus, as per the accounts the assessee did not carry out any manufacturing or trading activity during the year. The only business done was of sale agency from which commission income became due. The assessee has claimed the said expenses mainly for the reason that SVR carried on manufacturing activity on behalf of the assessee-company but such activity carr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the previous owner have not been allowed to the succeeding owner and the expenses allowed are for the period from the date of commencement of the business. In the present case though there was an agreement made on 23rd May, 1987, to take over the assets and liabilities of SVR including the raw material and finished goods but the said goods were in fact purchased by the assessee and possession taken not during the current year but in the succeeding asst. yr. 1989-90. Thus, the business of manufacturing or trading in aromatic chemicals, essential oil, etc., did not commence during the current year, but the same was commenced only in the following year when the said goods were purchased and manufacturing activity started and in this view of the matter and having regard to the ratio of the decision cited supra, the expenses claimed for the period prior to the commencement of manufacturing/trading business are not admissible. The facts of the case in Addl. CIT vs. Sintex Fabrics Ltd. are distinguishable from those of the assessee-company inasmuch as that in that case the promoters purchased machinery, installed them, and started doing business in 1969. The company was incorporated on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 69,123 being 10% of the cost of shed as initial payment and the balance amount was to be paid in 96 monthly instalments along with interest at the rate of Rs. 10,410 per month. The assessee-company was also required to execute a lease-cum-sale agreement and letter of undertaking signed by all its directors within 15 days of the allotment letter. The hire purchase instalments commenced from 1st Nov., 1987. It so appears that SVR paid interest of Rs. 66,537 to KSSIDC for the period earlier to its allotment to the assessee-company. The payment of said interest being not the liability of the assessee-company has rightly been disallowed by the lower authorities. As regards the interest payment of Rs. 19,650 by the assessee-company, it is not clear whether such interest paid by the assessee-company is for the period earlier to its allotment to the assessee-company or thereafter. Having regard to the facts, in our opinion, in case the interest relates to the period earlier to 1st Nov., 1987, the same is not allowable. In case the interest paid related to the period after 1st Nov., 1987 when the shed was allotted to the assessee-company the same is allowable in the hands of the assessee- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO that this is also not an allowable expenditure." The learned counsel for the assessee reiterated the submissions made before the lower authorities. He also made a submission that the SVR carried on manufacturing activity on behalf of the assessee-company. Apart from that the assessee-company also carried on activities for marketing, commission income and sales. For commission income samples were prepared at the premises and customers were also contacted from there. Thus, the premises were fully used for business purpose. Depreciation is, therefore, allowable on factory shed. 9.1. The learned Departmental Representative placed reliance on the orders of the AO as well as the CIT(A). The learned Departmental Representative also cited in support the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Suhrid Geigy Ltd. (1981) 25 CTR (Guj) 280 : (1982) 133 ITR 884 (Guj) wherein depreciation was held allowable on actual user of the assets for business. 10. We have considered the rival submissions made on the issue. Admittedly though the factory shed was transferred to the assessee-company from 1st Nov., 1987, but no manufacturing activity was carried on by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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