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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 ..... y, 1987. The Assessing Officer (AO) noted that 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. 9,75,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny prior to its take over on 23rd April, 1987, 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, advert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred wholly and exclusively for keeping the 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 wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision of the Calcutta High Court in 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 was pointed out that the accounts must be prepared on accrual basis and as the expenses incurred by SVR though they were reimbursed in the financial year 1988-89 relevant to asst. yr. 1989-90 all expenses upto 31st March, 1988, must be provided for in the current a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 carried on, if any, was obviously not for the business of the assessee and also the said expenses incurred were not wholly and exclusively for assessee's business. The reimbursement of the said expenses to SVR is thus not the liability of the assessee-company. This view is supported by the decision cited by the learned Departmental Representative in the case of CIT vs. Tea Producing Co. of India Ltd. The company was incorporated on 29th March, 1951, and took over a tea estate as a going concern and commenced business from 23rd June, 1951. As per the terms of sale deed, income and profits from 1st Jan., 1951, belonged to the assessee-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 26th Nov., 1969, and it obtained certificate of commencement of business on 1st Jan., 1970. In a resolution adopted on 23rd Jan., 1970, the company accepted and adopted the business and loss suffered by promoters while carrying on business on behalf of the assessee. It was held by the Hon'ble Allahabad High Court that the profit or loss of promoters on given facts could be treated as profit or loss of the company. It would thus be seen that in this case the company accepted the business from the point of its commencement as per resolution whereas in the present case on purchase and taking over the said goods the business of manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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-company. Looking to the terms of allotment the assessee-company was not required to make payment of interest separately to KSSIDC. The assessee-company in fact was required to make the initial payment of Rs. 69,123 and the balance amount was to be paid in monthly instalments, along with the interest. Any how the AO is directed to verify the actual position of the interest paid and act as per the observations made above. 8. As regards the second ground relating to depreciation claimed at Rs. 2,701 on plant and machinery and Rs. 28,938 on factory shed the AO has noted that the assessee-company did not carry out any manufacturing act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liance 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 assessee-company during the current year in the factory shed. Moreover, the goods consisting of raw material and finished products belonging to SVR were lying in the factory shed during the year and as such its use for the purpose of business of the assessee did not arise. However, the assessee has no doubt declared income of Rs. 4,76,225 on account of commission accrued/received during the year on account of orders procured for export/imports on behalf of its customers and for that purpose the assessee-company might have used the office portion, if any, for preparing samples, entertaining customers, etc., and such portion was thus used by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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