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TMI Blog2008 (2) TMI 448X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer and sustained some of the additions. The Department is in appeal against some of the additions deleted by the CIT(A). 3. The Department has taken the following grounds of appeal : "(1) Whether on the facts and in the circumstances of the case learned CIT(A) was correct to allow set off of brought forward losses of M/s. Aparna Projects (P.) Ltd. violating the conditions under section 72A as the company was not engaged in business for the last three years prior to the relevant assessment year? 2. Whether on the facts and in the circumstances of the case learned CIT(A) was correct in allowing the payment of insurance premium which does not pertain to the relevant previous year? 3. That on the facts and under the circumstances of the case learned CIT(A) erred in allowing air fare of Rs. 37,126 in absence of details and failure on the part of the assessee to show that the air travel was for business purposes." 4. Regarding ground 1, the learned Departmental Representative contended that as per the provisions of section 72A, the amalgamating company was required to be engaged in the business in which the loss was sustained for a minimum period of 3 years bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agement in business must be reckoned with reference to the point of time when the business activities were started, which would include also the preparatory stage for manufacturing activity, which is just one of the stages or ingredients of the business. He emphasized that the Assessing Officer had wrongly equated "engaged in business" with "start of manufacturing" although the section itself did not specify the same. He submitted that the latter is a much narrower process and it alone cannot be termed as "engaged in business". He further submitted that "business" is of much wider import and encompasses within its fold all the steps for starting the manufacturing operations. In this particular case, M/s. Aparna Project (P.) Ltd. was clearly in business when it undertook the steps to acquire the plant and machineries and that step itself has to be considered to be the commencement of business. He submitted that the legislature clearly did not intend for the start of production as the criteria for allowing deduction as the Assessing Officer had interpreted and in support of the same he submitted that in certain sections of the Act, the legislature has made a difference between pre-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e "engaged in that business" from that moment on and would meet the criteria as required under section 72A. He submitted that in the instant case, the Assessing Officer had held that the business of M/s. Aparna Project (P.) Ltd. had not been in existence before the actual manufacturing activities were started by that company, which was directly against the decisions of the various Courts as cited above. He submitted that M/s. Aparna Project (P.) Ltd. had been carrying on its business since April, 2000 i.e., the moment it applied for license to manufacture coke being the first integral and necessary activity for the purpose of carrying on of the business. He therefore submitted that since M/s. Aparna Project (P.) Ltd. was engaged in its business since April, 2000, it had fulfilled the necessary condition for allowability of benefit under section 72A of the Act and the assessee was eligible for the benefit of allowance of brought forward loss and also unabsorbed depreciation of the amalgamating company i.e., M/s. Aparna Project (P.) Ltd. 8. Sri Tulsiyan thereafter took up ground 2 for his arguments. He submitted that the alleged advance payment of premium was not actually an advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tants of the company, the disallowance was unwarranted and only based on suspicion and the CIT(A) had rightly deleted the same. 10. We have heard the rival parties, considered their rival submissions and perused the records available with us. Ground 1 of the appeal mainly pertains to the allowance of brought forward loss and unabsorbed depreciation of the amalgamating company viz., Aparna Projects (P.) Ltd. as per the provisions of section 72A. The relevant provisions of section 72A state asunder : "(1) Where there has been an amalgamation of a company owning an industrial undertaking or a ship or a hotel with another company or an amalgamation of a banking company referred to in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), with a specified bank, then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of this Act relating to set off and carry forward of loss a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tute in place of the word "business" and thereby changed the entire requirement of the said section. Section 72A(2)(a)(i) clearly uses the words "engaged in business" and there is no requirement of start of production to be eligible for deduction. There may be many instances where the business may have commenced but the actual production may not have commenced but that would not imply that the business itself had not commenced and that an assessee would not be engaged in production. Therefore, it appears, the Assessing Officer has narrowed down the requirement of the section without there being any such intendment within the section itself. In this case, therefore, it needs to be examined whether Aparna Projects (P.) Ltd. had been engaged in business for a period of 3 or more years. In this case, the said company had applied for license to manufacture coke, being the first integral and necessary activity for the purpose of carrying on of the business, in the month of April, 2000. The brought forward losses and unabsorbed depreciation sought to be set off pertain to the said business of manufacturing coke. Therefore, the assessee had performed the first integral and necessary activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing on of the business, the business is deemed to have been set up and expenses are allowable as revenue expenses. In this connection, the case of CIT v. Saurashtra Cement Chemical Industries Ltd. [1973] 91 ITR 170 is of relevance. The Hon'ble Gujarat High Court held as under : "'Business' connotes a continuous course of activities. All the activities which go to make up the business need not be started simultaneously in order that the business may commence. The business would commence when the activity which is first in point of time and which much necessarily preceded all other activities is started." In the case of CIT v. Sponge Iron India Ltd. [1993] 201 ITR 770, the Hon'ble Andhra Pradesh High Court held as under : (i) whether a business has been commenced or not is a question of fact. However, what activities constitute commencement of business is a mixed question of law and fact and it has to be decided on the facts of each case; (ii) there is a distinction between setting up of business and commencement of business. A business is said to be set up when it is ready to commence; (iii) where the business consists of a continuous course of activities, for commenceme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hs on the assessee for the payment of premium and the assessee had no option to pay part of the premium relating to this year in the year in appeal and the balance in the subsequent year. We have considered the argument advanced by the learned Authorised Representative that the raising of bill by the insurance company for the period of 12 months leads to an accrual of liability on the date of receipt of the bill as per the mercantile system of accounting. In mercantile system of accounting, an expenditure is said to have accrued when the said expense becomes due for payment. In this case we find that the premium for a period of 12 months, partly attributable to subsequent year, had become due for payment in this year itself and therefore has to be held as having accrued during the year. An expense has to be allowed as deduction in the year it has accrued to an assessee. The benefits of such an expense may be enjoyed by the assessee over a period which may extend beyond the relevant assessment year but the expense has to be allowed in its entirety in the year of accrual unless specifically barred by any provision of the Income-tax Act, 1961. A good example would be an advertisement ..... X X X X Extracts X X X X X X X X Extracts X X X X
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