TMI Blog1986 (3) TMI 149X X X X Extracts X X X X X X X X Extracts X X X X ..... income in the nature of revenue must exist which would be followed by expenses in the nature of revenue. According to him, therefore, till there is generation of income in the nature of revenue there can be no expenses in the nature of revenue. He also placed reliance on s. 35D in support of his theory that before commencement of business there can be no expenditure in the nature of revenue. He also relied on Metropolitan Springs Pvt. Ltd. vs. CIT (1981) 22 CTR (Bom) 260 : (1981) 132 ITR 893 (Bom) for the proposition that even carrying out of trial production does not amount to manufacture and, therefore, it cannot be said to be that there was any commencement of production. He further argued that allowing of expenditure incurred prior to commencement of production but incurred after the setting up of business as an expenditure of revenue nature is not only contrary to law but would help only in tax avoidance as has been held by the Supreme Court in Mc Dowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC). He also relied on the two other decisions in CIT vs. Sheo Kumari Devi (1986) 50 CTR (Pat) 350 : (1986) 157 ITR 13 (Pat) (FB) and Workmen of Associated Rubber ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as revenue in nature. He further submitted that it is a matter of principle which has to be decided by this Tribunal as otherwise the assessee being a loss it would hardly have any effect on the assessee either way as no tax is payable. He further added that apart from the observations made by the Institute of Chartered Accountants in their respect about authorities, the following authorities were cited by him as relevant to the issue before us. They are CIT vs. Saurashtra Cement and Chemical Industry Ltd. (1973) 91 ITR 170 (Guj) Western India Vegetable Products Ltd. vs. CIT. Bombay (1954) 26 ITR 151 (Guj) Sarabhai Management Corporation Ltd. vs. CIT 1975 CTR (Guj) 111 : (1976) 102 ITR 25 (Guj) Prem Conductors Pvt. Ltd. vs. CIT 1976 CTR (Guj) 324 : (1977) 108 ITR 654 (Guj) CIT vs. Ralliwolf Ltd. (1980) 121 ITR 262 (Bom) We have given careful considerations to the facts and the arguments of both the parties. The Institute of Chartered Accountants of India in their report on Treatment of Expenditure during consideration period in paras 12.5 to 13.5 have specifically death with this very issue of treatment to be given of expenditures incurred after the setting up of busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 CTR(Guj) 111 : (1976) 102 ITR 25 (Guj) (4) CWT vs. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478 (SC). (5) Travancore-Cochin Chemicals Pvt. Ltd. vs. CIT (1967) 65 ITR 651 (SC). 13. Interval Between Establishment of a Business and the Commencement of Actual Production. 13.1. As indicated in paragraph 12, a new project can be treated as having arrived at the Revenue earning stage as soon as it is ready to commence commercial production that is, a soon as it is established and is ready for commercial production. However, there is often an interval of time between the date of project is completed and commissioned and is ready for production and the date when commercial production begins. The question which is discussed in the paragraph relates to the treatment of the expenditure incurred during this period. 13.2. In the normal course, the interval of time between the date a project is commissioned and is ready for production and the date that commercial production actually begins should be very brief. However, several factors sometimes operate to make this interval of time very prolonged and this is especially so in India because of the multifarious list of regulati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er hand, the expenditure of a revenue nature incurred during the period of such delay while on the other hand, the expenditure of a revenue nature incurred during this period would have to be charged to the Profit and Loss Account as mentioned above. If the period of delay in commencing commercial production is extremely prolonged, the only possible concession which may be made is that the expenditure incurred during this period can be treated as deferred revenue expenditure, to be amortised over a period not exceeding 3 to 5 years after the commencement of commercial production. This procedure is not, however, recommended as a matter of general policy or practice, but may be resorted to only in those exceptional cases where fairly heavy revenue expenditure is incurred during a prolonged period of delay in commencing commercial production. In any case, it would be completely wrong to treat such expenditure as capital expenditure since it does not add in any way to the value or cost or utility of the plant and other manufacturing facilities which have already been constructed but which have remained idle due to delay in commencing commercial production. 13.5. After commercial prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that he can claim it as a revenue deduction in the trading profits of the business". Their Lordships thereafter considered the distinction between a person commencing a business and a person setting up a business. By referring to the Bombay High Court decision in Western India Vegetable Products (1954) 26 ITR 151 (Bom) which decision was approved by the Supreme Court in the case of CWT vs. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478(SC). The Bombay High Court decision was in relation to s. 2(11) which is present s. 3(1)(d) of the IT Act, 1961. They have further observed that "What is required to be consider of is setting up of a business and not the commencement a business. It is only when a business is established and is ready to commence business that it can be said of that business it is not set up". Their Lordships reproduced the salient paragraph of the Supreme Court decision which read "A unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit has been put into such a shape that it can start function as a business or manufacturing organisation that it can be said that the unit has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business was set up. In this case, the Company purchased houses, various apartments, with a view to let them. The question they were considering was on which date the business could have been said to have been commenced and what is the nature of the expenditures incurred before the actual letting out. In this decision, they had considered the earlier two Gujarat High Court decisions, as also the Supreme Court decisions supra. Their Lordships had observed that the first business activity is to acquire either by purchase or by any other manner immovable property so that property can be ultimately given out either on lease or on lease licence basis or on lease to others together with the appurtenant services. The second category is to put these buildings into proper shape and set up the appurtenant services so that ultimately the property can be given out on lease and licence basis and the third activity is actually to give and licence basis and the third activity is actually to give it on lease or on leave and licence basis. They have observed that by 1st Oct., 1964 the first two essentials had already been concluded and, therefore, it was held that the Company has commenced busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ish Dictionary "to place on foot" or "to establish" and is in contradistinction to "commence". They further observed "The destination is this that when a business is established and is ready to be commenced then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deduction under s. 10(2). In page 267, they further observed as in the present case, as indicated in the order of the Tribunal, purchase were affected by the assessee-company during the relevant accounting period and the items purchased may either be used for manufacture or for sale. The Tribunal was justified in taking the view that the assessee can be said to have commended its business. 9. As against these authorities which lay down clearly the principle that what is important from the point of the view of IT Act is the setting up of the business in order to determine th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial undertaking and the assessee was entitle to claim exemption under the WT Act. 11. From the above discussion of the Supreme Court, it is clear that what is relevant for the purpose of the Income-tax is to reckon from the date on which the business is set up from which date the assessee's previous year for determination of income commences. What s. 35D talks of is regarding the expenses incurred before the commencement of the business and not before the commencement of production as has been advanced by the Sr. D.R. before us. Merely for the reason that ss.28 29 precede the sections of expenditures from s. 30 onwards it does not follow that there must be income before any expenditure could be said to be incurred or allowable. Rather, the reality of any situation is that once the business is set up the assessees have to necessarily incur expenses after which only income could be generated. Therefore, even this argument of the Department as advanced by the Sr. D.R. has no merit. The Sr. DR has placed reliance on the Patna High Court decision in the case of CIT vs. Sheo Kumari Debi (1986) 50 CTR (Pat) 350 : (1986) 157 ITR 13(Pat) and also the Supreme Court decision in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re those, which are incurred with a view to acquire a capital asset or with view to increase substantially the life of the asset by carrying out modifications on it and in the present case none of the expenditures incurred by the assessee are disputed by the Department as having any relation whatsoever with the acquisition of the assets, to our mind, they can never be treated as capital expenditure. If they are not capital expenditures, then how can the Department refuse to allow them as a revenue expenditure unless there is a specific provision contained in the Act which prohibits such an allowance. There is no section in the IT Act which prohibits allowing of such expenditures as revenue in nature. The only prohibition that is contained in s. 35D and that too is in relation to such expenditures, which are incurred before the commencement of the business or if incurred after the commencement of the business in connection with extension of his industrial undertaking or in connection with his setting up a new industrial unit. The nature of such expenditures have been provided in sub-s.(ii) which are in the nature of preparation of feasibility report, project report, conducting of ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee did not carry out any modification in the basic designs. The assessee carried out development of the parts as per the designs and since the scooters required precision made parts it carried out such operations for correction of the parts which are developed so that any manufacturing defect could be sorted out and resolved before the actual commencement of production. Such kind of operations are part of the manufacturing operations as such as any improper part has to be either scrapped or had to be modified to suit to the requirement of the scooters as such. 15. We have given the careful consideration to the arguments of both the parties on this issue. The case law relied on by the ld. DR is on the issue of the drawings, designs, charts, plants and such other literature whether these could be termed as a plant or not and whether depreciation could be allowed as such or not. This case would have no application to the present case as the facts are different. The ITO had disallowed the expenses on design and development of Rs. 6,52,606 on the ground that the expenditure in question was incurred prior to the date of commercial production on which basis if it was not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducted from the cost of plant and machinery for allowing of depreciation. 17. The next issue is of the direction provided by the CIT(A) to allow Development rebate on plant and machinery on the basis of the total cost of plant and machinery installed. On behalf of the Department, Mr. Ruhela's argument was that s. 34 of the IT Act clearly provides that development rebate reserve would be allowed to an assessee only when the assessee follows certain procedure, like creation of development rebate reserve by charge to its profit and loss account. The assessee had not created the Development rebate reserve due to inadequacy of profits. According to Mr. Ruhela, the Board's circular dt. 30th Jan., 1976 on which reliance has been placed by the CIT(A) is not at all justified as the Board is not empowered to do what the Parliament did not do or it cannot under what the Parliament did. The Board's Circular dt. 30th Jan., 1976, according to him, is contrary to the very provisions of law and, therefore, such a circular has no validity in the eyes of law. He placed reliance on A.C. Paul vs. TRO and Anr. (1979) 117 ITR 412(Mad), CIT vs. Malayala Manorama and Co. Ltd.(1983) 33 CTR (Ker) 277 : (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legislatures as argued by the learned DR. The direction of the CIT(A) in his paragraph 21 is quite contrary to the law whereby he has directed the ITO to allow the development rebate in the year itself knowing fully well that the assessee has not complied with the conditions laid down under s. 34. The assessee is free to claim the development rebate in the subsequent year in which it has a positive income after complying with the conditions laid down under s. 34 read together with the Board's circular of 30th Jan., 1976. This disposes of the quantum appeal of the Department. 20. In ITA No. 686, the Department is aggrieved by the order of the CIT(A), who though has technically upheld the action of the ITO has cancelled the same on the ground that the issue is already covered in his main order on the quantum. 21. On behalf of the Revenue, it was argued that ITO in his order under s. 154 has rectified the mistake of not deducting the subsidy amount received from the cost of assets in arriving at the capital employed of the business for determining the 80J claim. Referring to the order of CIT(A) paragraph 3, Mr. Ruhela pointed out that the ITO has clearly observed that the subsidy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d turns out the products for which it was established. In case the industry fails, then the government has the prerogative of receiving it back and in case the industry is successful enough, then after a certain period of time the subsidy amount becomes a grant like. Therefore, till the time of the completion of a certain period of time, which is about five years, the nature is that of a liability as the government could make a claim and on successful completion of the period it becomes a grant which is not repayable. It is under these circumstances that it raised an important question of law and, therefore this cannot be a subject matter of rectification under s. 154. The CIT(A) was in error when he observed that the issue has become infructuous and redundant for the reasons observed above. 24. In the result ITA No. 386 of the Department is partly allowed while ITA No. 686 is dismissed. H.S. AHLUWALIA, J.M. Personally speaking, I am of the opinion that the contention raised by the DR, according to which allowance of revenue expenditure under s. 30 to 43A is permissible only when there is income from profits and gains of business or profession within the meaning of s. 28 o ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
