TMI Blog1999 (8) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... confirming the action of the Dy. Commissioner of Income-tax, Madras in not allowing the following on the ground that there was no production during the relevant previous year and plant and machinery was not put to use: 1. Depreciation Rs. 8,68,557 2. Business loss Rs. 8,90,715." 2. The Assessing Officer while completing the assessment for asst. year 1988-89 (previous year ending 30-9-1987) asked the assessee to produce production register and details of actual production in quantity from March 1987 to September 1987. The assessee was also asked to furnish details of trial production such as number of machines worked, production capacity of each machine, number of hours for which trial production was made and evidence of trial production. The assessee declared a loss of Rs. 10,92,367, which includes depreciation of Rs. 8,24,865 besides claim for investment allowance of Rs. 5,16,334 also made. Similarly, for the asst. year 1989-90 (previous year ended 31-3-1989) the assessee declared loss of Rs. 17,59,270 in its return. The loss consisted of business loss of Rs. 8,97,715 and depreciation of Rs. 8,68,557. The Assessing Officer observed that the assessee had shown opening stock o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18 months). The assessee's counsel has also filed paper book containing 50 pages and an index of case laws. The Id. counsel referred to page 14 of the paper book which is directors report and page 15 of the paper book which is balance sheet as on 30-9-1987. It is stated by the Id. counsel that even the bank has given loan against hypothecation of stock shown by the assessee at Rs. 12,24,301 under the head inventories, to the balance sheet. He referred to page 20 of the paper book which is balance sheet showing work-in-progress and value of finished goods at Rs. 58,345 as on 30-9-1987. According to the Id. counsel 44,000 sanitary napkins are produced during the year. The Id. counsel argued that the business was set up and trial production has been done and, therefore, the assessee is entitled to depreciation on the plant and machinery. He relied on the decision of the Calcutta High Court in the case of CIT v. Kanoria General Dealers (P.) Ltd. [1986] 159 ITR 524/26 Taxman 216 and the decision of the B-Bench of the Tribunal, Calcutta in the case of Asstt. CIT v. Paharpur Cooling Towers (P.) Ltd. [1993] 44 ITD 540. It is submitted that the machinery has been used in trial production an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 989-90 there would have been more commercial production and sale of goods for which there was no evidence. The Id. D.R. argued that no reliance can be placed in the audit report because the Auditor has not verified the facts regarding production, etc. It is stated that even the factory building was also constructed by 31-3-1987. Production of few samples of insignificant value will not amount to production, and trial production does not amount to commencement of production. Reliance in this regard was placed on the decisions of Madras High Court in Madras Machine Tools Mfrs. v. CIT [1975] 98 ITR 119 and K. Sampath Kumar v. CIT [1986] 158 ITR 25/27 Taxman 534, Addl. CIT v. Southern Structural Ltd.[1977] 110 ITR 164 of the Bombay High Court in Metropolitan Springs (P.) Ltd. v. CIT [1981] 132 ITR 893/7 Taxman 92, CIT v. Hindustan Antibiotics Ltd. [1974] 93 ITR 548, Bhodilal Menghraj Co. (P.) Ltd. v. CIT [1979] 119 ITR 968/1 Taxman 286 and of the B-Bench of the Tribunal, Mumbai in the case of International Computers Indian Mfrs. Ltd. v. Dy. CIT [1997] 63 ITD 195. According to the Id. D.R. mere purchase and erection of machinery does not amount to setting up of a business, and the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 31-3-1989). Even on 30-3-1989 the value of finished products has been shown at Rs. 28,000 and work-in-progress at Rs. 30,000 and the value of finished goods and work-in-progress was the same as on 31-3-1987 (Asst. year 1988-89). Therefore, there is no Commercial activity during the years ended 30-9-1987 and 31-3-1989. The expenditure on material cost for the period 1-10-1987 to 31-3-1989 has been shown at Nit. From these facts it is clear as admitted by the assessee company in its Directors report particularly for the year ended 31-3-1989 that the plant for manufacture of Sanitary Napkins at Maraimalainagar has not fully gone into commercial production. In the Directors report it has been stated that steps have already been taken to activate the plant, which is expected to go on stream within a short time. It has been further stated in the Directors report that the assessee company has not fully gone into commercial production nor engaged in any trading activity and the provisions of Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, are not applicable to the company. In the paper book filed by the assessee at pages 43 and 44 copy of a letter d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the machinery can be made. The trial run alone will show whether any part of the machinery can be added or removed so as to make the plant and machinery work with higher efficiency. Before handing over the plant and machinery after completion it must be in a condition to start functioning in a fullfledged manner. Before operating the plant and machinery, it should be tested and the working condition of the plant and machinery should be found to be satisfactory. During the trial runs, raw materials, necessary supply of water, fuel, power, etc. are absolutely necessary. It also requires the services of the engineers in working and maintenance as well as for corrections and adjustments. Therefore, the expenses incurred in respect of raw materials, materials and supplies, fuel, water, power, etc. used in the trial run will definitely go to add up to the cost of the assets. . . ." Similarly, in the case of CIT v. Food Specialities Ltd. [1982] 136 ITR 203/ [1981] 7 Taxman 86 (Delhi) cited by the Hon'ble Madras High Court in the abovementioned case of Madras Fertilisers Ltd., the brief facts of the case were that the assessee which was engaged in the manufacture of condensed milk se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordingly held that since the said production was a trial production the assessee was not entitled to the benefit of exemption under section 15C beyond the assessment year 1956-57. 10. It is clear from the aforesaid decisions of the Madras and Bombay High Courts that unless and until the assessee company reaches a stage where it is in a position to decide that a final product, which could ultimately be sold in the market, could be manufactured or produced by it, it will be idle formality to say that it had stated manufacture or production of articles simply because trial products are prepared with a view to verify whether they can be ultimately used in the preparation or manufacture of the final products. In the present case, the assessee might have produced some sanitary napkins but they were not for the purposes of any trading activity as it has admittedly not gone into commercial production. The letter dated 15-10-1987 of the assessee's Asstt. Production Manager addressed to T.T.K. Co. shows that the trials were conducted at LRC Lab. by Mr. Chandrasekhar and the results thereof. Similarly, the documents at pages 39 to 42 of the paper book filed by the assessee show that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment years 1988-89 and 1989-90 and as discussed above no commercial production or any trading activity has started and only trial run has been conducted by it. Therefore, since no business has been carried on by the assessee in the assessment years under consideration investment allowance is not admissible to the assessee. The assessee Will be eligible for investment allowance in the year in which the business is actually commenced. 12. The assessee's counsel has submitted index of case laws in support of his arguments. A copy of the judgment of the Calcutta High Court in the case of Kanoria General Dealers P. Ltd. was filed before us. In that case it was held that expenditure incurred after setting up of business cannot be disallowed on the ground that commercial production has not started. In view of the decision of the jurisdictional High Court in the case of Madras Fertilizers Ltd. referred to earlier, the ratio laid down therein is binding and the decision of the Calcutta High Court in Kanoria General Dealers (P.) Ltd.'s case relied on by the Id. counsel cannot be applied to the facts of the assessee's case. 13. The assessee's counsel relied on the Delhi High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10-1987 to 31-3-1989 as there were no manufacturing activity. If the assessee had started commercial production in the assessment year 1988-89 (accounting year ended 30-9-1987) then there was no reason why the plant and machinery could have been kept ideal from 1-10-1987 to 31-3-1989. Since the plants were not at all used by the assessee for the purpose of business in the assessment year 1989-90 no depreciation is admissible. Similarly the plant and machinery were not used for the purpose of commercial production in the assessment year 1988-89 but only to test the working of the plant and machinery and only some trial production was conducted. Therefore, depreciation is not allowable for the assessment year 1989-90 also. In view of the decisions of the Madras High Court in Madras Fertilizers Ltd.'s case and Southern Structural Ltd.'s case other decisions of the High Courts and Tribunal cited by the assessee's counsel are not considered because the facts in those cases are not similar to the facts of the assessee's case. 16. In the end we may point out that when the Assessing Officer called upon the assessee to produce production register and details of actual production in quanti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y affidavit to be filed to enable it to pass orders or for any other substantial cause, or, if the I.T. authorities have decided the case without giving sufficient opportunity to the assessee to adduce evidence either on points specified by them or not specified by them, the Tribunal, for reasons to be recorded, may allow such document to be produced or witness to be examined or affidavit to be filed or may allow such evidence to be adduced.' It is clear from the Appellate Tribunal Rules that if the assessee wants additional evidence to be filed then the same should be filed by way of separate paper book and accompanied by an application with reasons to file such additional evidence. No reasons were given by the assessee's counsel why additional evidence could not be filed before the authorities below. In fact, the assessee has not furnished the details which were asked for by the Assessing Officer for the purpose of verifying its claim. After going through the additional evidence furnished by the assessee, we found that they are not decisive in determining or for considering the claim of the assessee and that these documents may require verification. Therefore, the additional docu ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
