TMI Blog2001 (5) TMI 144X X X X Extracts X X X X X X X X Extracts X X X X ..... joining as an Association of persons to exploit the business for retail sale of country liquor in the financial year 1986-87 at shops 1 to 3 situated in Hapur City, Shop No. 4 situated at Pilakhuwa and Shop No. 5 situated at Dhaulana and Shop No. 6 situated at Faridnagar, Ghaziabad, for which the excise licence under the U.P. Excise Rules was obtained for a sum of Rs. 84,00,000 in the group auction held on 20-3-1986. The business was decided to be carried on under the name and style of Hem Raj Vijay Kumar and Company. The initial capital of the AOP had been contributed by the parties of the 1st to 22nd part which was drawn by them from their respective capital accounts in an erstwhile firm, for making payment to the excise authorities. The parties of the 23rd part to 26th part had undertaken to contribute a minimum amount of Rs. 4,55,000 as capital and had actually contributed the same by31-3-1986. In terms of clause 4 of the Memorandum of Association, the final accounts, for the purpose of determination of profit and/or loss, were to be closed on 31st December, 1986 and the accounts for the remaining period were to be made up on the closure of the business, which date in no case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od of 1-4-1986 to 31-3-1987 for assessment year 1987-88 itself on substantive basis. Assessment year 1988-89: (i) Assessing Officer had allowed claim of deduction of Rs. 1,21,893 as interest paid to members of A.O.P. on their capital investment which was not allowable. (ii) While completing the assessment the Assessing Officer did not consider as to what happened to empty bottles which invariably remained with the assessee in this line of trade. (iii) Since the licence was granted for period1-4-1986to31-3-1987, as such, protective assessment should have been made for assessment year 1988-89 and the income for the period1-4-1986to31-3-1987should have been made on substantive basis for assessment year 1987-88 itself. 3.5 In reply to the show cause notices, the plea of the assessee on the first aspect was that interest to members of AOP was an admissible business expenditure in view of the decision of the M.P. High Court in the case of CIT v. Hamandrai Shrikishan Akodia [1966] 61 ITR 50. It was asserted that while deciding the issue the Assessing Officer had considered the ratio of this decision of the higher appellate authority and, therefore, the order could not be consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were clearly erroneous and prejudicial to the interest of revenue. 3.6 On the second aspect (issue of empty bottles), the assessee had stated that element of profit never existed in handling empty bottles. It was explained that the persons wishing to return the empty bottles were entitled to refund of Rs. 1.45 per bottle as per directions of the excise department. It was pointed out that the returned bottles were sent to distillery which allowed credit to the assessee in the bills @ Rs. 1.45 per bottle. According to the ld. CIT, the assessee could not adduce any evidence before him to establish that payment to customers @ Rs. 1.45 per empty bottle was made by it. The ld. CIT, therefore, concluded that this issue was not examined by the Assessing Officer in each of the two years and hence those orders were erroneous and prejudicial to the interest of revenue. 3.7 On the third aspect, i.e. the adoption of calendar year as the accounting period, the submission of the assessee before the ld. CIT was that during the course of assessment proceedings, a detailed reply was filed explaining the legitimacy for adopting the accounting period from 1-4-1986 to 31-12-1986 (for assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. CIT, the above clauses of the agreement proved beyond shadow of doubt that the business was not set up in Financial Year 1986-87 but, in fact, it was set up in Financial Year 1985-86 itself when the members joined together, deposited the bid money and secured the licence to sell the liquor. According to the ld. CIT, it was also established that on 31-3-1986 itself, the business was ready to commence but since as per explicit provisions of the U.P. Excise Act, the sale was to be effected from 1-4-1986, so the assessee was unable to execute any sale prior to this date. It was pointed out that the law was very clear that when a business is established and is ready to commence then it can be held that it is "set up", though there may be an interval between the setting up of the business and actual commencement of the business. For this proposition, the Bombay High Court decision in the case of Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151 was referred to. It was thus held that the first condition of section 3(1)(d) that the business is set up in the Financial Year, which in the present case was Financial Year 1986-87, was not fulfilled and, therefore, section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uals. It was only after the insertion of clause (ba) in section 40 of the Act that the amounts paid as interest, salary etc. are not deductible w.e.f.1-4-1989. He then submitted that this issue was considered by the Tribunal Benches in several cases, including the case of Bulandshahr Wine Syndicate v. ITO. Our attention was invited to the Tribunal's order in this case dated 27-10-1989 rendered in IT Appeal No. 2510 (Delhi) of 1989 for the assessment year 1986-87, copy placed at pages 79 to 82 of the paper book. It was submitted that the facts in that case were identical to the facts of the assessee's case and following the decision of the M.P. High Court in the case of Harnandrai Shrikishan Akodia , the Assessing Officer had allowed deduction for interest paid to members of the AOP on their capital contribution. The CIT was of the view that the said decision was not applicable to the case before him and, therefore, he had assumed jurisdiction under section 263 of the Income-tax Act and set aside the assessment on this issue with a direction to the Assessing Officer to frame it afresh. It was pointed out that the Commissioner's order under section 263 of the Act was cancelled by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase and refer a question on the above issue as also on the issue of cancelling the assessment order under section 263 in respect of consideration of empty bottles, the ld. counsel for the assessee drew our attention to the decision of the jurisdictional High Court in the case of CIT v. Kesho Ram [2000] 245 ITR 733 (All.), by which, the reference application filed by the Department under section 256(2), on the following question of law, was rejected:- "Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the decision of the Madhya Pradesh High Court, reported in CIT v. Harnandrai Shrikishan Akodia [1996] 61 ITR 50 is directly on the point and there was no prohibition under the. provisions of the Income-tax Act to pay interest to the members of association of persons during the assessment year under consideration?" He, particularly, drew our attention to the following observations of Hon'ble High Court in the context of M.P. High Court decision and to the finding recorded on the question of deduction of interest paid to members of AOP and applicability of clause (ba) of section 40 of the Act:- "As regards the judgment of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned empty bottle while purchasing a new bottle, he was given credit for an amount of Rs. 1.45 and in turn the assessee obtained credit for the bottles returned to the distillery. Our attention was invited to the Tribunal's order dated8-10-1992in the case of Bulandshahr Country Liquor Traders for the assessment year 1987-88, to submit that on this issue, the Commissioner's order under section 263 was set aside by the Tribunal. 7. On the third aspect, i.e., the adoption of calendar year as the previous year, the main submission of the ld. counsel for the assessee was that the assessee's business could be said to have been set up only from1-4-1986from which date it was granted licence to sell liquor and not from any earlier date. It was submitted that mere execution of memorandum of agreement could not by itself lead to a finding that the business was set up prior to1st April, 1986. It was stressed that purchase and sale of liquor could possibly be made by the assessee only w.e.f.1-4-1986and, therefore, it cannot be said that business had been set up prior to31st March, 1986. Relying upon the Bombay High Court decision in the case of CIT v. Ralliwolf Ltd. [1980] 121 ITR 262, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale proceeds of empty bottles, the ld. DR relied on the order of the ld. CIT. 8.3 On the question of setting up of business, the ld. DR submitted that the auction was held on20-3-1986in which the assessee had successfully participated. It had made the payment of auction money on that date itself. He pleaded that after the successful bid in the auction the business could be said to have been set up even though the commencement had taken place only on1-4-1987. On this aspect also, relying on the order of the ld. CIT, he submitted that the order of the Assessing Officer was erroneous and prejudicial to the interest of revenue. 9. In reply, the ld. counsel submitted that the Apex Court decision in the case of Bazpur Co-operative Sugar Factory Ltd. , relied upon by the ld. DR, was considered by the ITAT, Delhi Bench 'A' in Department's appeal in the case of Dy. CIT v. Hari Shanker Subhash Chand for the assessment year 1987-88 and vide order dated 29-2-1996 rendered in IT Appeal No. 1577 (Delhi) of 1990, copy placed at pages 11-12, the facts of the case before the Apex Court were found distinguishable. It was contended that reliance on this decision is misplaced. The ld. counsel onc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court has laid down an important proposition of law that when an Assessing Officer has adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the Assessing Officer has taken one view with which the Commissioner does not agree, the order cannot be treated as an erroneous order prejudicial to the interest of revenue unless the view taken by the Assessing Officer is unsustainable in law. It would be pertinent to extract below the relevant observations of Their Lordships at page 88:- "The phrase "prejudicial to the interests of the Revenue" has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in Loss of Revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is held that interest paid to members of the AOP on their capital contribution was an allowable deduction in the years under consideration, though the position changed after the insertion of clause (bd) in section 40 of the Act w.e.f. 1-4-1989. Here, we would particularly like to refer to the order of the ITAT, Delhi Bench 'D' in the case of Dy. CIT v. Kesho Ram [IT Appeal No. 1377 (Delhi) of 1990, dated 13-10-1994] for the assessment year 1988-89. In this case, following the M.P. High Court decision in the case of Hamandrai Shrikishan Akodia , the CIT(A) had allowed deduction of interest paid to members of AOP on their capital contribution. In appeal before the Tribunal, the Department had attempted to distinguish the facts of the cases, as has been done in the case before us, but the Tribunal had rejected those arguments. The Department had sought a reference to a question of law under section 256(2) of the Act, referred to in para 4 above, which has been rejected by the Allahabad High Court in Kesho Ram's case . We are of the considered opinion that in view of this judgment of the jurisdictional High Court, it has to be accepted that the view expressed by the Tribunal on the que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the said sub-section and sub-section (2). In the present case, for setting aside the asst. orders, the ld. CIT has referred to only clauses (a) and (d) of section 3(1) and, therefore, we will confine ourselves to these provisions, which, prior to amendment by the Direct Tax Laws (Amendment) Act, 1987, with effect from 1-4-1989, stood as under:- "3. 'Previous year' defined.-(1) For the purposes of this Act, 'previous year' means- (a) the financial year immediately preceding the assessment year; (d) in the case of a business or profession newly set up in the said financial year, the period beginning with the date of the setting up of the business or profession and- (i) ending with the said financial year, or (ii) if the accounts of the assessee have been made up to a date within the said financial year, then, at the option of the assessee, ending on that date, or (iii) ending with the period, if any, determined under clause (c), as the case may be; or" As would be seen from the above provisions, the general rule, as per clause (d), in the absence of special provisions and option, is that the previous year would be the financial year immediately preceding the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness, it is not set up." This decision dealt with the treatment of the expenditure incurred after setting up of the business but before it commenced and the observations at page 158 are as under:- "But there may be an interregnum, there may be an interval between 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 deductions under section 10(2)." The above view was approved by the Hon'ble Supreme Court in CWT v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478. It would be relevant to refer to the following observations at page 481:- "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 functioning as a business or a manufacturing organization that it can be said that the unit has been set up." It was further observed:- "Operations for the establishment of a unit, from the very nature of that expression, can only signify steps that have to be taken to establish the unit. The word 'set up' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Western India Vegetable Products Ltd. has been followed in that case. We would only say that the decision in the case of Ralliwolf Ltd. does not render any assistance to the assessee's case that its business was set up during the financial year 1986-87. 13.3 As regards making up of the accounts within the financial year, so as to entitle the assessee to exercise its option to adopt calendar year as its previous year, from the facts narrated by the ld. CIT, it is quit evident that for all practical purposes, the accounts for the entire period 1-4-1986 to 31-3-1987 have actually been closed as on 31-3-1987, at the end of the period for which licence was granted to the assessee and not on 31-12-1986, as is claimed by the assessee. It may be pointed out that the business activities having come to an end on31-3-1987itself, there could be no justification for continuing the accounts upto31-12-1987, as is stated to have been done by the assessee. 14. On a careful consideration of the facts and circumstances of the case in its entirety and in view of the foregoing discussion, we are of the considered opinion that the assessee did not satisfy the conditions precedent under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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