TMI Blog1993 (10) TMI 127X X X X Extracts X X X X X X X X Extracts X X X X ..... -88. The assessee's contention was that it was already in the business of trading and, therefore, the business of manufacturing in the same line amounted to same business, was rejected by the Assessing Officer as, according to him, "income from trade and income from manufacture are two different sources though assessable under the head 'business"'. In the instant case, he observed, the assessee switched from the source of trade to the source of manufacture and during the year of account no business was carried on with the activity of manufacture. Relying upon the decision of the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, he held that if the disbursement is made for acquisition of a source of profit or income, it would ordinarily, in the absence of any other countervailing circumstances, be in the nature of capital expenditure. If there is an enlargement of the permanent structure of which income would be a produce or fruit, he observed, there would be a change in the character of the profit-making apparatus. In other words, according to him, the profit earning structure of the assessee was enabled to produce more goods because of addition or augmenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee was carrying on trading business in gases and cylinders before the Unit of Pennzol Gases was launched and that the new project was in the same line of business excepting that in earlier years it used to trade in gases, in this year, besides trading it was also manufacturing gases. The revenue's case is that the two lines of business, viz., trading and manufacturing, are two different businesses unconnected with each other for which separate books of account were maintained, separate profit and loss accounts were prepared and pre-production expenses were capitalised and allocated to various buildings, viz., office building and gases building, by the assessee itself. Support is had of the decision of the Supreme Court in the case of Empire Jute Co. Ltd., Andhra Pradesh High Court in the case of Vazir Sultan Tobacco Co. Ltd. and the decision of the Supreme Court in the case of Textile Machinery Corpn. Ltd. The learned departmental representative further supported the case of the revenue by relying upon the following decisions: (1) Ram Chandra Munna Lal v. CIT [1949] 17 ITR 394 (East Punj.); (2) CIT v. Sarabhai Sons (P.) Ltd. [1973] 90 ITR 318 (Guj.); (3) CIT v. Indus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 1954-55 the business of exporting cotton textiles and earned profits in the business in that year and subsequent years. In his report in the revisionary proceedings, it was expressly stated by the Income-tax Officer that "there was a common control and common management of the same board of directors" of the business of import and export. In the light of the aforesaid statement, their Lordships of the Supreme Court held that the unity of control and the other circumstances of the case showed that there was dovetailing or interlacing between the business of import and the business of export carried on by the assessee and that they constituted the same business. There is no dispute in the present case that there was a common board of directors controlling and managing both the lines of business and, therefore, there can be no doubt that the two lines of trading and manufacturing are the same business. 17. In the case of Oswal Spg. Wvg. Mills Ltd. before the Punjab and Haryana High Court, the facts were that the assessee, hitherto carrying on the business of spinning and weaving woollen yarn, incurred registration charges for obtaining a loan for the purpose of starting a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and amongst all units of the business as a whole, that the expenditure incurred in connection with the new divisions was deductible as business expenditure. 20. In the case of Kesoram Industries Cotton Mills Ltd. before the Calcutta High Court, the assessee had a cement unit in Andhra Pradesh. During the previous year relevant to assessment year 1975-76, it incurred miscellaneous expenditure and legal charges in connection with a proposed factory in Rajasthan and claimed it as business expenditure. The Tribunal held that the expenditure in connection with the proposed factory in Rajasthan unit was deductible. The Calcutta High Court upheld the order of the Tribunal by observing that the expenditure pertained to exploring the feasibility of expanding or extending the assessee's existing business and it was in connection with the carrying on of the assessee's business. 21. Taking the aforesaid into consideration, in our opinion, the expenditure incurred by the assessee in the setting up of Pennzol Gases Unit was an expenditure for extension of its existing business and, therefore, the expenditure was incurred in the same business. 22. In the case of Ram Chandra Munna Lal re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. before the Bombay High Court, the assessee was incorporated in August 1959 and the expenses were claimed for the period prior to the setting up of its business and in that connection the court held that the expenses were not allowable. That was a case of an altogether new business. Similar is the position before the Bombay High Court in the case of Forging Stamping (P.) Ltd. There also the company was incorporated in August 1962 for the purpose of manufacturing, fabricating, producing and selling all types of dies and moulds for drop forgings, drop stampings and various other tools. The expenditure claimed pertained to the period prior to its setting up of the business. That was also a case where there was no existing business before the new business was started. 25. In the case of Empire Jute Co. Ltd. relied upon by the learned Departmental Representative, the Supreme Court held that the disbursement made for acquisition of a source of profit or income is capital expenditure, but the court ultimately held that the expenditure should be in the capital field and that something tangible or of permanent character must be obtained by the assessee by incurring the expenditure. By ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 30. Nothing further has been brought to our notice to justify any interference in the order of the CIT (Appeals). Looking to the facts and circumstances of the case, we are of the opinion that there is no further scope of reducing the disallowance as upheld by the CIT (Appeals). These two grounds of the assessee are, therefore, rejected. 31. Ground No. 6 in the assessee's appeal is with regard to the disallowance of 20 per cent of service charges incurred by the assessee. The assessee claimed a sum of Rs. 42,900 by debiting it to profit and loss account towards service charges. No details about the nature of these charges were furnished by the assessee. The Assessing Officer, therefore, disallowed 20 per cent of the service charges on estimate basis. The disallowance was upheld by the CIT (Appeals) as before him also the assessee had not furnished any details. 32. At pages 80 and 81 of the paper-book, the assessee has given some details of the service charges from which it appears that the expenditure was incurred by the assessee on payments to labourers towards cleaning and loading charges and painting and reconditioning charges of drums. All these payments were made in ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that if a part of the claim is accepted, the other part cannot be disallowed. With the introduction by NISL, the assessee earned a commission of 6 per cent from Philips Carbon Black Ltd. and 5.5 per cent from other two companies. The claim for payment is only for 2 per cent which was paid for introduction of the assessee to the suppliers by NISL and should not, therefore, have been disallowed as it was for earning the income. Reliance in this connection was placed on the decision of the Gujarat High Court in the case of CIT v. Navsari Cotton Silk Mills Ltd. [1982] 135 ITR 546, and in the case of Swastic Textile Co. (P.) Ltd. v. CIT [1984] 150 ITR 155 (Guj.). It was further submitted that NISL is not related to the assessee in any way. It is a limited company and has paid tax on the income earned from the assessee, and therefore, no evasion or saving of tax could be attributed. The decision of the Supreme Court in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148, relied upon by the departmental authorities have been referred to in the subsequent decision in the case of CWT v. Arvind Narottam [1988] 173 ITR 479 (SC) and was also a subject matter of consideration of the Mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e claim was rightly disallowed. The payment to Ceat Tyres was allowed because they supplied carbon and that payment has no connection with the payment to NISL and, therefore, there was no question of accepting a part of the claim and rejecting the other part as contended by the learned counsel of the assessee. NISL has been assessed, he submitted, on income from other sources and in view of the fact that the entire amount has been assessed as income, it was earned without incurring any expenditure, meaning thereby that they have not made any efforts in earning the income. The assessee admits the defects in the letters filed and, therefore, they do not constitute evidence in proof of services having been rendered to the assessee. One set of letters dated 20-3-1986, 24-3-1986 and 28-3-1986 are not signed whereas the second set, though signed, were with different contents. In these circumstances, he contended that no credence could be given to either set of letters. There could be no question of introduction by NISL as the letters produced by the assessee are dated 20-3-1986 onwards whereas the agreements were prior to that date, i.e., on 25-2-1986 in one case, 15-3-1986 and 17-3-1986 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Madan Lal held that merely because the assessee has established the existence of an agreement between him and an agent and the actual payment made thereunder, it would not take away the jurisdiction or discretion of the Assessing Officer to consider whether the expenditure was incurred wholly and exclusively for the purposes of the business of the assessee. At the same time, it was further held that it has also to be determined whether the expenditure incurred was commercially expedient. Any payment for extra-commercial considerations cannot be allowed as a business expenditure wholly and exclusively incurred for the purposes of business of the assessee. The emphasis is, therefore, on the services rendered. If there is no evidence to show that the agent made any sale or rendered any services whatsoever to the assessee, claim can be disallowed. In the case of Swadeshi Cotton Mills Co. Ltd., the Supreme Court held that where the payment has no relation with the value of the services or goods received in return, the payment could be disallowed notwithstanding that the payment was pursuant to an enforceable agreement. The submission of the learned counsel of the assessee that the on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ental Carbon Chemicals Ltd. and Gujarat Carbon Ltd. (13) Letter dated 21-2-1986 by NISL to Philips Carbon Black Ltd. The first set of letters dated 20-3-1986, 24-3-1986 and 28-3-1986 were discarded by the departmental authorities on the ground that they were unsigned and were also vague as to rendering of any services by NISL to the assessee. The agreement letters dated 25-2-1986, 15-3-1986 and 17-3-1986 were found to be of no help as they do not have any reference to NISL's role in the assessee procuring the order from Ceat Tyres. The letters of NISL to the assessee are held to be an afterthought to support the accounting entries and, therefore, no credence was given. The second letter dated 20-3-1986 by NISL to the assessee also leaves the matter of service vague excepting for the introduction of the assessee to Philips Carbon Black Ltd. The letter dated 11-10-1990 confirming the introduction of the assessee by NISL to the three suppliers was in response to the assessee's letter dated 9-10-1990 seeking information. 40. According to the Revenue. the three agreement letters dated 25-2-1986, 15-3-1986 and 17-3-1986 do not have any reference to the role of NISL. However, on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the undersigned accompanied with Mr. B. R. Kothari of Pennzol Investment Trading Company Pvt. Ltd. had with you in regard to the supply of Carbon Black by your Company to Ceat Tyres of India Ltd. As requested by you, we do hereby confirm that in case you appoint Pennzol Investment Trading Co. Pvt. Ltd. as your commission agent in respect of supplies of Carbon Black made to Ceat Tyres of India Ltd., you would not be liable to make any separate payment of commission to ourselves. We shall obtain our portion of the commission directly from Pennzol Investment Trading Co. Pvt. Ltd. This is for your information and record. Yours faithfully, For New India Shipping Lines Ltd. (sd.) (S.N. Dalmia) Director." 41. Further, though copies filed before the Assessing Officer of the letters dated 20-3-1986, 24-3-1986 and 28-3-1986 were xerox copies of the unsigned typed copies of those letters, the assessee filed xerox copy of the letter dated 20-3-1986 which was signed by the Director of NISL. The second letter dated 20-3-1986 which was filed before the CIT (Appeals) was written by them after discussion of the matter by Sri Kothari, Director of the assessee-company, with Sr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the same reasons. On a reference, the High Court held that the statement of Shri Naresh K. Patel clearly established that he was instrumental in bringing both the purchaser and the supplier together: in other words, he introduced the supplier to the purchaser. The High Court further held that the reply of M/s. Arvind Mills Ltd. that they had purchased the above machinery directly from the assessee-company meant that they had not purchased through any stockist or dealer and it would not mean that Shri Naresh K. Patel was not responsible for bringing the purchaser and the supplier together. In these circumstances, it was held by the Gujarat High Court that it would be difficult to enclose, as has been done by the subordinate revenue authorities as well as by the Tribunal, that no services were rendered by him and that Shri Naresh K. Patel had rendered some services in introducing the parties to each other. This case clearly established that the commission paid for introducing the parties would be a payment for services rendered. Since the orders procured were for the purposes of the assessee before us, the expenditure incurred by the assessee would be allowable under section 37 o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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