TMI Blog2005 (8) TMI 333X X X X Extracts X X X X X X X X Extracts X X X X ..... e completing the assessment under s. 143(3) of the Act, the AO noted that the assessee had incurred the following expenditure during the relevant previous year: Rs. (1) Payment made to MSEB for 220 KV 4,00,00,000 power supply at Ratnagiri to manufacture PVC resin (2) Cost of poles used for laying said 6,31,611 power supply line (3) Expenses towards construction of 12,12,000 approach road and culvert (4) Expenses towards construction of 1,57,500 Thorli Nala ------------ 4,20,01,111 ------------ 4. He further noted that the expenses were not debited to the P L a/c and were not claimed as a deduction in the return but were claimed only in the course of assessment proceedings by letter dt. 10th March, 1994. Apparently, he had called upon the assessee to explain how the above items of expenditure were allowable as revenue expenditure. In response thereto, it was contended that so far as the laying of the high tension cables were concerned, for which the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. vs. CIT (1980) 17 CTR (SC) 113: (1980) 124 ITR 1 (SC). 7. The AO examined the facts and perused the judgments cited above and found that the expenditure was allowable as revenue expenditure as claimed in the assessment. The relevant discussion is contained in pp. 10 to 12 of the assessment order. It has to be clarified here that the assessee had also claimed expenditure of Rs. 6,31,611 as cost of poles used for laying the power line. The AO did not discuss this item of expenditure separately. However, in the computation of the taxable income at p. 16 of the assessment order, it is seen that he has allowed the entire payment of Rs. 4,06,31,611 as deduction. Apparently, the AO was convinced that the cost of poles amounting to Rs. 6,31,611 was also of the same nature as the amount of Rs. 4,00,00,000 paid to MSEB for laying high tension power lines. 8. By notice dt. 2nd Dec., 1994 issued under s. 263 of the Act, the CIT called upon the assessee to show cause why the aforesaid expenditure aggregating to Rs. 4,20,01,111 should not be treated as pre-operative. expenses and disallowed since the Ratnagiri project for manufacture of resin has not commenced production as on 31st Mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the CIT relied on the judgment of the Supreme Court in the case Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC). 9. The assessee is in appeal before the Tribunal challenging the assumption of jurisdiction by the CIT under s. 263 and also his decision on merits. 10. We have carefully considered the rival contentions and the facts of the case. In our view, the Ratnagiri unit cannot be considered to be a new business. It should be considered as an extension or expansion of the same business carried on by the assessee. The assessee was manufacturing PVC pipes in its Chinchwad unit in Pune since incorporation in the year 1981. The manufacture of PVC pipes involved substantial import of PVC resin which constituted 75 to 90 per cent of the finished products. It was, therefore, felt the assessee should itself manufacture PVC resin. That would also save substantial foreign exchange. The memorandum of association was, therefore, got amended after passing a special resolution in the general meeting of the company. Whereas even before the amendment, the memorandum of association did contain a broad object which included the manufacture of PVC resins, it was con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pal vs. CIT (1987) 66 CTR (MP) 207 : (1988) 170 ITR 41 (MP), the assessee was carrying on a rice and Dal mill and borrowed money for setting up a factory for the manufacture of straw boards by using waste from the rice and Dal mill. The Madhya Pradesh High Court held that it was only a case of expansion of the business as it was a case of forward integration. In CIT vs. Shah Theatres (P) Ltd. (1988) 67 CTR (Raj) 120 : (1988) 169 ITR 499 (Raj), the assessee was carrying on business in exhibition of film and during the year it started construction of a theatre of its own for the purpose of exhibiting the films. The Rajasthan High Court held this to be a case of expansion of the same business. In CIT vs. Malwa Vanaspati Chemicals Co. Ltd. (1998) 149 CTR (MP) 283 : (1997) 226 ITR 253 (MP), the assessee was manufacturing vegetable oils and chemicals and put up a new unit for the manufacture of a particular variety of acid which was to be used for the manufacture of dyes. This was considered to be a case of expansion of the business. 12. In the prospectus issued by the assessee-company for raising monies in respect of Ratnagiri unit for issue of redeemable convertible debentures, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arate management. This is belied by the statement made by the prospects under the head "management" at p. 18 which refers to the same board controlling the PVC resins project also through Mr. K.P. Chhabria and Dr. A.S. Kane. This gentleman was made in-charge of the project but only under the control of common board of directors headed by Mr. P.P. Chhabria. The fact that 280 people have to be recruited does not mean that they would constitute a separate source of power to manage the Ratnagiri unit. They would also have to act only under the control and supervision of the board of directors, which is one and Shri K.P. Chhabria and Dr. Kane. There is no indication in the prospectus or anywhere in the record to show that the staff to be recruited would be reporting to a different board or a different authority in the hierarchy. 14. So far as the common business organization is concerned, the CIT has rejected the assessee's claim that there is a common business organization on the ground that an independent infrastructure is being set up by the assessee in the new project in Ratnagiri. He has also stated that since there is no common administration, there can be no common business org ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommon place of business. The PVC manufacturing unit had to be put up near a port so that the EDC could be imported at least during the initial years. It was therefore not feasible for the company to put up the PVC resin unit in Chinchwad itself. These are decisions which are taken after considering several factors such as the financial implication, technical feasibility, environmental considerations, incentives given by the Government for locating industrial unit in backward area and so on. As already noted, the registered office of the assessee-company continues to be in Chinch wad, Pune, and it is from this office that the board of directors functions and. supervises and controls both the Chinchwad unit and Ratnagiri unit. We have already adverted to this aspect. Therefore, merely because the two units are situated at two different places, it cannot be said that there is no common place of business. The conclusion of the CIT to contrary cannot be upheld. 16. The CIT has mentioned that the assessee acquired a separate industrial licence for setting up of PVC resin plant. These are the requirements of the industrial policy of the Government of India and it was incumbent upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The first is that of the Calcutta High Court in the case of Ashoke Marketing Ltd. vs. CIT (1994) 208 ITR 941 (Ca1). In this case, the assessee was manufacturing instruments and commenced manufacturing of mini computers and micro-processors based system. For this new activity, no licence had been received. Further, the assessee did not produce any material before the Tribunal or the IT authorities to show that the manufacture of new item was part and parcel of the. same business. There was only a mere assertion that there was unity of control between the different activities. The assessee was a small scale unit and the new item could be manufactured only in a large scale. The large scale unit required a licence which was not obtained by the assessee. Further, there was evidence to show in the directors report the mini computers division and instrument division did not carry out any business activity. It was on the basis of these facts that the Calcutta High Court held that the assessee had not established its case that the new units were part of the existing business. As regards the judgment of the Kerala High Court in Travancore Chemical Manufacturing Co. Ltd. vs. CIT (1992) 102 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection with the Ratnagiri project. Therefore, the Departmental authorities themselves, appear to have accepted the claim that the Ratnagiri project cannot be considered as a separate or new business of the assessee. Their action in allowing the aforesaid expenditure indicates that they have accepted the position that the Ratnagiri project forms part of the existing or same business of the assessee. 20. For the above reasons, we are unable to accept the findings of the CIT that the expenditure of Rs. 4,20,01,111 should be considered as pre-operative expenses since the PVC resin project in Ratnagiri District did not commence production as on 31st March, 1991. The conclusion of the CIT that the pre-operative expenses cannot be allowed as a deduction emanates from the fundamental decision that the Ratnagiri project is new unit and constitutes a separate business of the assessee. Since we have held that the Ratnagiri unit must be considered as a part of the same business of the assessee and not a new business, the conclusion of the CIT that the amount of Rs. 4,20,01,111 should be considered as pre-operative expenses and to be disallowed on that basis cannot be upheld. 21. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court cited above was clearly distinguishable, inasmuch as in that case the expenditure was only a meagre amount of Rs. 84,633 whereas in the present case, the expenditure is of Rs. 10.29 croreS for raising debentures of Rs. 118.95 crore which amounts to 8.5 per cent of the debenture issue. He further noted from the papers relating to the debenture issue that 26 per cent of the debentures were to be converted into the equity in a period of 18 months and the balance of 74 per cent was to be redeemed after 10 years. According to him, the funds were raised for financing the Ratnagiri project for manufacturing PVC resin which was an entirely new product line embarked upon by the assessee. The assessee never manufactured PVC resin earlier. Under these circumstances, he considered the expenditure to be of capital account and disallowed the same. The assessee, would appear to have relied on Circular No. 56, dt. 19th March, 1971 issued by the Board wherein it was mentioned that the judgment of the Supreme Court in the case of India Cements Ltd. would continue to apply notwithstanding the provisions of s. 35B relating to amortization of the expenditure. The AO took the view that the debent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase before the Tribunal the date of conversion fell within the same accounting year. Even then the Tribunal held that this would not make any difference to the principle that what is to be seen is the factual position at the time of incurring of the expenses. In the present case, 26 per cent of the debentures was to be converted in 18 months. The conversion of the debentures was to take place at the end of 18 months from the date of allotment of convertible debentures. This date does not fall in the previous year ended 31st March, 1990. Therefore, the order of the Bombay Bench of the Tribunal cited above as well as the judgment of the Calcutta High Court cited above, apply with greater force to the present case. 29. We, therefore, delete the disallowance of Rs. 10,29,98,005 and allow the first ground. 30. The second ground relating to the expenditure on entertainment is dismissed as not pressed. 31. The third ground relates to the expenditure of Rs. 5,776 incurred on gift articles. After considering the orders of the IT authorities and the smallness of the amount, we see no reason to interfere. 32. The ground NO.4 relates to the disallowance of the claim of deduction of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ady been narrated while disposing of the appeal of the assessee against the order passed by the CIT under s. 263 of the Act for the asst. yr. 1991-92 itself. We have held in that appeal that the PVC resin project at Ratnagiri cannot be considered to be a new business or separate business and that it should be considered as part of the existing business of the assessee. The learned CIT, Departmental Representative, referred to the judgment of the Supreme Court in the case of Challapalli Sugars Ltd. This decision was in fact relied upon by the CIT in his order passed under s. 263. In our decision in the assessee's appeal against the CIT's order, we have held that the aforesaid judgment of the Supreme Court does not apply to the facts of the present case. 37. The learned CIT-Departmental Representative, further relied on the Expln. 8 to s. 43(1) of the Act which was introduced with retrospective effect from 1st April, 1974. Sec. 43(1) defines "actual cost" for the purposes of ss. 28 to 41 of the Act. The said section says that the actual cost means the actual cost of the assets to the assessee reduced by that portion of the cost which has been met directly or indirectly by any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eys which are specifically borrowed for the purchase of a fixed asset may be capitalized only relating to the period prior to the asset coming into production, i.e., relating to the erection stage of the asset. However, once the production starts, no interest on borrowings for the purchase of such assets should be capitalized. In spite of these clear guidelines, as also the consistent view of the Department in this matter, some taxpayers had adopted a contrary stance and had capitalized such interest. The first decision in favour of this stance had been rendered on 13th May, 1974, in the case of CIT vs. J.K. Cotton Spinning Weaving Mills Ltd. (1975) 98 ITR 153 (All). This decision as well as the subsequent decisions were contrary to the legislative intent. Hence, in order to enable the Government to collect the tax legitimately due to it for the earlier years, a clarificatory amendment to this provision has been made retrospectively from 1st April, 1974 and will, accordingly, apply in relation to the asst. yr. 1974-75 and subsequent years." 39. It will be seen from the above that the Explanation dealt with capitalization and prohibited capitalization of the interest after the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ports fully the assessee's stand that the aforesaid Explanation is not applicable to the present case. 43. We, therefore, hold that the CIT(A) was right in allowing the deduction in respect of the interest. The ground is dismissed. 44. The second ground relates to the allowance of 20 per cent given by the CIT(A) in respect of entertainment expenses considering the employees' participation. After hearing both the sides, we see no reason to interfere. 45. The ground No.3 in the appeal is related to ground No.4 in the assessee's appeal. It relates to the allowability of the premium payable on reduction of redeemable non-convertible debentures. We have already held while dealing with the assessee's ground that the CIT(A) was right in directing the proportionate allowance which conforms to the judgment of the Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT. Accordingly, the decision of the CIT(A) is confirmed and the ground is rejected. 46. In the result, the appeal filed by the Department is dismissed. ITA No. 967/Pn/1995 for asst. yr. 1992-93 (assessee's appeal) 47. The first ground in this appeal is directed against the disallowance of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he judgment of the Hon'ble Bombay High Court in the case of Excel Industries Ltd. and held that the expenditure cannot be treated as capital expenditure. A perusal of the assessment order shows that the AO has disallowed the expenditure/payment by following the order of the CIT under s. 263 of the Act for the asst. yr. 1991-92. We have already noticed while disposing of the assessee's appeal against the order of the CIT under s. 263 of the Act for the asst. yr. 1991-92 that the CIT has taken a view that the expenditure represents pre-operative expenditure, i.e., they were incurred before the Ratnagiri unit commenced production and should therefore, be disallowed. This was based on the footing that the Ratnagiri unit was a separate business of the assessee. The CIT(A) does not appear to have gone into this question, viz., whether the Ratnagiri unit was a separate or new business of the assessee but appears to have rested his decision on the fact that the expenditure cannot be considered as capital expenditure. The Department has reiterated before us the ground that the expenditure should be disallowed for the reasons given by the AO. Be that as it may, since the reasons given by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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