TMI Blog1995 (2) TMI 159X X X X Extracts X X X X X X X X Extracts X X X X ..... as it was prejudicial to the interest of revenue. According to the CIT, the order was erroneous on account of the reason that the chemical division plant had not been set up during the accounting period relevant to the assessment year 1985-86. He accordingly initiated proceedings under section 263 and, after having heard the assessee, passed the impugned order under section 263 dated 16-8-1989 and directed the Assessing Officer to withdraw the depreciation amounting to Rs. 19,40,714 and the investment allowance of Rs. 8,00,082 granted for the year. It is this order which has brought the assessee before us. 3. The CIT has noted in his impugned order that during the course of the assessment proceedings the IAC (Assessment) had come to the conclusion that creation of chemical division was to avoid or reduce payment of proper taxes and that the assessee tried to set off the profits of the food division Rs. 22,93,922 against the deductions available in chemical division. The sale of chemical division was at Rs. 22,810 as against the expenditure of Rs. 35,82,082 incurred by the assessee. The IAC therefore, refused to accept the loss computed by the assessee-company for chemical divisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this sense, the business of manufacture of OPB was not set up at least till 31-3-1985. The CIT was further of the opinion that even though bulk purchases of raw materials were made, increased wages were paid, yet even for a trial run of the plant and machinery such expenditure would be necessary. This expenditure was thus not indicative of the fact that the chemical division had been set up. One of the reasons which persuaded the CIT to revise the order is found in sub-para (iv) of para 4 of his order and reads as under : " (iv) It is to be noted that while trying out the process, almost all the incidents (barring wastage) which would occur in production of commercial basis would normally be present. But, only after trying out the capability of the plant to produce, to the expected standard, the end-product smoothly on mass scale, the commercial production can be reasonably started. In the case of the assessee, the meagreness of the end-product (10 kgs. of OPB) obtained till 31-3-1985 shows that the assessee was still trying out the capabilities of the plant to produce the end-product on mass and commercial basis. " In conclusion, the CIT found that the said plant and machine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucts. It had only added chemical division to its pre-existing business.The dispute with regard to the setting up of business and admissibility of depreciation and investment allowance will have therefore to be considered in this context. Reference in this connection was made to the following decisions : (1) Bansidhar (P.) Ltd. v. CIT[1981] 127 ITR 65 (Guj.), (2) CIT v. R.M. Maruthai Naidu Sons [1991] 192 ITR 666 (Mad.), (3) CIT v. Modi Industries Ltd. (No. 3) [1993] 200 ITR 341 (Delhi), (4) CIT v. Expanded Metal Mfrs. [1991] 189 ITR 317 (All.), (5) Chhabirani Agro Industrial Enterprises Ltd. v. CIT [1991] 191 ITR 226 (Pat.), (6) Commentary under the caption 'Test of Interconnection and unit' by N.A. Palkhivala, 8th Edn., Vol. 1, page 878. 7. As against the above, it was contended by the learned departmental representative that there was no dispute that the assessee had in fact installed plant and machinery and had also conducted trial runs of the same before 31-3-1985. But then, commercial production had not commenced on or before that date. This is indicated by the fact that only a meagre quantity of 10 kgs. of end-product was obtained up to that date. This further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge, it would be convenient to discuss first the case law cited on behalf of the department. The first such decision is the judgment of the Supreme Court in the case of Ramaraju Surgical Cotton Mills Ltd. On the basis of this decision, it was urged by the learned departmental representative that since the new unit, namely, the chemical division, was not ready to discharge the function for which it was set up, it could not be said to have been set up. The new unit could be said to have been set up only when it is put into such a shape that it can start functioning as a business or a manufacturing organisation. We have made a study of this decision of the Supreme Court, but find that it hardly offers any material assistance to the revenue in the case before us. Firstly, that decision was under the Wealth-tax Act and on that valuation date only the building which was to house the factory/establishment was completed. It was in that context that it was held that business had not been set up. The next decision relied upon by the learned departmental representative was the judgment of the Allahabad High Court in the case of Sir Shadi Lal Sugar General Mills Ltd. In fact, this is a decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction with standardization and stabilisation of process the required or larger quantity of the end-product could not be manufactured could not justify a conclusion that the business had not been set up or that commercial production had not commenced. 11. The next decision which was referred to by the learned departmental representative was the judgment of the Gujarat High Court in Speciality Paper Ltd.'s case. Further such reference was made to the decision of the High Court in the case of Suhrid Geigy Ltd. From a study of these two decisions we again find that they do not provide any support to the case of the revenue. In the first case, installation of wet press was necessary for the purposes of producing the correct quality paper and such plant had not been installed during the accounting period relevant to the assessment year. It was in that context that it was held that the business could not be said to have been set up. In the case before us, it is not disputed that all the plant and machinery required for the production of the manufacture of the intended commodity was fully in its place and it was only because of the problem in the standardization and stabilisation of proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he laying of electrical plant for getting power supply constituted revenue expenditure or capital expenditure. It was an admitted position that the factory could start functioning only when it received the power connection and not earlier, although machinery had been installed. The facts of that case were thus materially different from the facts before us. This decision of the Bombay High Court, therefore, cannot validly be pressed into service by the revenue. 13. The next decision is the judgment of the Bombay High Court in the case of Piem Hotel (P.) Ltd. In this case, although the hotel building was completed, yet the hotel had not started functioning and in the meanwhile the assessee had given the banquet hall on lease in the incomplete building. it was on these facts that the Court held that the assessee could not be said to have set up its hotel business. The facts in the case before us are clearly different, inasmuch as the assessee had not only conducted trial production but also had produced some quantity of end-product and intermediate products. The other decision on which the department placed reliance is again the decision of the Bombay High Court in the case of Ralli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g commenced and the approach must be from a common sense point of view. If this ratio of the decision is applied to the facts of the present case, the only conclusion would be that the assessee had set up and commenced its business during the year under appeal. The next decision is again the decision of the Gujarat High Court in Saurashtra Cement Chemicals (P.) Ltd.'s case wherein it has been laid down that 'business' connotes a continuous course of activities. All the activities which go to make up the business need not be started simultaneously in order that the business may commence. The business would commence when the activity which is first in point of time and which must necessarily precede all other activities is started. On the application of this ratio to the facts of the present case, there cannot be a conclusion other than that the assessee had set up and commenced its business of chemical division. The next decision referred to is the judgment of the Bombay High Court in Forging Stamping (P.) Ltd.'s case. It has been held therein that when a company has been incorporated, installation of machinery has been completed, construction of factory building has been comple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w material was the date of commencement of production, as no purpose would be served by blocking monies for purchase of raw materials, unless the assessee really wanted to commence business. On these facts, the expenditure incurred after 9-6-1973 was held to be revenue expenditure. Last decision relied upon by the learned counsel for the assessee was the judgment of the Supreme Court in the case of ClT v. Sarabhai Management Corpn. Ltd. In this case, the Supreme Court was dealing with the case of business of acquiring immovable property and giving it on lease and licence basis or on lease with all appurtenant amenities. It was held therein that the business commenced when property is ready and the assessee is in a position to offer services to licensees. 15. Apart from the above rulings, the learned counsel for the assessee has cited more decisions referred to in para 6 of this order in connection with the fact-situation where an assessee has not started a totally new business, but has only added one more division to its pre-existing business. Our above discussion of the facts and the case law leads us to the conclusion that the assessee in the present case by completing all the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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