TMI Blog2006 (7) TMI 536X X X X Extracts X X X X X X X X Extracts X X X X ..... y the learned counsels, we restore the matter back to the Assessing Officer with a direction to ascertain as to whether the expenses are incurred prior to or setting up of the business relating to manufacture of garments newly set up. If the expenses pertain to the period subsequent to the set up of the business, the same has to be allowed as revenue expenditure. If the expenses are prior to setting up of the business, the same has to be included in the pre-operative expenses to be allocated over the fixed assets. The assessee shall furnish necessary details in this regard to the Assessing Officer who shall examine the issue and decide the allowability or otherwise of such expenses. 3. The next ground of appeal for assessment year 1995-96 by the assessee is against disallowance of Rs. 39,35,320 being provision for doubtful debts and advances. At the time of hearing, learned counsel for the assessee did not press the ground. For want of prosecution, this ground is dismissed. 4. An additional ground has been raised relating to allowability of expenses claimed in assessment year 1996-97 and disallowed on the ground that it pertains to assessment year 1995-96. 4.1 At the ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturing unit for cutting, printing and embroidery of knitted garments. This unit commenced production in February, 1995. The Assessing Officer found that the assessee debited a sum of Rs. 1,42,12,798 in the balance sheet as pre-operative expenditure pending allocation and capitalized the same in the fixed assets by transferring it proportionately to building and plant and machinery heads. However, in computation of income the same had been claimed as revenue expenditure. The Assessing Officer held that the entire expenditure is to be treated capital expenditure. The Assessing Officer also held that the expenditure was incurred by the assessee to bring the fixed assets into existence for the business and had also been admitted so by the assessee as mentioned in the balance sheet. Thus the total amount of Rs. 1,42,12,798 was treated as capital expenditure and not held as revenue expenditure. 7.1 Learned CIT(A) held that in regard to the claim of interest expenditure under section 36(1)( iii ), the decision of Hon ble Supreme Court in the case of Veecumsees v. CIT [1996] 86 Taxman 243 is applicable. Out of the financial expenses of Rs. 82,07,194, interest element is Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts has now started manufacturing the same. Thus, it is a case of import substitution. It is not even a separate line of activity and it is a case of integrating trading activity with manufacturing activity. However, in ultimate conclusion, the business is that of garments only. Thus, it amounts to extension of existing business and not setting up a new business. 7.4 We have considered the relevant facts, arguments advanced and case laws cited. The question to be decided is whether setting up of the manufacturing unit of garments can be considered as separate business or same business as that of trading in garments. Under section 36(1)( iii ), the amount of interest paid in respect of capital borrowed for the purpose of business or provision is allowed as deduction. This implies that such business or profession should have been carried on by the assessee during the relevant year. Hon ble Supreme Court in the case of Prithvi Insurance Co. Ltd. ( supra ) with reference to the provisions of section 24(2) of the Indian Income-tax Act, 1922 held thus : "That the respondent-company was entitled to the set off claimed by it as the life insurance business and the general insurance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )( iii ) of the Act of 1961. (2) This would be so, even if the capital is invested in order to acquire a revenue asset or a capital asset, because the act of borrowing capital is distinct from the act of investment of that capital to acquire an asset. (3) However, the business for which an asset of enduring nature is purchased with the borrowed capital should not be separate or distinct from the business for the purposes of which the capital is borrowed if deduction under section 10(2)( iii ) is to be allowed. (4) If there is no existing business with reference to which the capital is borrowed and the borrowed capital is invested to purchase a new asset of enduring nature, then the interest paid on such borrowing till the asset so purchased goes into production, increases the cost of the installation of the said asset, and hence should be treated as capital expenditure not covered by section 10(2)( iii ) of the Act of 1922 or section 36(1)( iii ) of the Act of 1961." Hon ble Rajasthan High Court in the case of Mohan Enterprises ( supra ) held as under : "The burden is on the assessee to establish that different ventures constitute part of the same business. Sufficient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Apart from this, the Tribunal found as a fact that the business carried on by the assessee as jeweller and in running the cinema theatre, etc., was composite. In view of this finding also, the assessee was entitled to the deduction of the interest paid on the loans in question under section 36(1)( iii ) of the Act." The Head Note in the case of Rainbow Dyestuff Ltd. ( supra ) reads as under: "The assessee at the material time was a dealer in dyes. The assessee set up a factory for manufacturing dyes at a different place. For the installation of assets certain borrowings were made on which interest has been paid. The Income-tax Officer estimated the interest attributable to the borrowings for the installation of the assets at Rs. 82,283 and disallowed the same treating the payment as of capital nature. This was upheld by the Tribunal. On a reference : Held, that the assessee was engaged in trading business. He started an independent manufacturing business at a different place. Considering the nature of trading business and considering in depth the business of manufacturing since started by the assessee, the Tribunal had arrived at the conclusion that the two businesses wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commenced production in February, 1995. Thus, it could not be said that the business originally carried on, i.e., trading in goods is the same business as manufacturing garments. Though the assessee was earlier trading in garments itself, manufacturing of garments is carried on with help of separate staff, separate premises and separate funds. The assessee, who was hitherto calling trader has entered into the shoes of manufacturer. The test laid down by Hon ble Supreme Court in Prithvi Insurance Co. Ltd. s case ( supra ) as to "if one business cannot conveniently be carried on after the closure of the other, there would be strong indication that the two constitute the same business" will go to show that even if the assessee was not carrying on manufacturing business, the trading business was being carried on earlier. Even after the manufacturing business is carried on and even if the trading business is closed thereafter, the manufacturing division is not going to be affected. There is no existing business for manufacturing garments with reference to which the capital is borrowed. Thus, there is no inter-connection, inter-lacing and inter-dependence of two units. Hon ble Gujar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not have been disallowed again. Since I have upheld the disallowance of Rs. 20,37,172 and as admitted by the Assessing Officer this amount of Rs. 15,53,582 stood included in the amount confirmed by me, the second disallowance of Rs. 15,53,582 is held to be unjustified and is deleted." 9.1 At the time of hearing, both the counsels agreed that the overall disallowance of Rs. 20,37,172 which has been sustained by learned CIT(A) and is challenged by the assessee in its appeal for assessment year 1995-96 is restored back. This being the duplication of disallowance is not justifiable. In view of the submission of both the counsels to which we agree, the appeal of revenue is without merit and is dismissed. 10. In the assessee s appeal for assessment year 1996-97, the first ground of appeal relates to disallowance of provision of bad debts amounting to Rs. 23,07,049. At the time of hearing, this ground was not pressed. For want of prosecution, this ground is dismissed and the disallowance of provision of bad debt is confirmed. 11. The next ground of appeal relates to disallowance of expenses amounting to Rs. 20,37,132 being prior period expenses. 11.1 At the time of hearin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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