TMI Blog2006 (5) TMI 440X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. It was claimed that all such expenses have to be capitalized and added to the cost of the assets for the purpose of allowing depreciation. The Assessing Officer accepted this claim in principle, but, held that the following expenses are not related to bringing into existence the new assets : Entertainment Rs. 5,09,734 Guest house expenditure Rs. 15,439 Gifts in excess of Rs. 1,000 Rs. 1,03,415 He, therefore, disallowed the claim to the extent of the above expenses totalling to Rs. 6,28,588. The learned Commissioner of Income-tax (Appeals) upheld the finding of the Assessing Officer for similar reasons. Learned counsel appearing before us on behalf of the assessee-company contended that all the expenses have a direct nexus with the setting up of the new project and the same have been incurred by the assessee only for the purpose of bringing into existence the assets, prior to commencement of the business. It is submitted that the project was being set up near Panvel and the employees associated with the construction of the project and various other technical personnel had to go to Panvel for supervising the setting up of the project. For this purpose, the guest house was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is contended that there is no basis for the assumption of the Revenue authorities that these expenses have no relation with the setting up of the project. The learned Commissioner of Income-tax (Departmental representative) supported the orders of the Revenue authorities and contended that the expenses are in the nature of personal expenses and cannot be said to have been incurred for setting up of the project. It is also submitted that entertainment expenses and guest house expenses are otherwise not allowable under the Income-tax Act. We have given a careful consideration to the rival submissions and have gone through the facts. In so far as the expenditure on gifts is concerned, we are of the view that this expenditure cannot be said to have been incurred for bringing into existence of any assets. However, with regard to entertainment expenses and guest house expenses, apparently these expenses have been incurred during the course of setting up of the new project and these expenses have a direct nexus with setting up of the new project. By virtue of some other provisions of the Income-tax Act, certain expenses may be disallowable or partly disallowable, but, for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connection with the setting up of the new project and as and when such equipment become unusable, the same are sold away as scrap. The expenditure incurred on acquisition of such materials is added to the cost of the project prior to commencement of production and the receipts realized on sale of non-useful materials are deducted from the cost of the project. The Assessing Officer rejected the assessee s claim and held that the receipts of Rs. 46,05,942 was chargeable to tax as revenue receipts as held by the Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT [1997] 227 ITR 172. The learned Commissioner of Income-tax (Appeals) upheld the Assessing Officer s order. Learned counsel appearing for the assessee submitted that the receipts have a direct nexus with the setting up of the project and, therefore, the same must be deducted from the cost of the project and cannot be independently brought to the charge of tax. He relied on the Supreme Court decision in the case of CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315. The learned Commissioner of Income-tax (Departmental representative) supported the orders of the Revenue authorities. We have considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the Assessing Officer to exclude the aforesaid sum from the total income of the assessee and reduce it from the cost of the project. Ground No. 3 pertains to disallowance of depreciation of Rs. 18,98,300. The facts are that the Assessing Officer disallowed assessee s claim for depreciation to the extent of Rs. 18,98,300 solely on the ground that the aforesaid depreciation was disallowed while processing the return of income under section 143(l)(a) of the Income-tax Act. Since no other reasons were mentioned by the Assessing Officer, when the matter came up before the learned Commissioner of Income-tax (Appeals), he called for remand report and the Assessing Officer submitted his remand report vide letter dated December 9, 1998. The Assessing Officer stated that the assets were put to use in the accounting year for a period of less than six months and therefore depreciation was allowable at 50 per cent. of the normal rate. The Assessing Officer informed that in respect of plant and machinery, the assessee claimed depreciation correctly at 50 per cent. of the prescribed rate. However, in respect of certain items like furniture, equipment and building, the assessee claimed full de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r view, if the business itself has not commenced, it cannot be said that any assets have been used for the purpose of business. The intention and the object of section 32 is to allow deduction from the income earned by the assessee from the exercise of business or profession. It is true that in the present case, some of the assets might have been used by the assessee for the purpose of setting up of the new project. In our view, the user of the assets for business, for the purposes of section 32, will start only after the business is commenced. Learned counsel for the assessee has relied on the Bombay High Court decision in the case of Bralco Metal Industries P. Ltd. v. CIT [1994] 206 ITR 477, for the proposition that the expression for the purposes of the business is wider in scope than the expression for the purpose of earning profits . It is submitted that even before the assessee started earning profit, the assets can be used for business purposes. In our view, the Bombay High Court decision cannot be applied to the facts of the assessee s case. There is no dispute that the commercial production was commenced in the month of March, 1995. Therefore, the assessee has carried o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for depreciation. The issue shall be redecided accordingly. The last ground of appeal pertains to rejection by the Revenue authorities of the assessee s claim for capitalization of the sum of Rs. 97,39,722 being depreciation for the period prior to commencement of business. The assessee claimed that various assets were being used during the course of setting up of the project and such assets depreciated on account of such use. The assessee, therefore, suffered loss on account of diminution of the value of such assets and such loss has to be capitalized and added to the cost of the project. The Revenue authorities rejected this claim on the ground that such notional loss cannot be added to the cost of the project for the purposes of allowing depreciation. We have heard both the sides on this issue and have gone through the facts. In our view, the claim made by the assessee-company is not acceptable. The assessee acquired assets during the setting up of the project and such assets might have been used by the assessee for the purposes of setting up of the project. Once the business commences and such assets continue to be used for business purposes, the assessee will be entitled ..... X X X X Extracts X X X X X X X X Extracts X X X X
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