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TMI Blog2014 (7) TMI 640X X X X Extracts X X X X X X X X Extracts X X X X ..... of expenses of Rs. 64,53,786/being related to acquisition of raw materials, by treating the same as capital expenditure." 3. Briefly stated facts relating to the above issue are that during AY 2007-08, assessee has incurred expenses to the tune of Rs. 64,53,786/being related to procurement of raw material. Claim of assessee is that procurement of raw material had taken place before commencement of actual production but after setting up of the business and it has been claimed as pre-production expenses by the assessee company in schedule 17 of its Balance Sheet under the heading "Pre-commissioning Revenue Expenditure". The AO disallowed these expenses holding the same to be capital in nature being incurred before commencement of business or setting up of business. The CIT(A) also confirmed on the premise that the commercial production has started in the factory premises of the assessee company from 16.08.2006 and all these above expenses were incurred till 15.08.2006 i.e. the date before the commencement of production and therefore, the assessee itself has rightly debited under the head "Pre-commissioning Revenue Expenditure". Accordingly, he confirmed the disallowance of these exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing charges for testing of coal and iron ore were incurred. The assessee claimed that the above expenses clearly show that these are expenses relating to raw material cost and accordingly, the same should be allowed as revenue expenditure. It means that the assessee has already set up its business and the assessee's factory has already done trial run and it was in the process of starting of production i.e. w.e.f. 16.08.2006. The CIT(A) as well as the AO admitted that the commercial production had commenced in the factory premises from 16.08.2006 and for that business has already been set up. Ld. counsel for the assessee before us referred to the case law of Hon'ble Supreme Court in the case of CWT Vs. Ramaraju Surgical & Cotton Mills Ltd. (1967) 63 ITR 478 (SC) wherein the set up of business has been explained as under: "The word "set up" in the principle clause, in our opinion, is equivalent to there word "established", but operations for establishment cannot be equated with the establishment of the unit itself or its setting up. The applicability of the proviso has, therefore, to be decided by finding out when the company commenced operations for esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p" means, as is defined in the Oxford English Dictionary, "to place on foot" or "to establish", and in contradistinction to "commence". The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions under Section 10(2). Now, applying that test to the facts here, the company actually commenced business only on the 1st of November, 1946, when it purchased a ground-nut oil mill and was in a position to crush ground-nuts and produce oil. But prior to this there was a period when the business could be said to have been set up and the company was ready to commence business, and in the view of the Tribunal one of the main factors was the purchase of raw materials from which an inference could be drawn that the company had set up its business; b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it can start functioning as a business or a manufacturing organisation. Finally, Hon'ble Gujarat High Court held as under (from head notes): "on the facts, that the new business could not be said to be ready to discharge the function for which it was established, namely, the manufacture of scientific instruments and communication equipment until the machinery necessary for the purpose of manufacture was installed. Obtaining land on lease, placing orders for machinery and raw materials were merely operations for the setting up of the business. In the present case, the business could not be said to be set up until July, 1966, when the machinery had been installed and the factory was ready to commence business. Revenue expenditure incurred before that date would not be a permissible deduction in the assessment for the assessment year 1966-67. 6. From the above case laws and legal position, a clear distinction has been drawn between activities that are for the purpose of setting up of business and activities which constitutes business activities carried out in the performance of business activities of the concern or for carrying out the object with which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 2007-08. A search and seizure operation u/s 132 of the Act was carried out by the Investigation Wing of the Department on assessee's group of cases on 20.09.2007. During the course of search various documents and books of accounts were found and seized from the premises of the assessee. Pursuant to the search notice u/s. 153A of the Act dated 05.09.2008 was issued and served on the assessee on 03.10.2008. The due date for filing of return u/s. 139(1) of the Act for the relevant AY 2007-08 was 1.10.2007. As the search was conducted on group cases of the assessee, the assessee had not filed any return of income u/s. 139(1) of the Act for the reason that the proceedings i.e. assessment proceedings having abated for the concerned year in view of the 2nd proviso to section 153A(1) of the Act. We find that the AO has merely disallowed the loss by observing as under: "Business loss of 2,65,26,210/included in the total loss assessed is not allowed to be carried forward since the return was filed after the due date." The CIT(A) also dismissed the ground raised after considering the submissions of the assessee and second proviso to section 153(1) of the Act b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d." Aggrieved, now assessee came in appeal before Tribunal. 9. Before us, Ld. counsel for the assessee relied on second proviso to section 153(1) of the Act. He argued that in view of second proviso to section 153(1) makes it clear that assessment or reassessment relating to any assessment year falling within the period of six assessment years, which are pending on the date of initiation of search u/s. 132 or requisition u/s. 132A of the Act shall stand abated. Explaining the above second proviso, Ld. counsel for the assessee stated that the second proviso provides that if on the date of initiation of search or requisition u/s. 132 or 132A of the Act. According to him, any assessment or reassessment proceedings relating to any assessment year falling within the period of six assessment years is pending than the pending proceedings shall stand abated and fresh assessment can be done by issuing notice u/s. 153A of the Act. This proviso is specifically enacted to avoid multiplicity of proceedings of assessment of a particular assessment year of the same person. This proviso is specifically brought out by legislature to avoid, on the same material, one regular assessment and another ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 132A after the 31st day of May, 2003, the Assessing Officer shall - (a) issue notice to such person requiring him to furnish within such period as may be specified in the notice, the return of income in respect of each assessment year falling within six assessment years referred to in clause (b), in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139; (b) assess or reassess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made: Provided that the Assessing Officer shall assess or reassess the total income in respect of each assessment year falling within such six assessment years: Provided further that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 132 or 132A of the Act on or after 01.06.2003. The provisions of section 153A open with a non-obstante clause and override the provision of sections 139, 147, 148, 149, 151 and 153 of the Act. The new section 153A of the Act provides that in the case of a person where a search is initiated under section 132 or books of account, other documents or any asset are requisitioned u/s. 132A of the Act after 31.05.2003, the AO shall notwithstanding anything contained in abovementioned sections, issues notice to such person requiring him to furnish within such period as may be specified in the notice the return of income in respect of each assessment year falling within six assessment years as referred to in clause (b) of section 153A(1) of the Act. It is specifically prescribed that the provisions of the Act shall, so far as may be, apply accordingly as if such return was a return required to be furnished u/s. 139 of the Act. However, the second proviso to section 153A(b) of the Act specifically provides that the assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years referred to in section 153A pending on the date of the initi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to in clause (b) of sub-section (1) of section 153A in case of a person referred to in section 153A or section 153C, shall be deemed to have commenced on the date of issue of notice initiating such proceeding and concluded on the date on which the assessment is made;] (iv) a proceeding for assessment for any assessment year, other than the proceedings of assessment or reassessment referred to in clause (i) or [clause (iv) of the proviso or clause (iiia) of the Explanation], shall be deemed to have commenced from the 1st day of the assessment year and concluded on the date on which the assessment is made;]" From the above provision of section 145A, it clarifies the term assessment year, which itself signifies that assessment proceedings have began with the 1st day of the said year. Sub-clause (4) of this Explanation to section 245A of the Act clarifies a proceeding for assessment for any assessment year when to commence i.e. from the 1st day of the assessment year and continues on the date on which the assessment is made. Hence, this provision of section 245A is suitable to draw support and import to the meaning of pending asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, Ld. Counsel for the assessee stated that the following amounts were offered in three assessment years on account of interest income credited to Pre-commissioning Revenue Expenses: Financial year 2004-05 Rs.5,25,955/- Financial Year 2005-06 Rs.6,14,251/- Financial Year 2006-07 Rs. 96,972/- Ld. Counsel for the assessee stated that three amounts totalling to Rs. 12,37,178/having been already subjected to tax, a sum of Rs. 64,53,786/standing on the debit side of P&L Account under the head 'Pre-commissioning Revenue Expenses' should be increased to Rs. 76,90,964/during the relevant assessment year. When this fact was confronted to Ld. CIT, DR, he made a preliminary objection that this issue is not arising from the orders of the lower authorities. In turn, when the same was referred to Ld. Counsel for the assessee he fairly conceded that this issue is not arising from the orders of the lower authorities but for the proper computation of income this issue needs adjudication because it will affect the income of the assessee. On this Ld. CIT, DR agreed that the issue can be remitted back to the file of the AO for fresh adjudication in term of the above facts. We find that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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