TMI Blog1987 (1) TMI 487X X X X Extracts X X X X X X X X Extracts X X X X ..... s and liabilities. Soon after taking over this business from Hindustan Tools Dies, Laxmi Mansion, the assessee launched a scheme of expansion and diversification of the manufacturing job which was done by the existing business. The assessee made purchases of plant and machinery amounting to ₹ 1,96,208 for the assessment year 1975-76. ₹ 2,10,355 for the assessment year 1976-77, ₹ 5,03,053 for the assessment year 1977-78 and ₹ 63,229 for the assessment year 1978-79. The machinery and plant which he had obtained from Hindustan Tools Dies, Laxmi Mansion, was valued at ₹ 5,21,411. According to the assessee he had pumped into the business quite a substantial amount of fund to make these purchases which he installed in a shed obtained from Hindustan Tools Dies, Laxmi Mansion, which was lying vacant and unused. As a result of installation of new plants and machineries of such value as given above, he was able to produce several new articles which had not been produced so far. These were high speed steel single point, tools and tool bits, high speed steel milling cutters and high speed steel reamers and tungsten carbide tipped mining tools. It was also su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... industrial unit was independent, distinct unit. Its coming into operation increased the sale many-fold as also its profit as given out in the table reproduced above. The ITO, however, was not persuaded and he declined the request of the assessee to allow the benefit of exemption under section 80J. He rejected the claim of the assessee for two reasons. One of the grounds was that the assessee had maintained composite accounts of all the trading done. He observed 'the very fact that the assessee has not separately maintained accounts in respect of the business done by the use of the new plant and machinery strikes at the root of the claim. Even if it is assumed that a new industrial undertaking came into being, the base for deduction under section 80J, i.e., the profit of the so-called new unit is not available'. Another ground for his rejection was that he refused to accept that the assessee had set up 'a separate, independent and distinct, trading and industrial undertaking' for diversification of expansion of scheme because according to him the business was done by the newly added machinery and plant which had merged with the business taken over by the company. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... versification and expansion of production. According to the Commissioner (Appeals), clause (ii) of sub-section (4) of section 80J forbade the transfer to a new business of building, machinery or plant previously used for any purpose. This clause underwent amendment by section 12 of the Finance Act, 1975 with effect from 1-4-1976. By the amendment the words 'a building' were deleted. Therefore, the Commissioner (Appeals) held that the assessee was not entitled to 80J deduction for the assessment year 1974-75 because he had used the building in the two assessment years 1974-75 and 1975-76 for housing its machinery and plants. It was only when the word 'building' was omitted the claim of the assessee could not be made to suffer on account of user of the shed for housing the new machineries and plants. Therefore, the Commissioner (Appeals) upheld the finding of the ITO for disallowing the benefit under section 80J for the assessment years 1974-75 and 1975-76 but he upheld the claim of the assessee for the assessment years 1976-77 to 1978-79. Therefore, both the revenue and the assessee felt aggrieved. The assessee for upholding the finding of the ITO for the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erned, we do not find that any of the plea on which the ITO based his claim can be sustained in law. Regarding the point he has made out from the composite accounts maintained by the assessee for the entire business, we reproduce the observation of their Lordships of the Calcutta High Court in the case of CIT v. Dunlop Rubber Co. (I) Ltd. [1977] 107 ITR 182: The assessee in the instant case had kept a composite account and had made apportionment on certain basis on the principle of commercial accounting. With regard to the method adopted by the assessee, the Tribunal said that the method adopted by the assessee could not be said to be wrong, that if the Income-tax Officer found it to be wrong, he could have corrected it and not rejected it wholesale, . . . in the circumstances, the assessee's statement of the profits of the new undertaking had to be accepted. . . . (p. 183) Similar view was taken by their Lordships in CIT v. Rohtas Industries Ltd. [1979] 120 ITR.110 (Cal.) and the Karnataka High Court in International Instruments (P.) Ltd. v. CIT [1980] 123 ITR 11. Their Lordships of the Supreme Court had endorsed the same view in Textile Machinery Corpn. Ltd. v. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in the case, of Rohtas Industries Ltd. ( supra) observed as under: . . . The fact that an assessee by establishment of a new industrial undertaking expands his existing business, which he certainly does, would not, on that score, deprive him of the benefit under section 15C. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion. of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business ... In order that the new undertaking can be said to be not formed out of the already existing business, there must be new emergence of a physically separate industrial unit which may exist on its own as a viable unit (p. 122) 6. It is apparent that new unit set up by the assessee had a new team of workers engaged in the manufacturing concern. In the new business, the assessee had poured more capital which was by any test applied sub-stantialy. The new unit was economically a viable unit. That it was connected with the old business in some way would not deprive the assessee of the bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee for the assessment year 1975-76 on this ground by the Commissioner (Appeals) was misconceived and is, therefore, vacated by us. 7. As far as the claim of the assessee for the assessment years 1976-77 to 1978-79 is concerned, having rejected the pleas advanced on behalf of the revenue, we uphold the finding of the Commissioner (Appeals) and dismiss the appeal of the revenue on this issue. This disposes of the one common issue raised in all these five years of appeal by the revenue and the assessee. 8. We now take up another issue raised in the appeal for the assessment year 1974-75 in the appeal of the assessee. The assessee had made a provision of ₹ 34,033. The ITO disallowed the claim of the. assessee in, respect of a sum of ₹ 752 and turned down the plea of the assessee that the entire provision was to be allowed. In his view, the amount of ₹ 8,752 was not in accordance with the provisions of section 40A(7) of the Act. The Commissioner (Appeals) found that on the basis of actual payment only a sum of ₹ 2,582 was allowable. He has dealt with this issue in para 4 of his order where he held that the assessee was not entitled to seek a deduction on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has rightly been held to be deductible in assessing the assessee's real profits from business. Same view has been taken by the Supreme Court in CIT v. Nickles Engg. Co. [Civil Appeal No. 3372 (NIT) of 1979, dated 11-8-1983]. Taking this view of the matter, we have no doubt left in our mind that the assessee is entitled to relief and the disallowance made by the Commissioner (Appeals) is due for deletion. Similarly, we dispose of the appeal on this issue raised by the assessee for the assessment years 1975-76 and 1976-77 and vacate the disallowances made by the Commissioner (Appeals). 9. In the assessment year 1974-75, the assessee had raised a further issue regarding a disallowance made from expenditure incurred on the vehicle upkeep and repair expenses. Similarly, a part of the depreciation on the vehicle has also been disallowed. The Commissioner (Appeals) had dealt with this issue in para 5 of his order. The ITO had disallowed one-fourth expenditure and one-fourth depreciation claimed on the vehicle on account of personal use of cars by the directors. The Commissioner (Appeals) restricted the disallowance to one-sixth of the expenditure and depreciation allowance c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT Appeal No. 560 (Pat.) of 1983, dated 22-7-1985 for the assessment year 1979-80. The Tribunal upheld the finding of the Commissioner (Appeals) that the rental income of property in question was to be treated as income derived from business. Therefore, following the said order, we uphold the finding of the Commissioner (Appeals) and dismiss the appeal of the revenue. 13. Another issue raised in this appeal is in respect of the depreciation allowed by the Commissioner (Appeals) on property which had been let out on rent but the rental income in the preceding paragraph had been held to be income derived from business. We have scanted the order of the Commissioner (Appeals). We have not been. able to find the finding of the Commissioner (Appeals) on this issue. Therefore, in our view the issue does not arise out of the finding of the Commissioner (Appeals) and the ground of appeal raised by the revenue is incompetent and is liable only be dismissed. We do so. 14. There is another issue raised regarding the charging of interest of ₹ 4,794 under section 217 of the Act by the ITO. The Commissioner (Appeals) has dealt with this issue in para 20. Reading through his finding, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nickles Engg. Co.'s case (supra). The facts in this case were that the High Court declined to go into and apply the provisions of section 40A(7), as the income-tax authorities had not mentioned and had not taken note of the provisions of section 40A(7). The High Court under these circumstances declined to consider the applicability of provisions of section 40A(7). The Supreme Court has held reversing the decision of the High Court in this case as under: These being the facts and circumstances of the case, we are clearly of the view that the High Court was not right in declining to go into this question, whereby it permitted a deduction to the assessee which was claimed by the department in contravention of the newly inserted provision. Unquestionably the contention based on the new provision required investigation into facts but the High Court should have called for a supplementary statement of case from the Tribunal on the basis of investigation into facts which could have been directed to be undertaken by the taxing authorities. Since, in our view the question raised is an important one and the impugned judgment of the High Court could be regarded as in a sense as per c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee admittedly did not use any capital in new industrial unit on the first day of the previous year or the assessment year 1974-75. This conclusion is based on the assessee's own written submissions on the statement of facts filed before us as under: The new machines started arriving during the first half of year 1972-73 and the new items were made during the second half of year as such the capital employed for the purposes of claim under section 80J as on 1st day of omputation period, i.e., 1-10-1972 was nil. 4. For the assessment year 1975-76, the relief under section 80J is not admissible in my opinion to the assessee on the ground that the new industrial unit was installed in an old godown which was used earlier. 5. For the rest of the years in appeal also in my opinion, the relief under section 80J is not admissible. My learned brother has held that the relief under section 80J is admissible to the assessee for the assessment years 1975-76 to 1978-79. I do not agree with this conclusion basically as the assessee has utilised only borrowed capital in the new industrial undertaking. This argument was taken by the standing counsel in the course of hearing bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s purpose amounting to ₹ 5.65 lakhs + 5.75 lakhs= 11.40 lakhs. The value of the new machines introduced in the assessment year 1978-79 cannot be taken into consideration as according to the said decision of the Supreme Court in Lohia Machines Ltd.'s case (supra), the capital has to be taken on the first day of the previous year. Thus, the capital introduced in the course of the previous year has not to be taken into account. The assessee, thus, introduced the capital of ₹ 11.15 lakhs while he took loans from Bihar State Financial Corpn. of ₹ 11.40 lakhs. The assessee took this loan from Bihar State Financial Corpn. is admitted by the assessee in the statement of facts filed before us as under: Term Loan application was made with Bihar State Financial Corpn., Patna on 19-1-1973 and sanction letter dated 14-11-1973 for a term loan of ₹ 5.65 lakhs were received. A loan of ₹ 5.75 lakhs was also sanctioned vide letter dated 16-2-1971 and disbursed in the subsequent years. I, therefore, hold that whole of the new unit functioned with borrowed capital and the assessee was not entitled to any relief in any one of the years under consideration und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... THIRD MEMBER ORDER Per Shri Y. Upadhyay, Vice President - The question under section 255(4) has been assigned to the Third Member by the Hon'ble President as there was disagreement on the conclusion by the learned Accountant Member and Judicial Member. It is relevant to mention that the Members, even, has not agreed on the question which they have forwarded to the President for reference to the Third Member. The Hon'ble Judicial Member has formulated the questions as hereunder: 1. Whether, on the facts and in the circumstances of the case, the plea of borrowed capital advanced by the revenue during the hearing of appeals for the assessment years 1974-75 to 1978-79 before the Tribunal could be considered for judging the eligibility of the claim made by the assessee under section 80J? 2. Whether the revenue is entitled to weave out a new case during the hearing of the appeal. before the Appellate Tribunal on which neither the ITO nor the Commissioner (Appeals) had recorded any finding? 3. Whether, on the facts and in the circumstances of the case, the Commissioner (Appeals) was correct in law in disallowing a part of the claim for deduction on gratuit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It also indicated that the turnover and the profit of the assessee were up and the assessee fulfilled the conditions of section 80J. The ITO did not allow the claim of the assessee on the ground that the assessee did not maintain separate accounts for the new unit and that the assessee did not had separate and independent industrial unit. The Commissioner (Appeals) confirmed the order of the ITO on this issue. 4. The learned Judicial Member was of the view that the assessee fulfilled the conditions of section 80J and, therefore, the assessee was eligible for relief. It was indicated by the Judicial Member that the assessee has made investment, new machines were purchased, a separate unit was established and the separate building was constructed. He did not entertain the ground of the department that the assessee, if, has constructed new unit with the borrowed fund, the assessee was not eligible for relief in view of Lohia Machines Ltd.'s case (supra). The Accountant Member, on the other hand, was of the view that the assessee constructed new unit with borrowed capital and, therefore, if the computation of relief is made, the assessee cannot get relief on the borrowed fund in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber has indicated in the order that the assessee took two loans of ₹ 5.65 lakhs and ₹ 5.75 lakhs. The loan of ₹ 5.75 lakhs was granted by Bihar State Financial Corpn. vide their letter dated 16-2-1971. This loan was stated to have been utilised by the firm. The second loan was granted by the said Institution on 19-1-1973 for ₹ 5.65 lakhs. This loan was utilised for the expansion programme. The assessee has purchased machineries for ₹ 11,78,554. Therefore, it is clear that the new project was financed partly by the capital of the assessee and partly by loan. The assessee cannot get relief under section 80J on borrowed capital-Lohia Machines Ltd.'s case (supra). Under the said circumstances the borrowed fund will be deducted and on the balance amount the assessee is only eligible for relief under section 80J. 9. The department took objection that the project was financed by the, assessee out of borrowed fund and, therefore, the assessee cannot be allowed any relief. This objection of the department, for the first time, was taken before the Tribunal. The Accountant Member has entertained the objection and accordingly has given finding whereas the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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