TMI Blog2003 (1) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... ated:- 15-1-2003 - Judge(s) : D. K. SETH., R. N. SINHA. JUDGMENT D. K. SETH J.-The question : This appeal, under section 260A of the Income-tax Act, 1961, arising out of the order dated January 18, 1999, passed by the Income-tax Appellate Tribunal, A Bench, Calcutta, in I. T. A. No. 1422/Cal. of 1993 in respect of the assessment year 1989-90, was admitted on the following ground : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest on borrowed capital to the extent it was invested in immovable properties in question was not allowable as business expenditure under section 36(1)(iii)/37(1) of the Income-tax Act, and whether the finding of the Tribunal is perverse ?" Appellant's submission : Learned counsel for the appellant contended that the Tribunal's finding was perverse having regard to the facts and circumstances of the case. He pointed out the perversity, leading us through the materials placed before this court. The immovable property was purchased for the purpose of the business of the assessee which had already commenced the business. The interest paid on the borrowed capital for acquiring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, this cannot be a revenue expenditure. Learned counsel for the respondent further contended that the business has not commenced since there is nothing to indicate in the balance-sheet that any business was in progress in respect of the same. He had also pointed out from the memorandum of association that the business in real estate was never carried on. It was only the business in shares that was being carried on. There is nothing in the report of the company or anywhere else that the assessee was carrying on business in real estate. Learned counsel for the respondent had further contended that this is a question of fact and no question of law is involved. He distinguished the decisions cited by learned counsel for the appellant and contended that these decisions do not help the appellant. He cited the decisions in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC); CIT v. India Steamship Co. Ltd. [1992] 196 ITR 917 (Cal) ; Dey's Medical Stores Manufacturing P, Ltd. v. CIT [1986] 162 ITR 630 (Cal) and Ritz Continental Hotels Ltd. v. CIT [1978] 114 ITR 554 (Cal) in order to support his contention. Appellant's reply : Learned counsel for the appellant, however, in reply co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g built upon. Business commences on the first step for commencement of the business if undertaken. In the business of real estate, there are three stages : one is the acquisition of land and the other is the process of construction of building and the third is the actual distribution or sale of the building. Similarly, in other business also there are three stages. Here, at the first stage, it has been acquired and works were in progress. The respondent's counsel contended that there is nothing to indicate that the works were in progress. It is not necessary to show that the work is in progress. It is the nature of the expenses that would determine the character in whatever manner it might be shown in the accounts of the assessee. In this case, the question was at the second stage and as such the business shall be deemed to have been commenced. The meaning of the expression "business" has been disputed by learned counsel for the respondent. In our view, "business" is an adventure or undertaking to gain profit out of the transaction. Even if it is one transaction, still then it is an adventure and a business. If someone starts a business and then leaves it after one transaction, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as shown as advance against the immovable property. Therefore, it cannot be a borrowed capital entitling the assessee to the benefit of section 36(1)(iii) in respect of the interest paid thereon. Revenue or capital expenditure : Immaterial : In Bombay Steam Navigation Co. (1953) P, Ltd. v. CIT [1965] 56 ITR 52 (SC), it was held that the expression "profits or gains" includes revenue outgoings and capital outgoings. Interest paid in respect of capital borrowed is admissible for deduction under section 10(2)(iii) of the Indian Income-tax Act, 1922, which is pari materia similar to section 36(1)(iii) of the 1961 Act. In State Of Madras v. G. J. Coelho [1964] 53 ITR 186 (SC), it was held that payment of interest in respect of capital borrowed for acquiring assets to carry on business must be regarded as revenue expenditure in commercial practice and should not be termed as capital expenditure. The interest paid need not, however, borrow the character of a revenue outgoing to be admissible as allowance under clause (iii) of section 36(1), but the interest must be paid in respect of capital borrowed. In Addl, CIT v. Akkamba Textiles Ltd. [1979] 117 ITR 294 (AP), it was held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. A business activity consists of three stages : the first stage relates to the activity necessary for the purpose of acquiring the raw material and establishment of plant and machinery and the second activity comprises the processing and manufacturing by using the raw material and the plants and machinery set up for the purpose and the third category consisted of the marketing thereof. The first in point of time lays the foundation for the second activity and the second activity when completed lays the foundation for the third activity. Therefore, the expenditure incurred for carrying on any of these activities including the first activity is also deductible in computing the profits and gains of the assessee for the relevant year when the activity is undertaken. In Sarabhai Management Corporation Ltd. v. CIT [1976] 102 ITR 25, the Gujarat High Court took the same view and held that the business commences with the first activity for acquirin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding that the transaction was not an adventure in the nature of trade is to be regarded as a pure finding of fact or as the determination of a question of law or of mixed law and fact, where the finding is perverse or the authority has misdirected itself in law by a misunderstanding of the statutory language or otherwise, the determination cannot stand. The misdirection may appear upon the face of the determination. It is only to be examined whether it is an adventure towards trade and business and nothing else. Even if the adventure was an isolated transaction, still then it is part of the trade or business. Therefore, the contention that the question referred is not a question of law as contended by learned counsel for the respondent cannot be sustained. Decisions cited by the respondent : Learned counsel for the respondent relied upon Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC). But this decision as discussed hereinbefore does not help him having regard to the facts and the circumstances of the case. He next relied upon Ritz Continental Hotels Ltd. v. CIT [1978] 114 ITR 554 (Cal) in order to contend that interest paid on capital prior to the commencement of busi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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