TMI Blog1981 (1) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee took over those machines at cost and installed them in a factory built by it. The machines were to be run on electricity. The assessee had no power connection for its factory. Hence, it borrowed electrical energy from K.C.P. Ltd., whose factory was nearby. After installation of the machinery, the assessee ran the plant on an experimental basis. For the trial runs, the assessee required raw materials, such as pig iron and other ingredients, such as coking coal. The assessee bought certain quantities of these items. In the trial runs given to the machines, a portion of these materials were used up and the rest remained in stock. The experimental production left the assessee on hand with a certain quantity of finished products such as 12 inch calibre " spun pipes ". But these pipes also lay in stock. They were not marketed, nor intended to be marketed. As it turned out, the trial run of the new machines with the resultant production of sample pipes was the only activity that the assessee did in this venture. After the initial spurt of experimentation, the factory went into a state of suspended animation. The finished products and the semi-finished products turned over during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as a new business venture, unconnected with the business which the assessee was all along carrying on, namely, managing agency business. On the basis that this unit was a new venture, the Tribunal held that it did not pass the preliminary stage of setting up. The installation of the factory and even the trial run of the machinery were only preliminary. Business had not been commenced, and production on a commercial scale bad not started. There was only experimental production. Even the products turned out at the trial run of the factory had not been marketed. In this view, the Tribunal held that the machinery cannot be said to have been used for purposes of a business carried on by the assessee during the accounting year. Before the Tribunal, the contention raised for the assessee was that the new pipe-producing unit could not be regarded as a new business at all, but must be regarded as a feature, or as a manifestation, of the assessee's existing business of managing agency. It was urged that the managing agency business was such an all-embracing business that acquiring the machinery from a company sponsored or promoted by the managing agent and setting up that machinery with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odies. What is more, this business was conceived of as covering responsibilities and concerns which were many and various, extending to several fields of activity, in addition to management tasks, pure and simple. Mr. Uttama Reddy, learned counsel for the assessee, gave us illustrations, even from the pages of reports of tax cases, of the infinite variety of the features of the managing agency business. In Tata Sons Ltd. v. CIT [1950] 18 ITR 460 (Bom), the question was whether expenses incurred by a managing agent, while undertaking part of the bonus commitment of the managed company, were allowable as part of the legitimate business expenses of the managing agent. The Bombay High Court held that although the workmen concerned were not employed by the managing agent, the payment of the bonus can still be regarded as a concern of the managing agent. In CIT v. Chandulal Keshavalal and Co. [1960] 38 ITR 601, the Supreme Court held that loss of remuneration forgone by the managing agent out of respect for the bad financial condition of the managed company must be held to be dictated by considerations of commercial expediency. In another managing agency case, CIT v. J. K. Industries (Pv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a managing agency. The Tribunal sought support for their decision in the object clauses in the memorandum of association of the assessee-company. We think the Tribunal's reference to the object clauses is not to the point. If the inquiries were about the intra vires or ultra vires nature of a particular activity of an incorporated company, it would be pertinent for a tribunal or court to address itself to the terms of the memorandum of association and the scope of the object clauses. But where the question is, as in this case, a factual question, namely, whether the take over of a particular venture was actually done by the assessee as one in the course of its business of managing agency, a meticulous examination of the object clauses is not only uncalled for, but it would throw no light on the problem. Whether a particular line of trade is part of an assessee's existing business or quite a departure from it is a factual question. There is no denying that the assessee-company's main object, as set out in its memorandum of association, was the carrying on of the business of managing agents. This object, as we have shown earlier, is comprehensive enough to permit the assessee to en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on by " the assessee. The same idea is put in clearer words in the same provision when it says that the machinery or plant must be " first put to use " either in the year of installation or in the immediately succeeding year. As a court of construction, we must read the words of this section as we find them without putting any gloss of our own. What the section requires is that the plant or machinery after installation must be " used" or " first put to use " for the purposes of the assessee's business. The section does not require that even in the very year of installation or in the year of the first user, the assessee must be carrying on the business. It is enough that the installation and the first user are " for the purpose " of the assessee's business. It is not necessary that the installation and first user must be " in the course of carrying on the business ". " For the purpose of " is different from " in the course of ". In this case, there is evidence to show that the factory was run on experimental production, and some quantity of pipes was actually turned out from the machines. The fact that the pipes so produced were not marketed or that the assessee did not commence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses in this line of business. The claim for losses was, however, rejected by the ITO and the Tribunal for the same reason which weighed with them in rejecting the claim for development rebate. They held that since the spun-pipe factory was not part of the assessee's managing agency business, any loss incurred in that venture cannot be regarded as a loss " incidental" to the assessee's business. The question which the assessee has raised before us, is whether this conclusion is the correct one in the circumstances. We do not think that a separate discussion either of the facts or of the law is called for, to answer this question. On the basis of our decision which we have earlier set out that the assessee's managing agency business comprehends the take-over of the subsidiary company's plant and machinery, it must be held that the expenses and losses incurred by the assessee, year after year, in this factory must necessarily be regarded and allowed as expenses and losses, in the course of, or as incidental to the assessee's business. It is true that the production in the factory was in state of suspended animation. But, there was no indication that the assessee had completely clos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad made a note of this information in his note-sheet for 1960-61. In the note-sheet for the next year 1961-62 also, the officer had made a clear entry to the effect that after the manufacture of a few pipes, the production had been suspended. In the face of this written record of the Department, we cannot hold that there was any omission on the assessee's part to do its part of the duty, namely, to place material facts before the Officer. It is true that the assessee did not prepare and file a separate profit and loss account for the spun-pipe factory for either of the account years relevant to the assessment years 1960-61 and 1961-62. As usual, the assessee prepared a single profit and loss account for its entire business, which included the results of this unit. But even with the full factual information given to the Department by the assessee about the spun-pipe factory, the Officer did not call for any separate break-up figures relating to that unit. It might be that the assessee did not put the ITO wise by suggesting that if a particular narrow view of s. 33(1) were taken, the claim for development rebate on the spun-pipe machinery could be rejected. But s. 147(a) does not req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question is against the Department. We do not agree with the Tribunal's finding that the assessee's business in spun-pipes was not even "set up " during the relevant account year. In any case, this finding is beside the point for purposes of s. 33(1)(b) which requires only that the machinery and plant (and not the business) must be " installed " or put to use in the account year concerned. There is no dispute that the machinery or plant was actually installed in the factory. There is no denying the fact that they also turned out from the production line a few pipes. The Tribunal's inquiry as to whether a business in spun-pipes has been " set up " during this year is wholly beside the point. As we have held earlier in the judgment, the pertinent inquiry is whether the plant or machinery have been set up or have had their first use in the relevant account year. The following common question of law, at the assessee's instance, figures for the assessment years 1960-6-1 to 1971-72 : " Whether the Tribunal was right in holding that the taking over of pipe casting undertaking from Ramakrishna Basic Industries Corporation Limited did not form part of the assessee's main business of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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