MINING MACHINERY AND EXPLOSIVES (P.) LTD VS COMMISSIONER OF INCOME-TAX
1994 P T D 398
[202 ITR 710]
[Calcutta High Court (India)]
Before Ajit K. Sengupta and Shyamal Kumar Sen, JJ
MINING MACHINERY AND EXPLOSIVES (P.) LTD
Versus
COMMISSIONER OF INCOME-TAX
Income-tax Reference No.49 of 1987, decided on 15/05/1991.
Income-tax---
----Business expenditure ---Assessee deciding to start new line of business-- Expenditure incurred in connection with setting up business---Not deductible if business was not set up---Indian Income Tax Act, 1961, S.37.
The assessee was a distributor of detonators used in mining operations. This was the only line of business in which the assessee-company was dealing, till it decided to export mangnese ore and import steel on barter basis. It was stated that the permission of the Government of India for export and import was taken and the assessee-company sent T, who was an expert in this line, to Europe in connection with the dealings in manganese and steel. An amount of Rs.3,852 was spent in this regard. The assessee-company also took on rent for a period of eleven months at Rs.3,000 per month certain premises for storing manganese ore and steel. However, in the assessment year 1964-65, no business was done in this regard. In the next year, the assessee's director went on a foreign tour for the same purpose and the assessee-company also paid Rs.27,000 as rent but again nothing came out and the business was never commenced. These expenses were debited by the assessee in its profit and loss statement but the income-tax Officer disallowed the same on the ground that the expenses were not incidental to the business. This was confirmed by the Tribunal. On a reference:
Held, that since the business of export and import was never set up, the question of allowing the expenses could never arise. The assessee company, accordingly, was not entitled to claim any expense in that regard.
C.I.T. v. Kanoria General Dealers (P.) Ltd. (1986) 159 ITR 524 (Cal.); C.I.T. v. Industrial Solvents and Chemicals (Pvt.) Ltd. (1979) 119 ITR 608 (Bom.); C.W.T. v. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478 (SC); Ramaraju Surgical Cotton Mills Ltd. v. C.W.T. (1962) 46- ITR 820 (Mad.); Sarabhai Management Corporation Ltd. v. C.I.T. (1976) 102 ITR 25 (Guj.) and Western India Vegetable Products Ltd. v. C.I.T. (1954) 26 ITR 151 (Bom.) ref.
JUDGMENT
SHYAMAL KUMAR SEN, J: --Pursuant, to the orders of this Court under section 256(2) of the Income Tax Act, 1961, the following questions have been referred to us by the Tribunal:
Assessment year 1964-65:
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenses of Rs.33,000 incurred in connection with rent for plot of land and Rs.3,852 incurred on account of the foreign tour of Shri T.H. Iyer are not deductible as
business expenses under section 30 and/or section 37 of the Income Tax Act, 1961?"
Assessment year 1965-66:
"(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenses of Rs.27,000 incurred in connection with rent of plot of land and Rs.10,000 incurred on account of foreign tour of Shri S.K. Agarwalla are not deductible as business expenses under section 30 and/or section 37 of the Income Tax Act, 1961?"
The facts, inter alia, are that the assessee is Messrs Mining Machinery and Explosives (P.) Ltd. and the assessment years involved are 1964-65 and 1965-66. The assessee-company although named as Mining Machinery and Explosives (P.) Ltd. was dealing in detonators manufactured by Indian Detonators Ltd. The assessee is a distributor of the detonators, which are used in mining operations. This was the only line of business in which the assessee company was dealing, till it decided to export manganese ore and import steel on barter basis. It was stated that the permission of the Government of India for export and import was taken and the assessee-company sent Shri T. H. Iyer, who was an expert in this line, to Europe in connection with the dealings in manganese and steel. An amount of Rs.3,852 was spent in this regard. The assessee-company also took on rent for a period of 11 months at Rs.3,000 per month premises at P-26, Transport Depot Road, Calcutta, for storing manganese ore and steel. However, in the assessment year 1964-65, no business was done in this regard. In the next year, the assessee's Director, Shri S.K. Agarwalla, went on a foreign tour for the same purpose and the assessee -company also paid Rs.27,000 as rent but again nothing came of it and the business was never commenced. These expenses were debited by the assessee in its profit and loss statement but the Income-tax Officer disallowed the same on the ground that the expenses were not incidental to the business. The Income-tax Officer also observed in regard to disallowance of rent in the first year that the business had never materialised and no benefit was derived from the occupation of the premises on hire. Complete details of the claim though called for were not furnished. The expense, according to the Income-tax Officer, was neither incidental to business nor of a trading nature. For similar reasons, he made the disallowance in the following year.
The assessee-company filed appeals before the Appellate Assistant Commissioner. The Appellate Assistant' Commissioner discussed the order in detail in the assessment order for the assessment year 1964-65. He held that it was clear from the very nature of the transaction that the expenditure was in regard to the object of purchase and sale of certain goods with a view to make profit. It was accordingly connected with the assessee's business, which was that of a dealer in goods. The Appellate Assistant Commissioner observed that although the assessee was dealing only in mining machinery and explosives and the proposed line was steel and manganese ore, it was only a continuation of the appellant's existing business by expansion of articles dealt in and that it will not be a new business. Consequently, it cannot be treated as an expenditure incurred prior to the setting up of a new business either. The Appellate Assistant Commissioner agreed with the submission and allowed the expenditure for both the years.
It was urged on behalf of the Department before the Tribunal that the approach of the Appellate Assistant Commissioner in this case was wrong. The assessee was dealing only in detonators as a distributor and started exploring the possibility of a new line of business, i.e., of exporting manganese ore and importing steel. It was not a continuation of the old business and the new business was never, in fact, set up and, therefore, the expenses could not have been allowed. As against this, it was urged on behalf of the assessee that the assessee-company was a dealer and, while it was dealing in one line, it diversified itself or tried to do so in the other lines and, therefore, it was the continuation of the old business.
The Tribunal concluded the matter in paragraph 6 of its order as hereunder:
"6. We have considered the rival submissions and we are of the opinion that the assessee-company was exploring a new line of business and it was not -the same business which it was doing already. Simply because it was a dealer before it could not be said that it decided to deal in manganese ore and steel. The lines in which the assessee was already dealing and the line in which the assessee decided to deal were entirely different. The assessee-company was only a distributor and was as such earning its income by getting commission on sales. On the other hand, the new line of business, i.e., of exporting manganese ore and importing steel on barter basis were altogether a new one and the assessee diversified its line by dealing in new goods because it did not take any agency for distribution of manganese ore or steel but tried to deal exclusively in these goods not on commission basis or on distributorship but as an exporter and importer. On facts, therefore, we are unable to uphold the finding of the Appellate Assistant Commissioner that it was only an extension of the old business of dealing in goods. On the other hand, we are of the opinion that it was a new business, which the assessee decided to set up but it never fructified. The assessee-company is entitled only to claim expenses in respect of the business, which was carried on by it and profits of which are to be computed and assessed and those expenses should be incurred only after the business is set up. As to when a business is set up has been the subject-matter of the decision of the Bombay High Court in Western India Vegetable Products Ltd. v. C.I.T. (1954) 26 ITR 151, and of the Supreme Court in C.W.T. v. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478. In the latter case, the Supreme Court held that the unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing organisation that it can be said that the unit has been set up. It was held by the Madras High Court in Ramaraju Surgical Cotton Mills Ltd. v. C.W.T. (1962) 46 ITR 820, that the resolution of the board of directors, the orders placed for purchasing machinery, the licence obtained from the Government for constructing the machinery, are merely initial stages towards setting up of the business. Therefore, the mere fact that the assessee-company obtained the permission of the Government for the export and import business could not mean that the business had been set up. The -assessee's business in this regard was only in an exploratory stage and the assessee-company sent, firstly Mr. Iyer and then its director, Shri S.K. Agarwalla abroad to explore the possibilities of export and import but nothing came out of it: The premises were also taken on rent because the assessee-company proposed to deal in these new lines but barring payment of rent nothing was done. In our opinion, the business of export and import was never set up. Therefore, the assessee-company was not entitled to claim any expense in that regard."
The learned Advocate for the assessee submitted that it may be necessary to pass through a preparatory stage before actual commencement of the business and the expenses incurred during the preparatory stage should be allowed. He has further submitted that the assessee will be entitled to claim deduction of expenditure during the stage prior to the commencement of the actual business of commercial production. Accordingly, the learned Advocate for the assessee urged that the Tribunal should have allowed the claim for deduction of expenditure during the stage prior to the commencement of the actual business of commercial production. In support of his contention, the learned Advocate for the assessee relied upon the following decisions:
(1) Sarabhai Management Corporation Ltd. v. C.I.T. (1976) 102 ITR 25 (Guj.) and (2) C.I.T. v. Kanoria General Dealers (P.) Ltd. (1986) 159 ITR 524 (Car.).
The learned Advocate for the Revenue, on the other hand, submitted that only expenditure for carrying on business after it is set up is allowable as business expenditure and the Tribunal rightly rejected the contention of the assessee. In support of his contention, the learned Advocate for the Revenue relied upon the following decision:
C.I.T. v. Industrial Solvents and Chemicals (Pvt.) Ltd. (1979) 119 ITR 608 (Bom.).
The principles decided in the aforesaid case, however, will not apply. In the instant case, the assessee was also carrying on business, however, the only line of business in which the assessee-company was carrying on was dealing in detonators manufactured by Indian Detonators Ltd. The assessee -company wanted to start a new line of business, viz., the export of manganese ore and import of steel on barter basis. The assessee-company, however, could not succeed in starting the said line of business. It is an admitted position, however, that the said new line of business could not be started by the assessee-company, and, as such, the question of the said expenditure being incurred on the said line of business does not arise at all. Nor could expense incurred in connection with the rent of plot of land for the said purpose be allowable expenditure; for, such new line of business never materialised.
In the case of C.I.T. v. Kanoria General Deraers (P.) Ltd. (1986) 159 ITR 524 (Cal.), it has been held that, where a business unit has been set up by the assessee which is ready to commence production, the assessee will be entitled to claim deduction of expenditure and the expenditure cannot be disallowed on the ground that the same had Been incurred prior to the commencement of the actual business of commercial production.
For the assessment year 1966-67, the Income-tax officer disallowed the claim of the assessee for depreciation and deduction of business expenditure on the ground that the assessee had not commenced manufacturing and that the production during the period was only on an experimental basis. Similarly, for the assessment year 1969-70, the claim for depreciation was disallowed on the ground that the factory of the assessee had worked for less than 30 days during the whole year. The Tribunal held that, as the business had been set up in the year 1966-67, the assessee was entitled to depreciation and the deduction of expenditure for the assessment year 1966-67 and depreciation for the assessment year 1969-70. On a reference, it was held that the Tribunal had found that the assessee had set up its business in the assessment year 1966-67. The finding of the Tribunal had not been challenged as perverse. Therefore, the assessee was entitled to depreciation and deduction of expenditure for the assessment year 1966-67 and depreciation for the assessment year 1969-70.
The principles decided in the aforesaid case can have no application to the facts of the instant case inasmuch as the new line of business as contemplated by the assessee could not have commenced in this case.
In the instant case, on the basis of facts, we are of the view that the assessee decided to set up a new line of business but it never fructified. The Tribunal was correct in holding that the assessee-company is entitled only to claim expenses in respect of the business which was carried on by it and the profits of which are to be computed and assessed and those expenses should be incurred only after the business is set up. It is only when the unit has been put into such a shape that it can be said that the unit has been set up. Since the business of export and import was never set up, the question of allowing the expenses could never arise. The assessee-company, accordingly, was not entitled to claim any expense in that regard.
We do not find any infirmity in the decision of the Tribunal, which calls for interference by this Court.
Accordingly, both the questions are answered in the affirmative and in favour of the Revenue.
There will be no order as to costs.
AJIT K. SENGUPTA, J.---I agree,
M.B.A./43/TFReference answered