Andhra HC (Pre-Telangana)
Commissioner Of Income Tax vs Coromandel Fertilizers Limited on 14 February, 2003
Equivalent citations: 2003(2)ALT338, (2003)182CTR(AP)264, [2003]261ITR408(AP)
Author: B. Sudershan Reddy
Bench: B. Sudershan Reddy
ORDER B. Sudershan Reddy, J.
1. The Income-tax Appellate Tribunal, Hyderabad Bench, at the instance of the Revenue, referred the following question of law to this Court for its opinion:
Whether, on the facts and in the circumstances of the case, the cement unit could be said to have commenced business during the accounting year relevant to the assessment year 1983-84?
2. The short facts which have given rise to the above question may have to be briefly noticed: The assessee is a public limited company. The assessment year is 1983-84. The previous year ending on 31-12-1982 is relevant to the assessment year 1983-84. The assessee is carrying on business of manufacture and sale of fertilizers as well as cement. During the year 1982 the assessee claims to have commenced limestone mining activity for the production of cement. It had claimed expenditure of certain amounts (excluding depreciation) incurred as an allowance deduction in the computation of the total income. The claim of the assessee is that the commencement of limestone mining is the first activity relating to cement manufacture so far as their cement business is concerned. The assessee also claimed depreciation and investment rebate on plant and machinery installed and used in the mining activity.
3. The inspecting Assistant Commissioner held that the business of the assessee was not set up nor did it start manufacturing activity of cement production and, therefore, is not entitled for any deduction as claimed by the assessee. The officer accordingly disallowed the claim for deduction of Rs.23,26,619/- and as well as the assessee's claim for depreciation and investment rebate.
4. On appeal, the Commissioner of Income-tax, relying upon the decision of the Gujarat High Court in C.I.T. v SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD, allowed the expenditure on quarrying of limestone as well as depreciation and development rebate on the machinery employed. The Commissioner came to the conclusion that quarrying limestone in a leased area of land is the first step in production of cement itself. The Commissioner held that the assessee had commenced its business of manufacture of cement and, therefore, entitled for the relief of grant of depreciation and investment rebate. The Revenue preferred appeal before the Income-tax Appellate Tribunal. The Tribunal upheld the order of the Commissioner of Income-tax (Appeals). The Revenue's contention that the business has not commenced has been accordingly rejected.
5. Sri S.R. Ashok, learned senior standing counsel for the Revenue, submitted that all that the assessee was doing was only to quarry the limestone and the said activity cannot be equated to that of commencement of manufacturing of cement. It is contended that unless the plant/machinery is set up and ready for production and manufacture of cement, the assessee shall not be entitled for any relief as claimed by it in law. It is submitted that the view taken by the Tribunal that commencement of quarrying limestone itself would amount to commencement of business of manufacture of cement, is erroneous.
6. Sri P.S. Pardiwalla, learned counsel appearing for the assessee submits that commencement of quarrying limestone which is an essential raw material for the manufacture of cement is the first step in the production of cement. It amounts to setting up the cement manufacturing unit. It was argued that the assessee is entitled for depreciation and development rebate. The learned counsel further contends that in view of the findings of the Tribunal that the manufacture of fertilizers and also cement are one and the same business of the assessee as a result of unity of control and management and inter-lacing and inter-dependence of such activities and in view of the admitted fact that the assessee had already commenced manufacture of fertilizers, the whole question has become academic. Setting up of plant and machinery for the manufacture of fertilizers, which admittedly the assessee did, is enough to allow the claim of the assessee, is the submission of the learned counsel for the assessee.
7. The short question that falls for consideration is as to whether the assessee could be said to have set up of business of manufacturing cement during the accounting year relevant to the assessment year 1983-84.
8. Some confusion appears to have crept into the mind of the Tribunal and as well as the appellate authority in appreciating this aspect of the matter. Even the Department contended before the Tribunal that the assessee had not commenced its business of manufacture of cement. The Tribunal also held that the assessee has commenced its business of cement manufacture. However, the learned senior standing counsel submitted that what is required to be considered is the setting up of a business.
9. In our considered opinion the set up of a business is not the same as commencement of business. It is not necessary for an assessee to claim the benefit of deduction of expenditure and also depreciation and investment rebate on the ground of its commencement of business. It would be enough if the assessee establishes that it had set up of a business. In the instant case it would have been enough for claiming the benefit that the assessee had already set up of a business of manufacturing cement.
10. In COMMISSIONER OF INCOME-TAX v SARABHAI SONS PVT LTD, [1973] 90 ITR 151 [Guj] the Gujarat High Court noticed the clear distinction between "commencement of business" and "setting it up" for the purposes of Section 3(1)(d) of the Income-tax Act, 1961 (as it stood at the relevant time). What is required to be considered is the setting up of a business. It is observed that when a business is established and is ready to start business it can be said to be set up. The business must be put into such a shape that it can start functioning as a business manufacturing organization. The Gujarat High Court, relying upon the decision in W.L.VEGETABLE PRODUCT LTD v C.I.T., and the decision of the Supreme Court in COMMISSIONER OF WEALTH TAX v RAMARAJU SURGICAL COTTON MILLS LTD, , observed:
The new business which was sought to be established by the assessee was a business of manufacturing scientific instruments and communication equipment and it could not be said to be ready to discharge the function for which it was being established, viz., manufacture of scientific instruments and communication equipment, until the machinery necessary for the purpose of manufacture was installed. It is only when the machinery was installed that the business could be said to be put into such a shape that it could start functioning as a manufacturing organization. It was not sufficient that the assessee obtained the land on lease from Gujarat Industrial Development Corporation ....or placed orders for purchase of raw materials and the source or ordered out the necessary machinery and equipment. These were merely operational for setting up of business. The business could be set up only as a culmination of these operations when all that was necessary for the setting up of the business was done.
(Emphasis is supplied)
11. In our opinion the judgment lays down the correct proposition in law. We are in entire agreement with the view taken by the Gujarat High Court.
12. However, in C.I.T. v SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD, the same Division Bench struck slightly a different note. In the said case a company was formed in 1956 for the manufacture and sale of cement. As part of its business the company obtained a mining lease for quarrying limestone and started mining operation in 1958. It claimed the expenditure incurred for the purpose of extracting limestone as also depreciation and development rebate for the machinery installed for that purpose for the assessment years 1960-61 and 1961-62. The Court while considering as to whether any relief could be granted to the assessee therein observed:
.... The activities which constituted the business of the assessee were divisible into three categories: the first category consisted of the activity of extraction of limestone by quarrying leased area of land. This activity was necessary for the purpose of acquiring raw material to be utilized in manufacture of cement. The second category comprised the activity of manufacture of cement by user of the plant and machinery set up for the purpose; and the third category consisted of the activity of selling manufactured cement. These three activities combined together constituted the business of the assessee. Each one of these activities was as much essential for the purpose of carrying on the business of the assessee as the others. If the assessee ceased to carry on any one of these activities, the business would come to an end. Each one of these activities constituted an integral part of the business of the assessee. Why then can it not be said that the assessee commenced its business when it started the first of these activities? The activity of quarrying the leased area of land and extracting limestone from it was as much an activity in the course of carrying on the business as the other two activities of manufacture of cement and sale of manufactured cement. The business could not in fact be carried on without this activity. This activity came first in point of time and laid the foundation for the second activity and the second activity, when completed, laid the foundation for the third activity. The business consisted of a continuous process of these three activities and when the first activity was started with a view to embarking upon the second and the third activities, it clearly amounted to commencement of the business. It may be that the whole business was not set up when the activity of quarrying the leased area of land and extracting limestone was started. That would be set up only when the plant and machinery was installed, the manufacture of cement started and an organization for sale of manufactured cement was established. But, as pointed out above, business is nothing more than a continuous course of activities and all the activities which go 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 the other activities is started. ....
13. In W.L. VEGETABLE PRODUCT LTD v C.I.T., Bombay High Court noticed clear distinction between a person commencing business and a person setting up a business and held that for the purposes of Indian Income-tax Act the setting up of the business and not the commencement of the business that is to be considered. It is observed that it is only after the business is set up that the previous year of that business commences and any expenses incurred prior to the setting up of a business would not be a permissible deduction. It observed:
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 the 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).
14. In the case on hand there is no finding by the Tribunal as to when the assessee actually commenced the manufacture of cement as such. There is also no finding as to when exactly the machinery and plant for the manufacture of the cement has been set up. The Tribunal proceeded to hold that the assessee having commenced quarrying limestone, which is an essential raw material for the manufacture of cement, in reality commenced the business of cement manufacturing.
15. In COMMISSIONER OF WEALTH TAX, MADRAS v RAMARAJU SURGICAL COTTON MILLS (4 supra) the expression "set up" in the principal clause of Section 5(1)(xxi) of the Wealth tax Act came up for consideration. The Supreme Court in categorical terms held that a 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 manufacturing organization that it can be said that the unit has been set up. The Gujarat High Court in C.I.T. v SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD, distinguished this binding precedent on the ground that the question before it was different one viz., as to when the business of the assessee could be said to have been commenced and on that question no light is thrown by the decision of the Supreme Court.
16. In C.I.T. v SPONGE IRON INDIA LTD, [1968] 68 ITR 750 [SC] this Court held:
Whether a business has been commenced or not is a question of fact. However, what activities constitute commencement of business is a mixed question of law and fact and it has to be decided on the facts of each case; (ii) there is a distinction between setup of business and commencement of business. A business is said to be set up when it is ready to commence; (iii) where the business consists of a continuous course of activity, for commencement of business all the activities which go to make up the business need not be started simultaneously. As soon as an activity which is the essential activity in the course of carrying on the business is started, the business must be said to have commenced.
17. This Court, having regard to the nature of business of manufacture of sponge iron, observed that it can be properly divided into three stages comprising (1) exploration of iron ore suitable for production of sponge iron; (2) mining of iron ore; and (3) production of sponge iron as contended by the counsel for the assessee. It is clearly held that the activity comprising exploration of iron ore suitable for production of sponge iron is too remote to be in proximity to the business of production of sponge iron to form the first stage of that business.
18. In the instant case, quarrying limestone - may be an essential raw material for the manufacture of cement - is too remote to be in proximity to the business of manufacture of cement to form the first stage of commencement of that business of manufacture of cement. However, the learned counsel for the assessee laid emphasis on the observation made by this Court, which is to the following effect:
Perhaps the same cannot be said to be of the suggested second stage of mining operations of iron ore. ... and the same amounts to commencement of the business since the same is in proximity to the business of manufacture of cement.
19. The observation made cannot be blown out of context. It is not as if the Court expressed any firm opinion that mining of iron ore to be in proximity to the business of production of sponge iron. The very expression "perhaps" indicates that the Court has not expressed any firm opinion on the same. The judgment, in our considered opinion, does not support the case set up by the assessee but, on the other hand, supports the submission made by the learned senior counsel appearing on behalf of the Revenue.
20. It is not the case of the assessee that the plant and machinery has been erected within a short span of time after commencement of the quarrying of limestone. There is no material available on record as to when the plant and machinery for the manufacture of cement has been erected. As observed by this Court, what activities constitute commencement of business is a mixed question of fact and law and it has to be decided on the facts of each case. On the facts of this case it is not possible to hold that the assessee had set up of the business and commenced the manufacture of cement as such.
21. In SARABHAI MANAGEMENT CORPORATION LTD v C.I.T., [1978] 115 ITR 505 the Gujarat High Court approvingly referred to its earlier decision in C.I.T. v SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD, [1970] 78 ITR 788 [CAL] and observed that in each case what is required to be done is to determine what was the business of the assessee and in particular what are the activities which constituted such business. The Court cautioned that one should always bear in mind the confusion which is likely to be created by two concepts - setting up business for particular business concerned and the commencement of business of the particular assessee. The assessee therein was a private limited company. The main object of the company was to acquire immovable property and give it out either on leave and licence basis or on lease as residential or in the alternative, business accommodation, with all appurtenant amenities including the amenities of storage, watch and ward facilities, canteen, refreshment rooms, etc. A bungalow together with appurtenant compound was purchased by the company on March 28th, 1964. Thereafter, building repairs were carried on by the company for the purpose of converting the residential accommodation to business and storage accommodation, to render the premises more serviceable to its prospective licensees or lessees. The assessee claimed that it was in a position to offer services to licensee on and from October, 1964 and, therefore, claimed that the expenditure which was incurred by it in between October 1st, 1964 and March 31st, 1965 was a business expenditure for the assessment year 1965-66. The authorities including the Tribunal held that the company could not be said to have been ready to commence business prior to May 1st, 1965 the date on which it gave on leave and licence part of the said building, and certainly not by October 1st, 1964 and disallowed the deductions claimed. On a reference the High Court, following its earlier decision in C.I.T. v SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD, (1 Supra) observed that the business activities of the company could be said to fall into three broad categories. The first business activity was to hire either by purchase or by any other manner, immovable property so that the property could be ultimately given out either on leave or licence or on lease to others together with appurtenant services. The second category of the business activity was to put the building accommodation and lands into proper shape. The third business activity was to actually give out accommodation on lease or on leave and licence basis. The Court took the view that though company actually let out on leave and licence a portion of the building with effect from May 1st 1965 the earlier and preceding part of its activities were also business activities to ensure that everything was in shape for the use of the occupier.
22. This judgment of the Gujarat High Court received the approval of the Supreme Court in C.I.T. v SARABHAI MANAGEMENT CORPORATION LTD, . However, the Supreme Court observed the first category of activities referred to by the High Court viz., acquisition of property for being let out can be said to be only a preparatory stage (analogous to the acquisition of buildings, plant and machinery in a manufacturing business). The subsequent activities certainly constitute activities in the course of carrying on of the assessee's business. The Supreme Court accordingly held that it would not be correct to treat the assessee as having commenced its business only when the licensee or lessee occupied the premises or started paying rent.
23. Relying upon these decisions the learned counsel for the assessee argued that the Supreme Court had put its seal of approval and accordingly upheld the principles laid down by the Gujarat High Court in C.I.T. v SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD, (1 Supra). It was contended that the principles laid down in SAURASHTRA CEMENT's case would be squarely applicable to the facts on hand.
24. We have already noticed that there is no finding by the Tribunal that the assessee having purchased the plant and machinery for the purposes of manufacture cement, had erected the same. There is nothing on record to suggest that the plant was commissioned as such. At any rate, there is no finding that the plant has been set up. There is nothing on record to suggest that the assessee was in a position to use the quarried limestone as a raw material for the purposes of manufacture of cement. The one and the only activity evidently undertaken by the assessee is quarrying of limestone. In our considered opinion, the sole step so taken by the assessee would not amount to setting up the business. There is no finding as to when the activity comprising of manufacture of cement by user of the plant and machinery set up for the purpose had taken shape. In the circumstances there is nothing to interconnect the activity of quarrying of limestone to that activity of manufacture of cement by the user of plant and machinery set up for the purpose.
25. It is true that the activities which constituted the business of the assessee were divisible into three categories: The first category consisted of the activity of extraction of limestone by quarrying leased area of land for the purpose of acquiring raw material to be utilized in manufacture of cement; The second category comprised the very activity of manufacture of cement by user of the plant and machinery set up for the purpose; and the third category consisted of the activity of selling manufactured cement. Each one of these activities was as much essential for the purpose of carrying on the business of the assessee as the others. May be, all the activities cannot be simultaneously carried on. The business may commence when the activity which is first in point of time and which must necessarily precede the other activities is started provided there is a proximate connection between the activity which is first in point of time and the subsequent activities which go to make up the business. Mere quarrying of limestone in the leased land itself per se would not amount to setting up of business. It is, therefore, for the assessee to establish that after the extraction of limestone by quarrying leased area of land the next activity in the chain of manufacture of cement by user of plant and machinery set up for the purpose has also begun. It is for the assessee to establish the same and if the same is not established the assessee cannot be held to have set up the business of manufacture and sale of cement.
26. For the aforesaid reasons we find it difficult to apply the ratio laid down by the Gujarat High Court in C.I.T. v SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD, (1 Supra) even if the ratio laid down therein is held to have received the approval of the Supreme Court in C.I.T. v SARABHAI MANAGEMENT CORPORATION LTD, (12 Supra).
27. The learned counsel for the assessee, however, strenuously contends that the whole question referred for the opinion of this Court has become academic one and an academic question need not be answered by this Court. The learned counsel submitted that this Court, in the facts and circumstances of the case, may have to refuse to answer the question. Learned counsel relied upon the judgment of the Supreme Court reported in C.I.T. v SPONGE IRON INDIA LTD, [1968] 68 ITR 750 [SC] in which the Supreme Court observed:
The High Court may decline to answer question of fact or a question of law which is purely academic or has no bearing on the dispute between the parties or though referred by the Tribunal, does not arise out of its order. The High Court may also decline to answer a question arising out of the order of the Tribunal, if it is unnecessary or irrelevant or is not calculated to dispose of the real issue between the tax payer and the department.
28. The submission is based upon the observation made by the Tribunal while considering the question relating to the deletion of the disallowance of certain amount being the interest on public deposits. The Tribunal observed that the very issue came up before the Tribunal for the assessment years 1982-83 in which the Tribunal is said to have taken the view that the business of manufacture of fertilizers and the cement by the assessee are one and the same business as a result of unity of control and management and inter-lacing and inter-dependence of such activities. Based on the said observations the learned counsel for the assessee contended that the assessee had already admittedly set up business and commenced the manufacture and sale of business of fertilizers and that itself would be enough to grant the relief as prayed for by the assessee. It is contended that the said finding of the Tribunal recorded for the assessment year 1982-83 has become final since no reference is sought. In such view of the matter the question referred was, therefore, academic in nature and need not be answered. Reliance is placed upon the judgment in C.I.T. v S.KRISHNASWAMY REDDIAR, (1978) 115 ITR 505. Reliance is also placed upon C.I.T. v SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD, [1970] 78 ITR 788 [CAL].
29. We are not inclined to accede to the submissions made by the learned counsel for the assessee that the question referred for our opinion has become an academic one. The Tribunal did not rest its decision in coming to the conclusion that the assessee has commenced its business of manufacture of cement by commencing quarrying of limestone which is an essential raw material for the manufacture of cement, on the ground that the assessee had set up and commenced its business of manufacture and sale of fertilizers. On the other hand, the Tribunal came to the conclusion that the assessee has commenced its business of manufacture of cement by taking the first and preliminary step of quarrying limestone which is an essential raw material for the manufacture of cement. We have to proceed on the basis of the finding recorded by the Tribunal in support of its conclusion. We cannot import the findings and the views of the Tribunal taken in the matter for the assessment year 1982-83.
30. In the result we hold that the Tribunal misdirected itself in reaching its decision in the matter. The evidence available on record would not justify the decision of the Tribunal. The Tribunal committed error apparent on the face of the record.
31. We will, therefore, redraft the question submitted by the Tribunal for our opinion as follows:
Whether, on the facts and in the circumstances of the case, the assessee could be said to have set up business of manufacturing cement during the accounting year relevant to the assessment year 1983-84?
And we will answer that in the negative. The reference is accordingly answered in favour of the Revenue and against the assessee.