Income Tax Appellate Tribunal - Mumbai
Income-Tax Officer vs Hindustan Diamond Co. (P.) Ltd. on 17 June, 1986
Equivalent citations: [1986]19ITD184(MUM)
ORDER
A.V. Balasubramanyam, Judicial Member
1. The revenue's appeal and the assessee's cross-objections raise one question and that is, whether the loss claimed should be allowed.
2. The assessee is a company incorporated on 10-2-1978. The business was to import and export diamonds and other precious stones, cut, clean, polish, set and otherwise prepare for the market of such stones either as principals, agents, brokers or otherwise. The accounting year relevant to the assessment for 1979-80 ended on 31-3-1979. In the return, the assessee claimed net loss of Rs. 11,12,558 from business. The ITO did not allow it on the reason that the business had not yet started. He took the net loss at nil. In the appeal, the Commissioner (Appeals) held that the business had been set up during the year and the loss claimed was eligible to be allowed and carried forward. The revenue has appealed to object. The grounds in the cross-objection are only to support the order of the Commissioner (Appeals).
3. The assessment had been completed under Section 143(3), read with Section 144B of the Income-tax Act, 1961 ('the Act'). The main reason for not allowing the loss was that the assessee had not either purchased or sold any goods and that a trader must do some trading activity in order to claim that business had started. The IAC pointed out that the first purchase had been made by the assessee on 21-9-1979 which was almost six months after the end of the previous year. In the appeal, the Commissioner (Appeals) pointed out few circumstances to hold that the business had been set up, relying upon rulings of the High Courts appropriate to the issue.
4. Shri Srivastav, representing the department, argued with great perpicacity and his industry and thoroughness of preparation deserve a special mention here. The Commissioner (Appeals)'s order mentions of the decisions of the Gujarat High Court in the cases of CIT v. Saurashtra Cement & Chemical Industries Ltd. [1973] 91 ITR 170, Sarabhai Management Corporation Ltd. v. CIT [1976] 102 ITR 25 and Hotel Alankar v. CIT [1982] 133 ITR 866 and the decision of the Bombay High Court in the case of Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151. Shri Srivastav's point was that there could be no commencement of business in the absence of even a single act of purchase or sale and to point out the distinction between setting up of business and commencement of business, he took us through the observations in Chaturvedi and Pithisaria's Income-tax Law (Vol. I, pp. 105-107). Citing the decision of the Gujarat High Court in the case of CIT v. Sarabhai Sons (P.) Ltd. [1973] 90 ITR 318, he contended that even placing orders for raw materials and stones would not put the company into the shape so as to start functioning. He, therefore, contended that the assessee cannot be said to have set up business since it had not embarked upon even a single transaction of purchase.
5. The Commissioner (Appeals) has in para 4 of the impugned order pointed out certain events which had in fact taken place before the end of this accounting year. They are :
(i) The appellant appointed a Company Secretary, Finance Manager and Departmental Heads between 1-5-1978 to 3-6-1978.
(ii) The appointees started taking action for selecting various other members of the staff.
(iii) Office accommodation was hired on 1-6-1978.
(iv) Registration under the Shops and Establishment Act was made in July 1978.
(v) Release of foreign exchange for Rs. 20 crores was obtained for the import of diamonds in July 1978.
(vi) A Senior Officer was appointed as Officer on Special Duty in the Ministry of Commerce in the rank of Joint Secretary to attend to the activities of the company. He went to London and Antwerp for discussion of the trading activities.
We gathered at the hearing that the Chairman and Managing Director, who had been appointed on 1-3-1978, had gone to London and Antwerp on 4-3-1978 in connection with purchase of rough diamonds. Having regard to the nature of business the assessee proposed to do, the raw materials (rough diamonds) had to be imported. The commodity is such that no inland purchase could have been made. For this the assessee had already obtained foreign exchange to the extent of Rs. 20 crores in July 1978 itself. Therefore, the necessary finance was at the command of the assessee. No purchase could be made unless a Chairman is appointed which in this case was made on 1-3-1978 following all the official formalities. Within three days, to be precise, on 4-3-1978, the Managing Director went abroad. It is clear that on 4-3-1978 the assessee was in a position to make purchases, that is to say, it was ready to start business. As pointed out by the Bombay High Court in Western India Vegetable Products Ltd.'s case (supra), there may not be commencement of business, but it is enough if there was setting up of business. It may be mentioned that Western India Vegetable Products Ltd.'s case (supra) is approved by the Supreme Court in the case of CWT v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478.
6. Turning to Sarabhai Sons (P.) Ltd.'s case (supra), the assessee therein was a company engaged in the business of manufacture of scientific instruments. It had placed orders for machinery and equipments in January 1966. Parallelly it had also placed orders for raw materials and stores and taken a premises on lease for establishing an industrial estate. The preparations continued up to July 1966 and the question was whether the business has commenced before the year that ended on 31-3-1966. As a fact, it was found that the business could not have commenced until July 1966, till the machinery had been installed and the factory was ready to start. It is in this context, it was held that placing orders for raw materials and stores had not made the manufacturing business being set up. It is true of this, because the installation of the machines itself was not complete till July 1966 and the factory was not in a position to manufacture any product. The same cannot be true if placing orders for raw materials was subsequent to the installation of machines, and if the factory was ready to go into production. The facts in the appeal on hand are altogether different and quite distinguishable. When the business is one of purchase and sale of diamonds and precious stones, either in the same condition or after processing, the business is set up the moment the assessee is in a position to purchase or sell. Whether or not the assessee made a purchase, it is beside the point. It had all the wherewithal and it was free and ready to make purchases and to explore the possibilities the managing director had even gone abroad. In this setting of things, the business had been set up, and the assessee was entitled to claim the loss incurred. The order of the Commissioner (Appeals) is affirmed.
7. The appeal and the cross-objections are dismissed.