Income Tax Appellate Tribunal - Delhi
Chakradhari Wheels (P) Ltd. vs Income Tax Officer on 21 June, 2005
Equivalent citations: (2005)96TTJ(DELHI)517
ORDER
Vimal Gandhi, President
1. This appeal by the assessee for asst. yr. 2001-02 is directed against order of CIT(A) confirming order of the AO wherein expenses and depreciation claimed by the assessee under the head "Business" were disallowed.
2. The facts of the case are that the company was formed with foreign collaboration on 31st Jan., 2000. The main business of the assessee was to manufacture and supply railway wheels to the Indian, Railways. The. assessee submitted return declaring loss of Rs. 26,04,110 on 21st Oct., 2001 In order to justify claim of expenditure and depreciation, the assessee vide letter dt. 30th Jan., 2004, filed before the AO, stated as under:
"The assessee's main customer is Indian Railways. During the year under consideration, the assessee could not get any order, therefore, there was no sale of the wheels. All the wheels purchased are duly reflected in the details of the closing stock enclosed. It consists of stock of raw wheels as well as stock of wheels under work-in-progress."
The AO held as under :
"By virtue of its own admission, the assessee has confirmed that the main customer is the Indian Railways and during the year under consideration, the assessee could not get any order. The emphasis is on the word 'order'. Indian Railways is a giant who have their own independent resources to look after the needs of the Railway Industries. Normally such a big industry depends upon the reputed suppliers who have got their own manufacturing facilities and who in turn perform to the utter most satisfaction as well as the rigours of the goods to be supplied normally having an ISI mark. In this case, the assessee has neither got any manufacturing facilities of its own nor could it commence any such manufacturing activities upto the standardisation of the ISI. The assessee has failed to place on record any such documentary evidence in support of its claim that it has in any commercial exigencies commenced the business activities."
The AO further observed that the assessee was in fact in the process of setting up its plant for manufacturing/assembling wheels for supply to Railways. He noted that assessee had imported 300 raw wheels from M/s NTRP, Ukraine, vide Bill No. 1350, dt. 14th Dec, 2000. However, no sale was effected by the party till 31st March, 2001. The AO accordingly held that the assessee did not carry on business and was not entitled to expenses and depreciation in the light of provision of Section 28 of the IT Act.
3. The assessee impugned above order in appeal before the CIT(A) and reiterated its submission that assessee had set up its business and was entitled to depreciation and expenses. It drew learned CIT(A)'s attention to the fact that wheels were purchased and were ready for sale. The learned CIT(A) did not find any force in the submission of the assessee and upheld the assessment of the assessee without allowing expenses and depreciation with following observations :
"3.3 I have carefully examined the issue and also considered the facts of the case. I have also carefully considered the submissions made by the learned Authorised Representative as well as the reasons given by the AO in the assessment order and have also perused the relevant material placed on record. It is noticed that the alleged business loss was made up of expenses and depreciation claimed by the appellant. The allowability of the claim for business expenses and depreciation has to be examined with reference to computation of income chargeable under the head profits and gains of business or profession under Section 28 of the Act. In order to compute the profits or loss assessable under the head profits and gains of business or profession under Section 28 of the Act, it is essential that the business of the appellant must have been carried on at any time during the previous year relevant to the assessment year under consideration. The appellant-company was incorporated to carry on the business of manufacture and production of railway wheels. Therefore, the appellant-company can be said to have carried on its business during the year only if it has commenced the commercial production. The onus to prove that the commercial production had commenced and the business was carried on during the year under consideration lies on the appellant. However, the appellant has not furnished any cogent, relevant and reliable evidence to prove that the commercial production had actually commenced and the business was carried on at any time during the year under consideration. Perusal of the balance sheet and P&L a/c relating to the year under consideration shows that there was no production of finished goods till the end of the year under consideration and the closing stock shown at the end of the year comprised only of raw wheels, cutting tools and work-in-progress. It is further seen that neither there was any order received by the appellant from its customers for supply of wheels nor there was sale of any goods till the end of the year under consideration. The facts of the case clearly indicate that the commercial production did not commence till the end of the year under consideration and no business was carried on by the appellant during the year. Therefore, the provisions of Section 28 of the Act cannot be invoked to compute any profits or loss assessable under the head profits and gains of business or profession. Consequently, the claim for alleged business expenses and depreciation and the resultant business loss was not allowable. On a careful consideration of the facts and circumstances of the case and the relevant provisions of the law, I am of the considered view that the AO was justified in disallowing the claim of the appellant for the alleged business loss and consequently, in assessing the total income at Rs. 2,02,510 on account of interest income chargeable to tax under the head 'Income from other sources' and the assessment so made by him is, accordingly, confirmed."
4. The assessee, being aggrieved, has brought the issue in appeal before the Tribunal. The learned counsel for assessee, Shri K.R. Manjani, drew my attention to details of closing stock shown in the balance sheet of the relevant period under the head work-in-progress. The assessee had not only shown purchase of wheels, cost of cutting tools consumed, expenses on wages included in total cost and sale of scrap. The assessee thus had wheels ready for sale. Shri Manjani also drew my attention to the tenders submitted by the assessee on 18th Nov., 2000, with the Railways. The assessee had also informed Excise Department that its commercial production has started w.e.f. 1st March, 2001. Now, if the railway does not accept assessee's tender to purchase wheels in the relevant period, it cannot be said that business has not been set up by the assessee. Shri Manjani further submitted that a distinction is drawn between setting up of business and commercial production in the business. He also placed on record that ultimately 300 wheels were supplied to the Railways in April, 2004, of value of more than Rs. 1 crore as per copy of documents attached. He also placed on record order dt. 29th April, 2004, from Railways to the assessee for supply of wheels after accepting assessee's tender dt. 27th Oct., 2003. It was accordingly contended that depreciation and expenses were wrongly disallowed to the assessee in spite of the fact that business was duly set up in the period under consideration. The learned counsel relied upon the following decisions :
(i) CIT v. Sarabhai Management Corporation Ltd.
(ii) CIT v. Kanoria General Dealers (P) Ltd.
(iii) CWT v. Ramaraju Surgical Cotton Mills Ltd. (iv) CIT v. Vindhyachal Distilleries (P) Ltd. and
(v) Jt. CIT v. Sardar Sarovar Narmada Nigam Ltd. (2005) 93 TTJ (Ahd) 965 : (2005) 93 TTD 321 (Ahd).
5. The learned Departmental Representative vehemently opposed above submissions for reliance upon the observations of the AO and of learned CIT(A) in the orders impugned. He pointed out that assessee did not have standardisation manufacturing certificate from ISI and it is unthinkable that a Department like Indian Railways could buy wheels without having above standardisation. No sale was admittedly effected in the period under consideration nor any evidence has been filed on record to show that assessee was in a position to supply wheels to the Railways. No business was carried by the assessee in the period under consideration and, therefore, depreciation and expenses claimed were rightly disallowed.
6. I have given careful thought to the rival submissions of the parties. It is settled law that expenditure and depreciation are to be allowed to the assessee in case it is established that business has been set up even if commercial production has not started. In this connection, reference may be made to Western India Vegetable Products Ltd. v. CIT , Sarabhai Management Corporation Ltd. v. CIT and CIT v. Western India Seafood (P) Ltd. . Thus, in my considered view learned Revenue authorities did not apply proper test in holding that expenditure could be allowed only if sale was effected by the assessee and commercial production of railway wheels was started. As observed in the case of Western India Vegetable Products Ltd. (supra), there is a distinction between a person commencing a business and a person setting up a business for purposes of IT Act and in the present case, Revenue authorities wrongly applied yardstick of commencement of a business. In a case where business is established and is ready to commence business then it can be said that the business is set up, but unless it is ready to commence business, it cannot be said to be set up. All expenses incurred between the setting up of business and commencement of business are to be allowed as a permissible deduction. Further, in the case of Prem Conductors (P) Ltd. v. CIT, their Lordships held that where the business of the assessee consists of different categories and activities then business can be said to be set up from the date when one of the categories of business is started and it is not necessary that all the activities of business must start simultaneously or last stage of the business should also start to hold that business has been set up. The test ultimately held to be applied was to see whether one of essential activities for carrying on business of the assessee as a whole had or had not commenced.
7. With the above legal quoting when I examine facts and circumstances of the case, I am satisfied that the assessee had set up business when it procured raw wheels and subjected them to process as detailed in work-in-progress and submitted tender with Railways for supply of wheels. Supply of wheels to the railway depended upon the acceptance of the assessee's tender. As tender was not accepted wheels could not be supplied. The Revenue authorities have not recorded any finding to the effect that the assessee was not in a position to supply wheels to the Railways in case its tender was accepted. They erroneously applied the test of commencement of commercial production and further on the ground that no sale was effected, denied deduction of expenditure and expenses to the assessee. In my considered opinion, the assessee had set up the business and was entitled to claim of expenses and depreciation.
I also deem it relevant to mention that in the order dt. 29th April, 2004, of Indian Railways for supply of wheels, it is provided as under :
"7. Specification 7 Drawing REF. The wheels shall be supplied strictly in accordance with the latest alteration of drawings and specification stipulated in Clause 5(a) above.
xx xx xx xx
10. (i) Wheel Making : Stamping (Branding) on wheels shall be done strictly in accordance with 'drawings and specification stipulated above.
(a) For manufacturer's name code, you shall stamp words KLW.
(b) Code for particular contract to be stamped on the wheels will be W399.
(ii) Colour Marking : With reference to Clause 12.1(c) of the bid documents, Pt II, Sec. IT (general conditions of the contract), distinguishing colour marking is to be made asl under :
Colour Item No. & Drg. No.
One Red Stripe D/WL-4948/R
The stripe indicated above should be prominently displayed on the wheels in a prominent place to enable the same to be segregated instantaneously.
11. Inspection : Inspection of the wheels shall be carried out by RDSO. The contractor shall afford full facilities to the Inspecting officers to inspect the wheels at all stages. A copy of the notice should also be sent to the purchaser simultaneously.
As safety considerations are involved, physical inspection either by RDSO or any other approved competent organisation should not be waived without the concurrence of the purchaser."
It is further stipulated that wheels to be supplied by the assessee have been manufactured by NTRP, Ukraine, and rough machining shall be done at the plant of the assessee situated at Bhiwadi, Rajasthan. There is no stipulation that wheels would be of ISI mark specification. The AO thus was not justified in holding that wheels should "normally have an ISI marking". This point was also emphasised by the learned Departmental Representative during the course of his arguments. However, the argument is without any merit. The railway insist on their own specifications and there is no material that wheels available with the assessee in the closing stock would not have satisfied above specifications if tender of the assessee was accepted and assessee was called upon to supply wheels. The claim of the assessee has been rejected on conjectures and without applying relevant test of "setting up of business". Accordingly, it is held that assessee had set up its business and was entitled to deduction of expenditure in accordance with law.
8. I further find from record that nature of expenditure and depreciation claimed by the assessee in the relevant period were not considered by the Revenue authorities for the reasons that they were of the view that assessee is not entitled to any deduction. In the light of what has been held above, I set aside impugned orders and restore the matter to the file of the AO to examine claim in dispute in accordance with law and allow expenses and depreciation as permissible to the assessee under the Rules. The matter be decided after affording reasonable opportunity of being heard to the assessee.
No other point was argued before me during the course of hearing.
9. In the result, assessee's appeal is allowed in terms stated above.