Income Tax Appellate Tribunal - Ahmedabad
N. K. Pharma Industries, Ahmedabad vs Assessee on 7 December, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
'C' BENCH - AHMEDABAD
(BEFORE SHRI G.C. GUPTA, VP AND SHRI A. MOHAN ALANKAMONY, AM)
ITA No.3530/Ahd/2004
A. Y.:2001-02
M/s. N. K. Pharma Industries, Vs The A. C. I. T., Circle - 6,
1814-B, Phase- II, GIDC Vatva, Ahmedabad
Ahmedabad
PA No. AACFN 2912 L
(Appellant) (Respondent)
Appellant by Shri A. C. Shah, AR
Respondent by Shri S. K. Gupta, Sr. DR
Date of hearing: 07-12-2011
Date of pronouncement: 2-03-2012
ORDER
PER A. MOHAN ALANKAMONY: This appeal of the assessee firm is directed against the impugned order of the Ld. CIT (A)-XII, Ahmedabad in Appeal No. CIT(A)-XII/Cir.6/197/03-04 dated 6.10.2004 for the assessment year 2001-02.
2. The assessee firm had raised its grounds in an illustrative and narrative manner. In this connection, the assessee's specific attention is invited to rule 8 of the Income-tax (Appellate Tribunal) Rules, 1963 wherein it has been prescribed under the caption 'Contents of Memorandum of appeal' that -
2
"8. Every memorandum of appeal shall be written in English and shall set forth, concisely and under distinct heads, the grounds of appeal without any argument or narrative; and such grounds shall be numbered consecutively."
2.1. Turning to the issue on hand, to be precise, the grievances of the assessee were that:-
(1) the Ld. CIT (A) had erred in confirming and holding that Unit 2 was altogether new business and thereby erred in disallowing Rs.34,49,138/- being the expenditure incurred prior to the date of commencement of Unit No.2;
(2) the CIT (A) had erred in confirming the addition of cash credits and interest of Rs.1,09,583/-;
(3) also erred in confirming the interest paid to Standard Chartered Bank on car loan;
(4) initiation of penalty proceedings u/s 271(1)(c) of the Act; and (5) charging of interest u/s 234B, 234D and 244A of the Act.
2.1.1. As far as the ground No.4 was concerned, we would like to reiterate that since initiation of penal proceedings u/s 271(1)(c) of the Act being in its infancy when the assessment proceeding was concluded , it cannot, therefore, be agitated in this appeal. Thus, this ground doesn't deserve any adjudication.
2.1.2. With regard to charging of interest u/s 234B, 234D and 244A of the Act (Ground No.5), the impugned assessment order dated 6.2.2004 (on Page 7), reveals only that "Charge interest u/s 3 234A/B/C, if applicable" and, thus, the assessing officer or his office for that matter was obliged to charge interest u/s 234A, 234B and 234C of the Act only. Even then, charging of interest under the above sections is mandatory and consequential in nature; this ground is dismissed as not maintainable.
3. Reverting back, the facts of the issues, in brief, are that the assessee firm (the assessee' in short) engaged in the business of manufacturing and trading pharmaceutical machinery and spare parts; that during the course of assessment proceedings, it was noticed by the AO that the assessee had claimed deduction to the tune of Rs.34,49,138/- being, among others, AFC Bill of Rs.398085, laboratory expenses of Rs.107105/-, depreciation of Rs.2253645/- and interest of Rs.5,23,853/-. According to the assessee, those expenses were related to the business identified by the assessee as Unit No. lI. However, the AO took a stand that for and up-to AY 2000-01, the assessee's business was to manufacture pharmaceutical machinery and its spare parts only, that from the current year the assessee set up Unit II to manufacture pharmaceutical items i.e., medicines and, therefore, he was of the view that Unit II was nothing but a new business and not the 4 expansion of the assessee's earlier business and, therefore, the expenses claimed in respect of the period up-to 16.3.2001 i.e., the date when commercial production commenced in Unit II was not allowable expenditure.
3.1. On being queried, this was hotly contested by the assessee that the date of set up of the business in Unit II was 2.12.1999 (sic) 21.12.1999 which was the date when the assessee had purchased and received the machinery from Hoechst in this Unit; that the commercial production was started in this case on 16.3.2001; and that both the Units 1 & 2 were under the same partnership which was having the same partners and as such there was no change either in the constitution of the firm or partners or their profit sharing ratio during that relevant period. It was, therefore, asserted that the expenditure claimed by the assessee was allowable revenue expenditure. However, the AO took a divergent view by taking refuge in the ruling of the Hon'ble jurisdictional High Court in the case reported in 251 ITR 133 (Guj) and observed that for the commencement of the business, production of the articles for the manufacture of which a plant had been set up, was an essential pre- condition for holding that the business of that assessee had started. 5 According to the AO, as the assessee commenced its production in Unit II only on 16.3.2001, the expenditure incurred before that date was not allowable and, accordingly, disallowed Rs.34,49,138/-.
4. Aggrieved, the assessee took up the issue, among others, before the CIT (A) who had, after due consideration of the assessee's contentions as recorded elaborately in his impugned order under dispute, observed thus:
"(On page 5: The appellant is shown to be already running Unit No.1 for manufacturing of pharmaceutical machinery and its spare parts. On the other hand, Unit No. II is set up to manufacture medicines. As observed by the AO, this is all together a new business and manufacture of medicines cannot be taken to be one and the same thing as manufacture of pharmaceutical machinery and its spare parts. As contended by the Ld. Counsel to examine as to whether a new unit set up by and assessee is to be taken as the new business or expansion of an existing business, various factors are to be considered. As held by various Courts, unit of control, common management, common administration and common funds etc; are some of these factors which may be relevant for deciding such an issue. However, this cannot be decided solely on the basis of one or two such factors. As held by Hon'ble Rajasthan High Court in the case of CIT v. Mohan Enterprises 208 ITR 145, the burden is on an assessee to establish that different ventures constituted part of the same business. It is also held by the Hon'ble High Court that sufficient evidence has to be produced about the unit of control and management and inter relation of the business or employment of the same staff etc., to run the business or the possibility of one after being closed affecting other business etc., to prove the same. Though in appellant's case it is contended that both the units are under the same partnership, and that therefore, there was common management and common control and that source of finance for running both the activities was also one and same, somehow, nothing has been brought on record by the appellant, what to say of 'sufficient evidence' either during the assessment proceedings or during the appellate proceedings to prove as above. Further, as is brought out in a number of decisions on this aspect, an important factor to decide the issue in question is to see if the closure of one business affects the running of the other business or not in appellant's case closure of business in the second unit where the appellant is manufacturing medicines would not affect in any manner, the running of the business in Unit No.1,where the appellant is manufacturing pharmaceutical machinery and its 6 spare parts. Therefore, from this angle also the contention of the appellant is not acceptable.
Coming to the various decisions relied upon by the ld. Counsel, it may be mentioned that Hon'ble Supreme Court in the case of Watkins Mahyor (Agrico) Pvt. Ltd. V. CIT 219 ITR 563 has distinguished the case of Prithvi Insurance Co. Ltd. (supra) and of Produce Exchange Corporation (supra) relied upon by the ld. Counsel. It is observed by the Hon'ble Supreme Court in the said decision that all these decisions were rendered with reference to section 24(2) of the IT Act 1922 and that question in all these cases was whether the business continued by that assessee in the relevant assessment year was the very same business, wherein loss was originally sustained within the meaning of section 24(2). The Hon'ble Supreme Court, therefore, held that question considered in these decisions is not the same as concerned in the case of Watkins Mayor (Agrico) Pvt. Ltd v. CIT 209 ITR 563. The issue in question in this case was as to whether on the facts and in the circumstances of that case, the various lines of activity like Tea Estate, Coffee Estate and Plantation, etc, did not constitute one single and integrated activity of business, but, independent unit of business. It was held by the Hon'ble Supreme Court in the facts and circumstances of this case that the question has to be decided on consideration of the relevant facts and circumstances and all over view has to be taken and the conclusion arrived at. The Hon'ble Court further held that even if it was found that one or two circumstances, among the several circumstances relied upon was found that one or two circumstances, among the several circumstances relied upon were not relevant, the finding of the fact recorded by the Tribunal could not be interfered with if there were other relevant circumstances to sustain the findings. Therefore, in then facts and circumstances of this case in spite of existence of centralized management, maintenance of single set of accounts, there being non evidence relating to interlacing, inter connection, inter dependence of the various estates in the day- to-day affairs or their functioning being dovetailed into one an other and considering that all the activities of that assessee were independent and closure of one would not affect the continuation of another, the Hon'ble Supreme Court upheld the finding that the different activities carried on by that assessee did not constitute one single and integrated activity of the business. In view of the ratio of this decision, on the facts and in the circumstances of the appellant's case also it has to be held similarly that the business of the appellant in Unit No.II is not the expansion of the earlier existing business in Unit No.I. The decisions of the jurisdictional High Court i.e., Hon'ble Gujarat High Court in the case of Rainbow Dyestuff Ltd v. CIT reported at 213 ITR 560 whereby distinguishing the case of CIT v. Alembic Glass Industries Ltd (supra) and which case is relied upon by the ld. Counsel can also be referred to hold as above. The finding is also be supported by the decision of Hon'ble Calcutta High Court in the case of Ashok Marketing Ltd v. CIT reported at page 208 ITR 941 and that of CIT v. Mohan Enterprises of Hon'ble Rajasthan High Court (supra). In view of the above, it is held that the setting up of Unit No. II by the appellant is not the expansion of the existing business of Unit No. I. 7 Coming to the contention of the appellant that the business in Unit No. II should be taken to have been set up from 2.12.1999, when the machinery for the manufacturing of medicine in that unit was purchased, the same cannot be accepted. If this contention of the ld. Counsel is accepted then in all the cases the business would have been taken to be set up when the assessee's purchased plant and machinery for their factories. However, as is well known, in a number of decisions, it has been rather held that even the trial run i.e., when the entire plant and machinery is not only purchased but installed and ready for production, is not the set up of the business if everything is not found to be in order in the said trial run. The decision relied upon by the ld. Counsel in this regard would also not help the appellant's case. In the decision of Sarabhai Corporation Ltd v. CIT (supra), the Hon'ble Gujrat High Court was not dealing with the cases of manufacturing unit as is the case of the appellant. Therefore, the ratio of that decision which is in relation to certain company letting out a building, on lease and license would not apply to the facts and circumstances of appellant's case. Similarly, in the case of Hon'ble Gujarat High Court in Prem Conductors v. CIT (supra), the question was not of purchase of plant and machinery, as contended in appellant's case, but the issue was as to whether starting securing orders against further production of the goods manufactured by a company could be said to be setting up of its business or not. Therefore, this decision would also not help the appellant's case. Similarly, the decision of Saurashtra Cement and Chemicals Industries Ltd v. CIT (supra) relied upon byh the ld. Counsel has been rendered on facts and circumstances distinguishable from the facts and circumstances of the appellant's case. Therefore, this would also not help the appellant's case. It is accordingly held that the AO is fully justified in disallowing the deduction of expenditure of Rs.34,49,138 incurred by the appellant in Unit No. II before 16.3.2001, when the appellant admittedly commenced business being commercial production in that unit.
Coming to the alternative contention of the appellant, the appellant is, however, entitled to deduction of depreciation on plant and machinery items as the commercial production commenced from 16.3.2001. However, as the plant and machinery items have been put to use for the period less than 180 days, depreciation is to be allowed @ 50% of the normal rates. The AO is directed to allow the appellant depreciation on the plant and machinery in Unit No. II as above after due verification etc. One other contention of the appellant also merits consideration. This is that the pre-operative expenses should be apportioned amongst the various assets and that while allowing depreciation these capitalized expenses should also be taken into account. The appellant is fully justified in claiming as above. While working out the allowable depreciation to the appellant as above for Unit No. II, the AO should also take into account the capitalized expenses for working out such depreciation."
5. Agitated, the assessee has come up with the present appeal. It was the case of the assessee that the CIT (A) had erred in 8 confirming the disallowance of revenue expenditure, depreciation and interest of Rs.34.49 lakhs as expenditure. The submissions made by the Ld. A R on the above issues are summarized as under:
(i) Depreciation of Rs.22.53 lakhs: The machinery was used from 15.3.2001 onwards and, thus, the assessee was entitled for depreciation for six months.
(ii) Interest of Rs.5.23 lakhs: Since the assessee had borrowed funds for its business purpose - for the purchase of machinery and the interest paid was Rs.5.23 lakhs - whether it was used either for revenue or capital purpose was of any relevance.
Relies on:
(a) DCIT v. Core Health Care Ltd - 298 ITR 194 (SC); &
(b) Gujarat State Fertilizer and Chemicals Ltd v. ACIT - 313 ITR 244 (Guj) - SLP dismissed 313 ITR 32 (Statute)
(iii) Revenue expenditure of Rs.6.71 lakhs:
The assessee being a partnership firm consisting of two partners, was the manufacturer of pharmaceutical machineries up-to the AY 2000-01 and from 16.3.2001 [AY 01-02], the assessee had expanded its business in pharmaceuticals and started manufacturing pharmaceutical drugs in Unit - II which was extension of its business; that it had set up Unit II to manufacture drugs which was the same business since it was expansion and extension;
and that the test of the same business was unity of control, inter-lacing, common management, administration and common funds. The following facts prove the assessee's claim, namely:
(a) Both the partners were in overall control of both the activities which were owned and carried on by the assessee which has been acknowledged by the AO - on page 3 of his assessment order;
(b) There was common fund from which the necessary capital and working funds were drawn to both the business activities; and that the gain or loss of the business was also worked out by a consolidated P & L account and Balance Sheet;
(c) there was common staff for carrying on both the business activities; &
(d) the source of finance for running both the activities was, thus, one and the same and there was consolidation of accounts for the purpose of ascertaining 9 the ultimate working result of the business carried on by the assessee and that there was complete unity of control in the management and administration of both the business activities;
- it was, thus, clear from the above that the control was with both the partners with common management and common funds; and that there was interlacing and unity control in both the activities.
(e) rebutting the AO's claim and distinguishing the case law reported in 251 ITR 133 (Guj) relied on by the Revenue, it was claimed that in the case of assessee, it was a case of expansion and extension of the existing business and not setting up altogether a new unit and the dispute was whether the expenditure incurred prior to the commercial production, particularly, when there was already an existing business. On the facts, the assessee case was covered by the ratio laid down in the case of Alembic Glass [103 ITR 715 (Guj)] and Jay Engineering Works v. CIT [ 311 ITR 405 (Del)]
(f) Setting up of Unit-II was the extension and expansion to the existing business of Unit-I and since Unit I & II were of the same business, the losses from one business can be set-off against the profits of the other business; Relies on case laws:
(i) CIT v. Prithvi Insurance Co. Ltd - 63 ITR 632 (SC);
(ii) Produce Exchange Corpn. Ltd v. CIT 77 ITR 739 (SC);
(iii) Bansidhar Pvt. Ltd v. CIT 127 ITR 65 (Guj)
(iv) CIT v. Modi Industries Ltd 200 ITR 341 (Del)
(v) Veecumsees v. CIT 220 ITR 185 (SC);
(vi) Jay Engineering Works Ltd v. CIT 311 ITR 405 (Del) Alternatively:
(g) Set-up of business: when any activity to set up the business was carried on, the business was said to have been set up. The revenue expenditure and interest incurred between the date of set up and date of commercial production is allowable revenue expenditure Relies on case laws:
(i) Sarabhai Management Corporation Ltd v. CIT 102 ITR 25 (Guj);
(ii) Prem Conductors P. Ltd v. CIT 108 ITR 654 (Guj)
(h) the CIT (A) held, relying on the case laws reported in (i) 208 ITR 146 (Raj), (ii) 209 ITR 563 (SC); (iii) 208 ITR 94 (Cal); & (iv) 213 ITR 560 (Guj) with regard to setting up of unit for manufacturing of pharmaceutical drugs, was not the expansion of business and that the assessee had not brought on 10 any evidence on record to prove that there was interlacing, inter connection and unity of control. Rejecting the CIT (A)'s observation, the assessee explained that the AO himself recorded in his assessment order that:
"(On page 3) Furthermore, both Unit I & II are under the same partnership firm namely M/s. N.K. Pharma Industries and having same partners, namely, Mr. N.R. Mewada AND Darshan N Mewada and also having same ratio i.e., 50% and 50%. There is no change either in constitution of the firm and/or partners and/or their profit sharing ratio during the relevant period."
This clearly shows that without looking into the facts of the issue and assertion of the AO, the CIT (A) had given a finding;
(i) that the case laws reported in 208 ITR 146 (Raj) and 77 IT 739 (SC) relied on by the CIT (A) were on the different footing and the SC Had remanded back the issue as no evidences with regard to unity of control, inter lacing and inter connection were furnished; that the facts were different in the case laws reported in 208 ITR 941 (Cal) also in the case of Rainbow Dyestuff Ltd v. 213 ITR 560 (Guj.).
(j) With regard to cash credit of Rs.1,09,583/- u/s 68 of the Act, it was submitted that the minors through their guardian(s) have confirmed the deposits which have been through banking channels. Relies on the case law: 256 ITR 360 (Guj). 5.1. To strengthen his argument, the Ld. AR had furnished, during the course of hearing, a paper book which consists of, among others, copies of (i) deed of partnership; (ii) audited accounts; (iii) invoice of Hochest Marion Roussel Ltd; (iv) various case laws etc., 5.2. On the other hand, the Ld. D R was very emphatic in his resolves that, after duly analyzing the pros and cons of the issues, the AO had disallowed the expenses claim of Rs.34.49 lakhs incurred by the assessee in Unit II before 16.3.2001 when the assessee admittedly commenced its business - commercial production of Unit 11 II - which has been judiciously sustained by the CIT (A). It was, therefore, pleaded that the assessee's plea in others issues also required to be rejected. He had placed strong reliance on the case laws reported in 90 ITR 318 & 63 ITR 478.
6. We have duly considered the rival submissions, diligently perused the relevant case records, various documentary evidences adduced by the Ld A R in the shape of a paper book (supra) and also the judicial pronouncements on similar issues advocated by either party.
6.1. It is an undisputed fact that the assessee firm - consisting of two partners - was the manufacturers of pharmaceutical machineries and spare parts up-to the assessment year 2000-01 and from the assessment year under consideration, i.e., from 16.3.2001 had expanded its business in pharmaceutical drugs and started manufacturing pharmaceutical drugs in Unit II which was rather extension of its earlier line of the existing business. Both the activities, namely, manufacturing of pharmaceutical machineries, spare parts and manufacturing of pharmaceutical drugs was, undoubtedly in the same line of business. The out come of the 12 scanning of test of unity of control, inter-lacing, common management, common administration, common funds etc., the following vital issues have emerged, namely:
(i) the partners of the assessee (firm) were in overall control of the activities of Unit I and II which were owned and carried on by the assessee; and that this very fact has been vouched in no un-certain terms;
(ii) there was common funds from which capital and working funds were channeled for the twin activities of the business;
(iii) a consolidated P & L account and balance sheet were in place to trace the gain/loss of the business of the assessee;
(iv) common staffers were put in place to carry out the both business activities of the assessee; &
(v) complete unity of control in the management and administration of the business activities of the assessee;
6.1.1. The above facts have clearly exhibited that there was inter-lacing and unity of control in both the activities. The assessee placed an order to import the required machinery for production of drugs with Hoechst Marion Roussel Ltd. which was subsequently imported vide Invoice No.Fact/Accts/2118 dated 21.12.1999 and cleared by the AMC (Octroi) [courtesy: P 60 & 61 of PB AR). However, we are not convinced with the theory of the Ld. CIT (A) that the assessee was shown to be running Unit I for manufacturing of pharmaceutical machinery and its spare parts and on the other hand setting up of Unit II to manufacture of medicines was altogether a 13 new business and manufacture of medicines cannot be taken to be one and the same thing as that of manufacture of pharmaceutical machinery and spare parts.
6.1.2. For instance, if BOSCH - a leading manufacturer of spark plugs, fuel injection equipments and allied items for vehicles - ventures to manufacture pharmaceutical drugs, then it can be classified that the BOSCH's scheme is nothing but altogether a new business which has no nexus with the existing business - manufacturing of spark plus, fuel injection equipments and allied items for vehicles. However, in the case under consideration, the assessee's main business being manufacture of pharmaceutical machinery and spare parts which intends to manufacture pharmaceutical drugs which, in our considered view, cannot be classified as altogether a new line of business as branded by the AO which was ratified by the CIT (A).
6.1.3. As conceded by the CIT (A) [on page 5 of his impugned order], an assessee has to be put under acid test - as to whether the new unit set up by it is to be termed as extension of an existing business or a new business - such as unity of control, 14 common management, common administration, common funds etc., as subscribed by various judiciary. In the present case, the assessee had proved to be unity of control, common management, common administration, common funds etc., as acknowledged by the AO in his impugned order (on page 3 - at the cost of repetition):
"Furthermore, both unit Nos. I & II are under the same partnership firm, namely, M/s.N.K. Pharma Industries. And having same partners namely Mr. N.R. Mevada & Darshan N Mevada and also having same ratio i.e., 50% and 50%. There is no change either in constitution of firm and/or partners and/or their profit sharing ratio during the relevant period."
6.1.4. With regard to the conditions prescribed by the Hon'ble Rajasthan High Court reported in 208 ITR 146 (Raj) relied on by the CIT (A), the assessee had placed sufficient evidence to the effect that:
(i) the partners of the assessee firm was in overall control of both the activities which were owned and carried on by the assessee;
(ii) there were common funds and that there was common staff for carrying on both the business activities.
6.1.5. The above facts amply prove that there were unity of control and management and inter-relation of the business or employment of the same staffers to run the business. 6.2. Let us now divert our attention to peruse the judiciary views on a similar issue.
15
Expansion and extension of business:
(1) CIT v. Prithvi Insurance Co. - 63 ITR 632 (SC):
(i) It was ruled by the Hon'ble Court "that the respondent
- company was entitled to the set-off claimed by it as the life insurance business and the general insurance business constituted one composite business. The inter-connection, inter-lacing, inter- dependence and unit were furnished by the existence of common management, common business organization, common administration, common fund and a common place of business."
(ii) It was, further, held that "(on p.633) if one business cannot conveniently be carried on after closure of the other, there would be a strong indication that the two constituted the same 'same business' but no deceive inference may be drawn from the fact that after the closure of one business, another may conveniently be carried on."
(2) Produce Exchange Corporation Ltd v. CIT (Central) Calcutta -
77 ITR 739 & 742 (SC):
It was held by the Hon'ble Court:
"(i) that the decisive test was unity of control and not the nature of the two lines of business;
(ii)that the Tribunal was right in holding that the share business and other businesses carried on by the appellant-company constituted the same business within the meaning of section 24(2) as it stood before its amendment in 1955;16
Referring to its earlier ruling in the case of CIT v. Prithvi Insurance Co. Ltd [63 ITR 632 (SC) referred (1) above wherein it had raised a question and answered itself which are as under:
"(Quote)Was there any inter-connection, any inter-lacing, any inter-dependence, any unity at all embracing those two businesses?
That inter-connection, inter-lacing, inter-dependence and unity are furnished in this case by the existence of common management, common business organization, common administration, common fund and a common place of business." (3) CIT v. Alembic Industries Ltd. - (1976) 103 ITR 715 (Guj):
Referring to the ruling of the Hon'ble Apex Court in the case of CIT v. Prithvi Insurance Co. Ltd [63 ITR 632 (SC), the Hon'ble jurisdictional High Court ruled that:
"(On Page 716) Even assuming that the test for considering whether a particular unit is a separate business from the business of the other unit or not, is to see whether the closure of one unit would affect the other unit or not, as contended by the revenue, the closure of any of the two units here would surely affect the working and the business of the remaining unit for simple reason that a larger liability of the whole business would obviously have to be borne by the other unit on the closure of one unit.
The Tribunal was, therefore, justified in law in holding that the new factory at Bangalore did not constitute a new business but was only an establishment of a new unit of the existing business at Baroda."
(4) Yet another ruling, the Hon'ble jurisdictional High Court in the case of Bansidhar Pvt. Ltd v. CIT [127 ITR 65 (Guj)] had observed:
"(On Page 66) that the board of directors of the assessee which was a private company was in overall control of all the five business activities which were owned and carried on by the assessee. There was a common fund from which the necessary capital and working funds were supplied to the various business activities. The ultimate gain or loss of the businesses was also worked out by a 17 consolidated profit and loss account and balance sheet. The source of finance for running the various businesses was thus one and the same and there was consolidation of accounts for the purpose of ascertaining the ultimate working result of the businesses carried on by the assessee. Merely because there was a separate staff which was not inter-transferable, the unity of control was not affected since at the apex, there was common management and administration with an overall control of the various businesses vesting in the board of directors of the assessee-company. Though some or most of the businesses were carried on at different places, the ultimate control was exercised at the registered office of the assessee-company and that circumstance also did not detract from the unity of control. The emphasis on the widely different nature of the business activities, though not altogether irrelevant, was not by itself decisive. The fact that manufacturing business was combined with trading activities was again a matter of no consequence because that by itself, or coupled with other circumstances, would not lead to the conclusion that there was no interlacing or interdependence, since there was unity of control. Even if different books of account were maintained and the transactions inter se between the different business units were recorded in those books of accounts; that circumstance would pale into insignificance once it was found that ultimately there was a common profit and loss account and balance sheet. The fact that the closure of one business did not affect or lead to the closure of the other businesses was also not of much consequence because no decisive inference can be drawn there- from.
Therefore, there was complete interconnection, interlacing, interdependence and dovetailing of the different business activities carried on by the assessee and all the activities constituted one and the same business..........."
6.2.1. Taking into account the facts and circumstances of the issue as discussed above and in conformity with the rulings of the judiciary as detailed supra, we are of the firm view that setting up of Unit II by the assessee was , indeed, laced up with an expansion of the existing business in Unit-I. It is ordered accordingly. 6.3. With regard to revenue expenses of Rs.6,71,640/-, we recall the ruling of the Hon'ble High Court of Delhi in the case of Jay Engineering Works Ltd v. CIT reported in (2009) 311 ITR 405 (Delhi) 18 wherein the issue, in brief, was that the assessee-company manufactured fans and sewing machines at various units including in Hyderabad. It decided to expand its activities and, therefore, undertook a fuel injection equipment project in Hyderabad and incurred an expenditure of Rs.1.56 Crores, out of which, Rs.1.35 Crores being acquisition of plant and machinery. This claim of the assessee was turned down by the AO which was upheld by the CIT (A) and the Tribunal as well. However, the Hon'ble Court, on reference, held:
"(On page 406) that it was clear that the control over the two units was in the hands of the same management and administration. There was no doubt on this score and in fact, the annual report of the assessee made a reference to the project at Hyderabad. The facts on record showed that the new venture was managed from common funds and there was the necessary unity of control leading to an interconnection, interdependence and interlacing of the two ventures such that it could be said that the fuel injection equipment project was only an extension of the existing business of the assessee and, therefore, the expenditure incurred by the assessee on this project was revenue expenditure."
6.3.1. In view of the facts as discussed above and in conformity with the judicial precedent, we are of the considered view that the assessee was entitled to claim the expenditure of Rs.6,71,640/-. 6.4. In respect of the depreciation claim of Rs.22,53,645/-, we find and also fairly conceded by the assessee itself that since the machinery was put to use only on 15.3.2001 which was less than 180 days, the AO shall work out and allow the eligible percentage of 19 depreciation as per the I.T. Rules prevailed at that relevant period. It is ordered accordingly.
Interest of Rs.5,23,853/-:
6.5. At the outset, we would like to reiterate that the Hon'ble highest judiciary of the land in its wisdom in the case of DCIT v. Core Health Care Ltd reported in (2008) 298 ITR 194 (SC) had held that the assessee was entitled to deduction u/s 36(1)(iii) of the Act prior to its amendment by the Finance Act, 2003, in relation to money borrowed for purchase of machinery even though the assessee had not used the machinery in the year of hearing.
6.5.1. Further, the jurisdictional Hon'ble High Court, in its ruling in the case of Gujarat State Fertilizer & Chemicals Ltd v. ACIT reported in (2009) 313 ITR 244 (Guj) by applying the ratio laid down by the Hon'ble Apex Court in the case of DCIT v. Core Health Care Ltd (supra), had held that "since there was no dispute about the fact that the capital borrowed was used for the purpose of business, the interest on the borrowed capital was deductible u/s 36(1)(iii) of the Act." Ironically, the Hon'ble Supreme Court had dismissed the SPL of the Revenue against the judgment of the Hon'ble Gujarat High Court (supra) reported in (2009) 313 IT (St) 32.20
In conformity with the ruling of the Hon'ble Apex Court as well as the Jurisdictional Hon'ble High Court referred supra, we affirm that the assessee was entitled to interest claim of Rs.5,23,853/- paid on the borrowed funds. It is ordered accordingly. 6.6. Addition of cash credits and interest - Rs.1,09,583/-:
The CIT (A) had, after considering the contentions of the assessee as well as perusing the reasoning of the AO, confirmed the addition for the reasons recorded in his impugned order, the relevant portion which are extracted as under:
"(On page 12)In the case of the appellant though it is claimed that the amount was deposited out of the savings from gifts received by the minors on diwali etc., the entries shown in the bank account did not reflect the similar position. If the amounts are deposited in the bank account out of gifts, etc., as explained above, small amounts would have been deposited on various occasions in the bank accounts of the minors. However, from the copies of the bank accounts filed before the AO and also during the appellate proceedings, it is seen that comparatively big amounts have rather been deposited on very few occasions in the bank account. In the face of position depicted in this bank account, it was all the more desirable that the details called for by the AO with regard to the occasions on which the gifts were received by the minors as alleged, the amounts received by them etc., were furnished during the assessment proceedings. In the absence of such details, the AO cannot be said to be unjustified in coming to the conclusion that the deposits were not explained satisfactorily. The ratio of the decision of Hon'ble Gujarat High Court in the case Rohini Builders (supra) which has relied upon by the ld. Counsel would also not help the case of the appellant. In this decision, the Hon'ble High Court confirmed the findings of the ITAT, Ahmedabad by which they had deleted the addition made u/s 68 in respect of the depositors which were shown to be income-tax assessees and interest on which deposits was not disallowed by the AO. Therefore, the facts and circumstances of that case are totally different from the facts and circumstances of appellant's case. The other case laws relied upon by the ld. Counsel would also not go to favour the appellant in the facts and circumstances of the present case and which are discussed as above. In 21 view of the above discussion, the addition of Rs.1,09,583/- made by the AO u/s 68 of the IT Act has to be confirmed."
It is rather strange and rather appalling on the part of the CIT (A) to mention that "(at the cost of repetition) it is claimed that the amount was deposited out of the savings from gifts received by the minors on diwali etc., the entries shown in the bank account did not reflect the similar position". In the 'Paying-in slips', the depositor is not required to indicate/disclose the origin/source of the amount intends to be deposited in his/her bank account. As a matter of fact, identical amount of Rs.50,000/- was lent through banking channels and the Cheque Nos.51051 and 51052 were clearly mentioned in the pass book of the lenders (though minors, through their guardian) [courtesy: Pass book and relevant entries - P 58 & 59 of PB AR]. In this connection, it is pertinent to mention here that the assessee had duly discharged its onus, i.e., furnishing of confirmation letter before the AO disclosing the names, addresses etc., and during the course of hearing before this Bench, the assessee had also furnished the documentary evidence (cited supra) to the effect that the amounts in question were through proper bank channels. Considering the facts of the issue, we are of the firm view that as far as the assessee was concerned, it had discharged its legitimate onus fully which cannot be put under a 22 scanner. Addition, in our considered view, was on a whimsical way which requires to be deleted and, accordingly, Rs.1,09,583/- (principal amounts + interest thereon) is deleted. 6.7. Motor Car Expenses:
The assessee on its own accord disallowed 1/5th expense out of motor car expense, owning possibility of personal use of the vehicle. However, the assessee, according to the AO, had not disallowed depreciation and interest paid to Bank of Rs.46,876/- and Rs.26,670/- respectively, by not applying the same rationality - in the case of depreciation and interest. The AO, accordingly, disallowed only Rs.14,710/- being proportionate depreciation and interest.
In its grounds of appeal, the assessee had objected to the confirming of interest paid to the bank on car loan, but not disputed the disallowance of proportionate depreciation which altogether came to a paltry amount of Rs.14,710/-. When the assessee itself was magnanimous in disallowing 1/5th of expense out of motor car expense, it was expected to extend the same gesture while claiming depreciation and bank interest also.23
Considering the facts of the issue, we are of the view that the AO was justified in his stand which warrants no intervention of this Bench.
7. In the result, the assessee's appeal is partly allowed.
Order pronounced in the open Court on this 2th day of March, 2012.
Sd/- Sd/-
(G. C.GUPTA) (A. MOHAN ALANKAMONY)
VICE PRESIDENT ACCOUNTANT MEMBER
Deka/--
Lakshmikant Deka/
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Dy. Registrar, ITAT, Ahmedabad