Bombay High Court
Commissioner Of Income-Tax vs Piem Hotel Pvt. Ltd. on 1 October, 1993
Equivalent citations: [1994]209ITR616(BOM)
JUDGMENT D.R. Dhanuka, J.
1. By this reference under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has referred the following question of law to this court for its opinion :
"Whether, on the facts and in the circumstances of the case, there was material for holding that the business had been set up before October, 1972 ?"
2. On March 31, 1968, the assessee was incorporated as a company to carry on, inter alia, the business of running a hotel. The business of the said hotel was ultimately set up. The hotel is known as "President Hotel". The assessee actually commenced its business of running the hotel in April, 1973. During October, 1972, to March 31, 1973, the assessee incurred expenditure of Rs. 3,96,431 concerning the aforesaid business commenced in April, 1973. The assessee claimed deduction of the said expenditure during the course of assessment proceedings pertaining to the assessment year 1974-75. The relevant previous year ended on March 31, 1974. The abovereferred expenditure was incurred by the assessee before the commencement of the said business. The question required to be considered is as to when the said business was set up and whether the same was set up before October, 1972. The Income-tax Officer did not allow the abovereferred claim of the assessee holding that the business of running the hotel had not been set up by the assessee prior to March, 1973, and the said expenditure could not be thus allowed as a "business expenditure". The Commissioner of Income-tax (Appeals) held that the claim of the assessee was admissible for deduction subject to the character of the items of expenditure being proved. The Commissioner of Income-tax (Appeals) held that the items of expenditure totalling Rs. 35,000 were not allowable as "business expenditure" having regard to the character of the expenditure incurred. The Commissioner of Income-tax (Appeals) directed that expenditure of Rs. 3,60,7373 be allowed as a deduction. Being aggrieved by the said order, the Department filed an appeal before the Tribunal. The Income-tax Appellate Tribunal sustained the order of the Commissioner of Income-tax (Appeals).
3. It is necessary to state a few more facts before the question of law referred to us is discussed and decided. The relevant facts are summarised as under :
In June, 1972, the assessee had appointed its employees. With effect from October 1, 1971, the Government of India approved the tariff of room rents to be charged by the assessee. On November 24, 1972, the banquet hall of the hotel was let out by the assessee. It appears that the construction of the hotel building was competed by about March, 1973, only. Thus the assessee was not able to commence the business prior to March, 1973. The hotel was not ready for commencement of business till then.
4. The question which arises for the consideration of this court is as to whether the assessee had set up the business for running of the hotel prior to March, 1973, even though the construction of the hotel building was not competed till then. In our opinion, it cannot be said that the assessee was ready to commence its business by October, 1972, or before March, 1973, in view of the finding that the building of the hotel was not ready till March, 1973.
5. Learned counsel for the Revenue has fairly invited the attention of the court to the ratio of relevant judgments of the Supreme Court as well as this court as indicated below.
6. In the case of CWT v. Ramaraju Surgical Cotton Mills Ltd. , a somewhat similar question arose before the apex court in the context of the provisions of the Wealth-tax Act, 1957, wherein Bhargava J., speaking for the court, observed as under (at page 481) :
"A unit cannot be said to have been set up unless it is ready to discharged 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."
7. It follows, therefore, that the unit must be ready to start functioning for the purpose for which it is being set up. If the unit is ready to star functioning, it does not matter that it has not actually started its business on the relevant date. Once the business is set up, expenditure incurred concerning such business can be claimed as business expenditure subject to other applicable conditions of the Act being satisfied.
8. Learned counsel for the Revenue has also invited the attention of the court to the judgment of this court in the case of CIT v. Forging and Stamping Pvt. Ltd. [1979] 1991 ITR 616. In this case, the Division Bench of this court in terms observed that the business was set up when the factory was ready to commence production.
9. Learned counsel for the Revenue also invited the attention of the court to the latest decision of this court in the case of CIT v. L. and T. Mcneil Ltd. [1993] 202 ITR 662 to which one of us, i.e., Dr. Justice B.P. Saraf, was party. In this case, this court analysed the relevant decisions and arrived at the conclusion that the business could not be treated as set up merely because of purchase of raw material or procuring of order for supplying machinery. The court held that the business could not be said to have been set up as the plant and machinery concerning the factory was not yet installed.
10. After applying the principles laid down in the above referred cases, we have reached the conclusion that the Commissioner of Income-tax (Appeals) and Tribunal was not justified in reaching the conclusion that the business was already set up by the assessee prior to October, 1972, and the expenditure incurred for a sum of Rs. 3,60,737 was deductible as a business expenditure.
11. The fact remains that the hotel building was not even complete at the time when the abovereferred expenses were incurred. The hotel business could not be treated as set up unless the hotel building was complete. Merely because the banquet hall in the incomplete hotel building was let out by the assessee on November 24, 1972, it does not follows that "the hotel business" as such was set up by the assessee by this date.
12. In the light of the above discussion, we answer the question referred to us in the negative, i.e., in favour of the Revenue and against the assessee.
13. Having regard to the facts and circumstances of the case, there shall be no order as to costs.