Delhi High Court
Hero Honda Motors Ltd. vs Deputy Commissioner Of Income Tax. Dy. ... on 23 November, 1994
Equivalent citations: (1995)53TTJ(DEL)163
ORDER
N. S. CHOPRA, A.M. :
The assessed as also the Revenue are in appeal against order dt. 5th December, 1989, of the learned CIT(A).
2. The only ground of appeal taken by the Revenue is that the learned CIT(A) erred in directing the Assessing Officer (AO) to identify the revenue expenditure incurred by the assessed-company from 16th March, 1985, to 30th April, 1985, and to allow deductions for the same in accordance with law even though the company had not been out into such shape that it could start functioning as business or manufacturing organisation and hence it had not been set up during the relevant accounting year. The relevant facts are that the assessed is a limited company engaged in the business of manufacture and sale of motor cycles in collaboration with M/s Honda Motor Cycles of Japan. The company was incorporated on 19th January, 1984, and closed its books of accounts on 30th April, 1985. This is, thus, the first year of assessed's business. The AO disallowed the assessed's claim of expenses incurred w.e.f. 16th March, 1985, to the close of the previous year on the ground that the assessed had not started business production. The assessed went in appeal before the learned CIT(A), who on detailed examination of relevant facts and circumstances, as also independent evidence, came to the conclusion that the assessed had set up its business w.e.f. 16th March, 1985, and, therefore, he directed the AO to identify the revenue expenditure incurred by the assessed from 16th March, 1985 to 30th April, 1985, and allow the same. The Revenue is aggrieved.
3. The learned Departmental Representative submitted that the learned CIT(A) erred in allowing assessed's claim when admittedly the assessed had undertaken only trial production and had not undertaken and commercial production as also had not produced any saleable commodity. According to the learned Departmental Representative, what is relevant is commercial production of saleable items. She pointed out that admittedly the assessed conducted trial production of 35 motorcycles, when none is in a saleable condition. It was argued that the trial production is only an experiment and, therefore, assessed was wrongly allowed the benefit of deduction of expenditure w.e.f. 16th March, 1985. In support of her proposition she placed reliance on Allahabad High Court judgment in the case of Sir Shadi Lal Sugar & General Mills Ltd. vs. CIT (1967) 63 ITR 72 (All). The learned Departmental Representative also placed reliance on the judgment of Hon'ble Supreme Court in the case of CWT vs. Ramaraju Surgical Cotton Mills (1967) 63 ITR 478 (SC) at page 481 and submitted 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. She submitted that admittedly the assessed did not produce any motor-cycle for sale and trial production being not commercial production, the assessed was rightly disallowed its claim by the AO. The learned Departmental Representative quoted a number of judgments in support of her proposition including Gujarat High Court in the case of Addl. CIT vs. Speciality Papers Ltd. (1982) 133 ITR 879 (Guj) and CIT vs. Suhrid Geigy (1981) 25 CTR (Guj) 280 : (1981) 133 ITR 884 (Guj), in the case of CIT vs. Forging & Stamping Ltd. (1979) 13 CTR (Bom) 127 : (1979) 118 ITR 616 (Bom), CIT vs. Industrial Solvent & Chemicals (1979) 8 CTR (Bom) 124 : (1979) 119 ITR 608 (Bom) and in the case of Bhodilal Menghraj & Co. vs. CIT (1979) 13 CTR (Bom) 101 : (1979) 119 ITR 968 (Bom) in the case of CIT vs. Food Speciality (1982) 136 ITR 203 (Del) and CIT vs. Piem Hotel Pvt. Ltd. (1994) 116 CTR (Bom) 401 : (1994) 209 ITR 616 (Bom). The learned Departmental Representative also referred to the provisions of s. 35D on amortisation of certain preliminary expenses admissible to the assessed before or after commencement of its business and submitted that assessed's claim is to be judged in accordance with the provisions of s. 35D. The learned Departmental Representative also advancing her arguments referred to the provisions of s. 28 and submitted that the profits and gains of the business are to be assessed in accordance with the provisions of s. 28 and there being no business carried on by the assessed at any time during the relevant previous year, no deductions claimed are admissible.
4. The learned authorised representative for the assessed Shri Vohra referring to s. 28 submitted that the profits and gains of business is with reference to the business carried on by the assessed at any time during the previous year. Shri Vohra submitted that previous year is defined in s. 3 and in the case of a newly set up business it is with reference to the making up of assessed's books. Shri Vohra, therefore, emphasised that what is to be seen is whether the business was set up or not. Shri Vohra referred to the statement of facts as contained at page 31 of his paper book, which is chart of relevant dates starting with certificate of registration on 3rd February, 1984, and culminating in trial production commencing on 16th March, 1985, with line off ceremony on 13th April, 1985, and license obtained under the Central Excise Rules on 23rd April, 1985, and closing of accounts on 30th April, 1985. It was, thus, submitted that the assessed was geared to commence commercial production of motor-cycles and which actually started on 27th May, 1985, but before that the assessed had already set up its business starting w.e.f. 16th March, 1985, when trial production started. Shri Vohra submitted that the learned CIT(A) for himself verified the trial production commencing w.e.f. 16th March, 1985, before he recorded a finding of fact that the assessed had set up its business during the relevant previous year w.e.f. 16th March, 1985. Shri Vohra submitted that the Allahabad High Court judgment in (1967) 63 ITR 72 (All) (supra) is in conflict with the Supreme Court judgment in (1967) 63 ITR 478 (supra). The learned authorised representative submitted that CIT vs. Kanoria General Dealers (P) Ltd. (1986) 53 CTR (Cal) 156 : (1986) 159 ITR 524 (Cal) did not follow (1967) 63 ITR 72 (All) (supra) and none of the other judgments cited by the learned Departmental Representative is applicable to the facts of the case. On the other hand, Shri Vohra also placed reliance on CIT vs. Industrial Solvents & Chemicals (supra) and in particular at page 609 in support of his proposition that when a business is established and is ready to commence business, that could be said of that business that it is set up. He submitted that on facts the assessed-company was fully geared for production during the relevant previous year when it undertook trial production of the items for which the assessed-company was engaged in i.e., production of motor-cycles. Shri Vohra referred to his paper book, particularly at pages 2 to 30 containing the written submissions made before the learned CIT(A) and in particular invited our attention to the judgment of Bombay High Court in the case of Western India Vegetable Products Ltd. vs. CIT (1954) 26 ITR 151 (Bom) and submitted that (1967) 63 ITR 72 (All) (supra) is without considering the judgment of Hon'ble Bombay High Court (supra). He further referred to the judgment of Gujarat High Court in the case of CIT vs. Saurashtra Cement & Chemicals Industries Ltd. (1973) 91 ITR 170 (Guj), Sarabhai Management vs. CIT 1975 CTR (Guj) 111 : (1975) 102 ITR 25 (Guj), Prem Conductors Pvt. Ltd. vs. CIT 1976 CTR (Guj) 324 : (1976) 108 ITR 654 (Guj), CIT vs. Industrial Solvents & Chemical (supra) CIT vs. Forgings & Stamping Ltd. (supra), CIT vs. Ralliwolf (1979) 8 CTR (Bom) 129 : (1980) 121 ITR 262 (Bom) and Kanoria General Dealers (supra).
5. We have heard the learned representatives of the parties. We have also gone through the relevant record, including the orders of the AO and that of the learned CIT(A). While the order of the AO in disallowing the claim of the assessed is very sketchy, we find that the learned CIT(A)'s order is not only detailed but well reasoned as well and his conclusions are based upon proper appreciation of relevant facts and circumstances when he reached the conclusion that the assessed, in fact, set up its business during the relevant previous year when it commenced trial production on 16th March, 1985. It is settled law by the apex Court in the case of CWT vs. Ramaraju Surgical (supra) that when a business unit had been set up by the assessed which was ready to commence production, the assessed was entitled to claim deduction of the expenditure which could not be disallowed on the ground that the same had been incurred prior to commencement of actual business or commercial production. The Hon'ble apex Court made a distinction between setting up of a unit and the operational function of the unit as a business. We accordingly endorse the findings of the learned CIT(A). We find that the authorities relied upon by the learned Departmental Representative are not relevant to the facts and circumstances of the case.
6. In the result, the appeal is dismissed.
7. In its appeal (No. 1115/Del/90), the assessed has taken the following grounds of appeal :
"1.1 That the CIT(A) erred on facts and in law in holding that Rs. 13,27,450 and Rs. 1,27,327 being interest on temporary deposits and incentive on these deposits respectively as income from other sources.
1.2 Without prejudice, the CIT(A) erred on facts and in law in not allowing deduction under s. 57(iii) for Rs. 22,70,273 being the amount of interest payable to customers on advances made by them which were placed on temporary deposits to earn interest.
2. That the CIT(A) erred on facts and circumstances of the case and in law in confirming levy of interest under s. 217 of the IT Act."
8. During the course of hearing, the Authorised Representative for the assessed has withdrawn the appeal. The same is allowed to be withdrawn and dismissed as such.