Calcutta High Court
Ashoke Marketing Ltd. vs Commissioner Of Income-Tax on 27 July, 1993
Equivalent citations: [1994]208ITR941(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(2) of the Income-tax Act, 1961, at the instance of the assessee, the following questions have been referred by the Tribunal for the opinion of this court for the assessment year 1976-77 :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in not following the decision of the Supreme Court pointed before them to hold that the electronic business of the company was an indivisible business and not liable to be bifurcated and that all the expenditure under the Alpha Electro Division was allowable deductions ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the electronic business of the company is divisible into two divisions and that only expenditure in respect of one division is allowable ?"
2. In its revised return of total income filed for the assessment year 1976-77, the assessee-company claimed deduction for an expenditure of Rs. 15,06,805 claimed to have been incurred in relation to Alfa Electro Unit. The expenditure in question mainly related to the research work and it was claimed that this should be allowed as a business expenditure, since Alfa Electro Unit was started for production of electronic goods. The assessee-company had shown these expenses as "pre-operative expenses" in its final accounts. In the balance-sheet, the directors had reported that since February, 1976, the activities of the instruments division had been suspended. The relevant portion of the directors' report dated September 3, 1976, with reference to the accounts of the assessee-company for the financial year ending March 31, 1976, was as under :
"As regards Alpha Electro Unit of the company, the activity in the instruments division has been presently suspended since February, 1976, owing to general recession and unfavourable conditions in the market. With this suspension, certain machinery, equipment and instruments not in use have been disposed of at the best available price so as to save expenses on cleaning and maintaining for the same. The activity in the mini-computer division has also been closed down. However, consolidation of documentation and other designs have been completed. R and D recognition has been renewed for an additional period of three years, valid up to March 31, 1979. Company is following up with the Government of India for issue of letter of intent/industrial licence for the same. Negotiations with the Punjab State Industrial Development Corporation and the U. P. Electronics Corporation Limited, for promotion of this industry in joint venture are in advanced stages and it is expected to have some protocol agreement shortly."
3. At page 25 of the printed balance-sheet, the auditors of the assessee-company reported that the expenditure of Rs. 15,06,803 had not been debited to the profit and loss account for the financial year ending March 31, 1986, as production had not commenced. The relevant portion of the auditors' note is extracted hereinbelow :
Auditors' note No. 8 in Schedule O :
"(a) Sale of prototype production has been credited to pre-operative expenditure and hence, the pre-operative expenditure pending adjustment is reduced to this extent.
(b) Pre-operative expenditure pending adjustment includes expenses of R and D nature which are subject to certification by the prescribed authority (i.e., Secretary, Department of Science and Technology, Government of India) and such expenditure has not been debited to the profit and loss account for the year as the production has not commenced and hence to be adjusted in the year of commercial production as per the provisions of the Income-tax Act, 1961. For the balance the company intends to capitalise in the year of commercial production.
(c) Stock of prototype in hand (cost unascertainable) shall be accounted for as and when sold."
4. The Income-tax Officer noted that under Section 35(1) of the Income-tax Act, 1961, any expenditure, not being in the nature of capital expenditure laid out or expended on scientific research related to the business carried on by an assessee was deductible in computing the business income. Here the scientific research did not relate to the existing business as it had not commenced. The Income-tax Officer also noted that for the last several years, the assessee-company has been carrying on business as a trading company. It had no manufacturing operation. Alfa Electro Unit had been set up to manufacture instruments and mini-computers. This was not related to the existing trading business of the assessee-company.
5. The Income-tax Officer thereafter proceeded to consider whether the business of Alfa Electro Unit could be said to have been commenced by the assessee-company. The assessee-company had placed reliance on the certificate issued by the prescribed authority in relation to the assessment year 1975-76. The prescribed authority had stated that in the mini-computer unit, the production stage had not yet been reached. It was also stated that certain instruments had been developed and in respect of these instruments, the business can be said to have been commenced.
6. The case of the assessee-company is that in the electronic instruments division, several types of machines can be produced and with the development and manufacture of certain instruments, it can be said that the business had already commenced. It was also contended on behalf of the assessee before the Income-tax Officer that the manufacture of mini-computers required continuous research and development and the mere fact that the mini-computers had not been produced did not mean that the business had not been commenced by the assessee-company. The Income-tax Officer noted that the directors of the assessee-company had specifically stated in their report that the activity of the instruments division in Alfa Electro Unit had been suspended since 1976 and certain machinery equipment and instruments which were not in use had been disposed of at the best available price so as to save cleaning and maintenance costs. The directors also stated that the company was following up with the Government of India for issue of a letter of intent and industrial licence without which commercial production could not start. The Income-tax Officer also noted that even the auditors of the assessee-company had stated in their report that no manufacturing activity was carried on by the assessee-company during the financial year ending March 31, 1976.
7. Having regard to the statements made by the directors as well as by the auditors in their respective report and the further fact that the assessee did not receive any letter of intent or industrial licence to start manufacturing operations and that the assessee-company had itself debited the expenditure of Rs. 15,06,803 as pre-operative expenses in the balance-sheet and did not charge it to its profit and loss account, the Income-tax Officer held that there could be no dispute that no production was commenced by the assessee-company and he, therefore, disallowed the claim of the assessee-company in respect of the said expenditure of Rs. 15,06,803.
8. Before the Commissioner of Income-tax (Appeals), the assessee-company tried to clarify that the remarks made by the directors as well as auditors of the assessee-company in the printed accounts for the year under reference were not correct and that necessary modification was duly made in the accounts for the next year after obtaining legal advice. In fact, the return for the assessment year 1976-77 was also revised by the assessee-company based upon the legal advice obtained in the next year.
9. The Commissioner (Appeals) noted that Alfa Electro Unit proposed to manufacture testing and measuring equipment as well as mini-computers for which there were two divisions, namely, (i) instruments division, and (ii) mini-computer division. In the instruments division, certain prototypes, viz., trial models were developed in the laboratory and the appellant-company started selling them from December, 1974. The instruments division functioned as a small-scale unit for which no licence under the Industries (Development and Regulation) Act was necessary. It was on this basis that the assessee-company obtained a certificate from the prescribed authority under Section 35 of the Income-tax Act, 1961. The Commissioner (Appeals) also noted that the assessee-company requested the prescribed authority for issue of another certificate in respect of research and development expenses incurred under the mini-computer division. As sophisticated instruments like mini-computers or micro processor systems involved very high capital expenditure, their development and manufacture could not be attempted fay a small-scale unit. It was also necessary to have a licence under the Industries (Development and Regulation) Act, 1951.
10. The Commissioner (Appeals), therefore, observed that the business of manufacturing mini-computers in Alfa Electro Unit did not factually start and could not have started and that is the reason why no certificate was granted by the prescribed authority in respect of scientific expenditure incurred by the assessee-company for development of mini-computers. The business of manufacturing mini-computers was different and distinct from the instruments division, which was a small-scale unit. The expenditure of mini-computer division was not an expenditure of existing business since the same involved large-scale operation and also necessitated a licence to be obtained under the Industries (Development and Regulation) Act, 1951. The Commissioner (Appeals) accordingly held that the research expenditure for mini-computer division could not be allowed under Sections 28, 35 and/or 37 of the Income-tax Act, 1961.
11. The Commissioner (Appeals), therefore, directed the Income-tax Officer to call for an analysis of the pre-operative expenses of Rs. 5,15,562 incurred in the instruments division of Alfa Electro Unit and allow those expenses, which related to the business of manufacturing of the testing and measuring instruments. The balance expenditure of Rs. 9,28,439 relating to the mini-computers division could not, however, be allowed as a business deduction.
12. On further appeal by the assessee before the Tribunal, it was contended that both the Income-tax Officer as well as the Commissioner (Appeals) failed to properly appreciate the facts relating to the assessee's case. It was urged on behalf of the assessee-company that different activities carried on by the assessee constituted a composite business and having regard to the fact that there was unity of control and management in respect of different activities carried on by the assessee-company, it was entitled to claim deduction for the entire expenditure on research carried on in the Alfa Electro Unit.
13. Reliance was placed on behalf of the assessee on the decision of the Supreme Court in B.R. Ltd. v. V.P. Gupta, CIT [1978] 113 ITR 647.
14. The Tribunal, however, found that the case of the assessee-company was clearly distinguishable from the facts considered by the Supreme Court, in the case of B.R. Ltd. [1978] 113 ITR 647. The Tribunal held that having regard to the totality of the facts and material brought on record by both the Income-tax Officer as well as by the Commissioner of Income-tax (Appeals), there was no reason to take a view different from the one taken by the authorities below. The Tribunal agreed with the conclusions drawn by the lower authorities and rejected the contentions of the assessee-company on this count.
15. We have heard counsel appearing for the assessee as well as the Revenue. It is an admitted fact that the instruments division of the Alfa Electro Unit was nothing but a small-scale unit. The instruments division was concerned with the manufacture of various kinds of voltmeters, oscilloscopes and calibrators. These are electronic testing and measuring instruments. This busines$ was different and distinct from the manufacture of mini-computers or micro processors. In fact, the Government of India through its letter dated September 18, 1979, clarified that an industrial licence will be necessary under the Industries (Development 'and Regulation) Act, 1951, for the establishment of a new industrial undertaking in the State of Haryana for the manufacture of mini-computers and micro processor-based systems subject to certain conditions to be fulfilled by the assessee. Admittedly, no licence had, so far, been received by the assessee-company for the manufacture of mini-computers and micro processor-based systems. The assessee-company did not produce any material before the Tribunal to show that the instruments division and the mini-computers division were part and parcel of the same business. No material to this effect were placed by the assessee-company either before the Income-tax Officer or before the Commissioner (Appeals). Even in this court, counsel for the assessee has not referred to any material to show that the instruments division and the mini-computer division were part and parcel of the same business.
16. In our view, the oral assertion that there was unity and control of management between the different activities of Alfa Electro Unit cannot help the assessee to claim the research expenditure in respect of minicomputer division when admittedly the assessee did not establish an industrial unit for manufacture of mini-computers.
17. The decision of the Supreme Court in B.R. Ltd. v. V.P. Gupta, CIT [1978] 113 ITR 647 has no application in the facts and circumstances of this case. In that case, the question was whether the business of importing and selling goods was distinct and separate from the business of exporting the goods. In that case, the Commissioner of Income-tax while disposing of the assessee's revision application under Section 33A of the Indian Income-tax Act of 1922 had observed that the nature of articles imported was entirely different from the nature of articles exported and the procedure involved in the import and export of articles was also entirely different. The fact that the same capital was employed and the same management looked after the two businesses in the different ventures, would not according to the Commissioner, make the import and export business carried on in different years the same business. Their Lordships of the Supreme Court referred to the various decisions already delivered on this aspect, which laid down certain objective tests for finding out the existence of inter-connection, interlacing, interdependence and unity between two or more businesses. Applying these tests, the court observed that the mere circumstances relied upon by the Commissioner showing that there was a distinct and marked difference in the nature of goods dealt in and that the procedure involved in the import of articles from the foreign countries and the export of articles manufactured in India to different foreign countries was entirely different were not by themselves sufficient to establish that the business of impart was not the same business as that of export. Their Lordships of the Supreme Court also noted that in that case, it was an admitted fact that there was a common control and common management of the same board of directors of the business of import and export. The court also found that there was common management, common business organisation, common administration, common fund and common place of business for both the export and import businesses and these factors showed that in that case, there was interlacing and interdependence of the various businesses carried on by the assessee.
18. In the instant case, none of the aforesaid facts have been found by either of the authorities. That besides, the question before the Supreme Court in that case stands totally in a different light and a different context. There it was not in dispute that the assessee's business consisted of two separate lines ; what was disputed was whether two businesses together constituted one business in the context of the expression "same business" for the purpose of the carry forward of the loss arising from one line of business for set-off against the profit of another, in a later year when the former line is closed down. That principle does not apply, where the same entrepreneur under the common management, control and finance sets up another line of business, for the purpose of treating expenditure in the new line as pre-operative expenditure. Where the trader adds to the existing business another new line of business, the pre-operative expenditure for such expansion has to be treated as capital expenditure. In Hyderabad Allwyn Metal Works Ltd. v. CIT [1975] 98 ITR 555, the Andhra Pradesh High Court has held the expenditure, incurred on tours for the purpose of setting up a new industry to be capital expenditure. Similarly, the expenses for starting manufacture of a new product has been held by the Gujarat High Court to be capital expenditure (see CIT v. McGaw Ravindra Laboratories (India) Ltd. [1981] 132 ITR 401).
19. Anyway, the facts found clearly show that the mini-computers division, which required a separate industrial licence and which licence had not been issued, was a different unit and was to set up itself as a large-scale unit. The instruments division was a small-scale unit and required no industrial licence. The comments made by the directors and the auditors of the assessee-company on the accounts for the financial year ending March 31, 1976, corresponding to the assessment year 1976-77 clearly showed that no operations had been carried out for setting up the minicomputer division. Even in respect of the instruments division, certain prototypes had been manufactured and further operations were suspended. In the absence of any material placed by the assessee on record, it is not possible to hold that both the instruments division and mini-computer division formed part and parcel of the same business.
20. In this view of the matter, we answer the first question in the negative by saying that there was no material before the Tribunal to hold that instruments division and mini-computer division were part and parcel of an indivisible business and, therefore, the entire expenditure of Alfa Electro Unit could not have been allowed as a business deduction.
21. We also answer the second question in the affirmative and in favour of the Revenue.
Shyamal Kumar Sen, J.
22. I agree.