Income Tax Appellate Tribunal - Ahmedabad
Interlink Petroleum Ltd. vs Deputy Commissioner Of Income Tax on 16 October, 2003
Equivalent citations: (2004)83TTJ(AHD)274
ORDER
B.M. Kothari, A.M. A. All these appeals by the assessee as well as by the Revenue involve consideration of some common points. Hence, these appeals were heard together and are being disposed of by this common order.
B. The assessee in their appeal for asst. yr. 1993-94 (ITA No. 3678/Ahd/2002) has raised the following grounds:
"1. The learned CIT(A) has erred in law and on facts in confirming the reopening of the case under Section 147 of the Act. Under the facts and circumstances of the case neither any income has escaped assessment nor there was any reason to believe that some income has escaped assessment and hence the action of AO in reopening the assessment is bad in law and without jurisdiction and therefore deserves to be quashed.
2. The learned CIT(A) has erred in law and on facts in confirming the action of AO in holding that the business of the appellant has not commenced during the year under consideration and further erred in confirming the action of AO in taxing the entire income of the appellant amounting to Rs. 9,56,337 under the head "income from other sources". As a matter of fact the business of the appellant has already commenced during the year under consideration and therefore the entire income of the appellant is required to be assessed under the head 'profits and gains from business or profession'.
3. The learned CIT(A) has erred in law and on facts in not appreciating that the income of Rs. 840 has been added twice. The appellant has returned income of Rs. 840 while its entire income including this Rs. 840 is already added in the total income of Rs. 9,56,337 and to this figure, learned AO has added the figure of returned income of Rs. 840. Thus there is duplication of addition of Rs. 840.
4. The learned CIT(A) has erred in law and on facts in not properly appreciating various authorities cited before him and further erred in law and on facts in applying the ratio of the authorities which are not applicable to the peculiar facts of the present case and which are distinguishable on facts. Learned CIT(A) has therefore, erred in reaching to an erroneous and incorrect conclusion in law as well as on facts.
5. Alternatively and without prejudice to any of the contentions raised hereinabove, learned CIT(A) has erred in law and on facts in not appreciating that if the income is required to be answered under the head 'income from other sources' under Section 56 of the Act, expenditure for earning such income including expenditure for maintenance of corporate status has to be allowed as deduction under Section 57(iii) of the Act.
6. Alternatively and without prejudice to any of the contentions raised hereinabove, learned CIT(A) has erred in law and on facts in not granting deductions as prescribed under Section 42 of the Act looking to the nature and type of business being carried on by the appellant.
7. Learned CIT(A) as well as learned AO have erred in not considering various facts, submissions, explanations and clarifications as given by the appellant. Both the lower authorities have further erred in not appreciating the facts and law in their proper perspective. Learned AO seriously erred in law in not observing and acting against the principles of natural justice in as much as time granted to the appellant for clarification and producing evidences was very short and the entire assessment proceedings were completed in a very hurried and hasty manner.
8. Levy of interest under Section 234A/B/C is unjustified.
9. Initiation of penalty proceedings under Section 271(1)(c) of the Act is unjustified.
C. The assessee in their appeal for asst. yr. 1994-95 (ITA No. 3679/Ahd/2002) has raised the following grounds:
"1. The learned CIT(A) has erred in law and on facts in confirming the reopening of the case under Section 147 of the Act. Under the facts and circumstances of the case neither any income has escaped assessment nor there was any reason to believe that some income has escaped assessment and hence the action of AO in reopening the assessment is bad in law and without jurisdiction and therefore deserves to be quashed.
2. The learned CIT(A) has erred in law and on facts in confirming the action of AO in holding that the business of the appellant has not commenced during the year under consideration and further erred in confirming the action of AO in taxing the income of the appellant amounting to Rs. 5,21,125 under the head "income from other sources". As a matter of fact the business of the appellant has already commenced during the year under consideration and therefore the entire income of the appellant is required to be assessed under the head 'profits and gains from business or profession'.
3. Learned CIT(A) has erred in law and on facts in holding that though the business of the appellant has commenced in as much as the appellant has exported traded goods out of India but business expenses shall not be allowed to be claimed as the main business has not commenced. This artificial distinction of main and other business drawn by the learned CIT(A) is against the scheme of the Act and uncalled for.
4. Learned CIT(A) has erred in law and on facts in not allowing the deduction under Section 80HHC of the Act on the export sales of Rs. 70,43,549.
5. The learned CIT(A) has erred in law and on facts in not properly appreciating various authorities cited before him and further erred in law and on facts in applying the ratios of the authorities which are not applicable to the peculiar facts of the present case and which are distinguishable on facts. Learned CIT(A) has therefore, erred in reaching to an erroneous and incorrect conclusion in law as well as on facts.
6. Alternatively and without prejudice to any of the contentions raised hereinabove, learned CIT(A) has erred in law and on facts in not appreciating that if the income is required to be assessed under the head 'income from other sources' under Section 56 of the Act, expenditure for earning such income including expenditure for maintenance of corporate status has to be allowed as deduction under Section 57(iii) of the Act.
7. Alternatively and without prejudice to any of the contentions raised hereinabove, learned CIT(A) has erred in law and on facts in not granting deductions as prescribed under Section 42 of the Act looking to the nature and type of business being carried on by the appellant.
8. Learned CIT(A) as well as learned AO have erred in not considering various facts, submissions, explanations and clarifications as given by the appellant. Both the lower authorities have further erred in not appreciating the facts and law in their proper perspective. Learned AO seriously erred in law in not observing and acting against the principles of natural justice in as much as time granted to the appellant for clarification and producing evidences was very short and the entire assessment proceedings were completed in a very hurried and hasty manner.
8. Levy of interest under Section 234A/B/C is unjustified.
9. Initiation of penalty proceedings under Section 271(1)(c) of the Act is unjustified".
D. The assessee in their appeal for asst. yr. 1995-96 (ITA No. 1298/Ahd/98) has raised the following grounds:
"1. The learned CIT(A) III, Baroda has erred in law and on facts in confirming the action of the learned AO in treating the business income as income from other sources.
2. The learned CIT(A), III, Baroda has erred in law and in facts in confirming the action of the learned AO in not allowing business expenses of Rs. 22,88,794 as business expenditure.
3. The learned CIT(A), III, Baroda has erred in law and in facts in confirming the action of the learned AO in not allowing depreciation claim of Rs. 8,77,956.
4. The appellant craves liberty to add, alter or amend any of these grounds of appeal."
E. The Revenue has also preferred cross-appeal for asst. yr. 1995-96 (ITA No. 1582/And/98) in which they have raised the following ground:
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the addition of Rs. 2,29,000 made on account of unexplained share application money."
F. The assessee has submitted an application for entertaining additional grounds of appeal for asst. yr. 1995-96, which are reproduced below:
"1. Alternatively and without prejudice to any of the contentions raised hereinabove, learned CIT(A) has erred in law and on facts in not appreciating that if the income is required to be assessed under the head 'income from other sources' under Section 56 of the Act, expenditure for earning such income including expenditure for maintenance of corporate status to be allowed as deduction under Section 57(iii) of the act.
2. Alternatively and without prejudice to any of the contentions raised hereinabove, learned CIT(A) has erred in law and on facts in not granting deductions as prescribed under Section 42 of the Act looking to the nature and type of business being carried on by the appellant.
3. Learned CIT(A) as well as learned AO have erred in not considering various facts, submissions, explanations and clarifications as given by the appellant. Both the lower authorities have further erred in not appreciating the facts and law in their proper perspective. Learned AO seriously erred in law in not observing and acting against the principles of natural justice in as much as time granted to the appellant for clarification and producing evidences was very short and the entire assessment proceedings were completed in a very hurried and hasty manner.
4. Levy of interest under Section 234A/B/C is unjustified.
5. Initiation of penalty proceedings under Section 271(1)(c) of the Act is unjustified."
G. The assessee in their appeal for asst. yr. 1996-97 (ITA No. 981/Ahd/2003) has raised the following grounds:
"1. The learned CIT(A) has erred in law and on facts in confirming the reopening of the case under Section 147 of the Act. Under the facts and circumstances of the case neither any income has escaped assessment nor there was any reason to believe that some income has escaped assessment and hence the action of AO in reopening the assessment is bad in law and without jurisdiction and therefore deserves to be quashed.
2. The learned CIT(A) has erred in law and on facts in confirming the action of AO in holding that the business of the appellant has not commenced during the year under consideration and further erred in confirming the action of AO in taxing the income of the appellant amounting to Rs. 42,41,742 under the head 'income from other sources'. As a matter of fact the business of the appellant has already commenced during the year under consideration and therefore the entire income of the appellant is required to be assessed under the head 'profits and gain from business of profession'.
3. Learned CIT(A) has erred in law and on facts in confirming the disallowance of business expenditure amounting to Rs. 32,58,658 on the ground that the appellant has not commenced its business activities. Learned CIT(A) further erred in not appreciating that the business of the appellant has already commenced and therefore he ought to have allowed the entire business expenditure incurred by the appellant.
4. The learned CIT(A) has erred in law and on facts in not properly appreciating various authorities cited before him and further erred in law and on facts in applying the ratios of the authorities which are not applicable to the peculiar facts of the present case and which are distinguishable on facts. Learned CIT(A) has therefore, erred in reaching to an erroneous and incorrect conclusion in law as well as on facts.
5. Alternatively and without prejudice to any of the contentions raised hereinabove, learned CIT(A) has erred in law and on facts in not appreciating that if the income is required to be assessed under the head 'income from other sources' under Section 56 of the Act, expenditure for earning such income including expenditure for maintenance of corporate status has to be allowed as deduction under Section 57(iii) of the Act.
6. Alternatively and without prejudice to any of the contentions raised hereinabove, learned CIT(A) has erred in law and on facts in not granting deductions as prescribed under Section 42 of the Act looking to the nature and type of business being carried on by the appellant.
7. Learned CIT(A) as well as learned AO have erred in not considering various facts, submissions, explanations and clarifications as given by the appellant. Both the lower authorities have further erred in not appreciating the facts and law in their proper perspective. Learned AO seriously erred in law in not observing and acting against the principles of natural justice in as much as time granted to the appellant for clarification and producing evidences was very short and the entire assessment proceedings were completed in a very hurried and hasty manner.
8. Levy of interest under Sections 234A/234B/234C is unjustified.
9. Initiation of penalty proceedings under Section 271(1)(c) of the Act is unjustified."
H. The Revenue has raised the following ground in their appeal for asst. yr. 1997-98 in ITA No. 1722/Ahd./2001:
"On the facts and in the circumstances of the case and in law, the learned CIT(A) in allowing the set off of the income from other sources against the business loss."
1. The learned representatives of both sides contended that the main issue in all these appeals is that as to when the assessee had set up its business so as to qualify for grant of deduction in respect of expenses of revenue nature incurred by them.
2. Shri S.N. Soparkar, the learned senior advocate submitted that the assessee-company was incorporated on 20th Aug., 1991 as a private company in the name of Interlink Geofizika Exploration (P) Ltd. and was subsequently converted to a public company vide certificate dt. 25th Feb., 1993 in the name of Interlink Geofizika Exploration Ltd. The name of the company was changed to Interlink Petroleum Ltd. vide certificate dt. 19th July, 1993. The main objects of the company as set out in its memorandum of association are as under:
1. To carry on the business of providing consultancy carrying 2-D and 3-D filed seismic CDP survey, wells seismic survey, many measured analysis of reflected waves spectrum, dynamic seismic sounding, to study geological structure of separate parts of the earth exploration and extension of oil and gas prospective objects, prognosis of geological sections, acoustics characteristics and reservoirs properties dismemberment of the thin beeded sections research of the zones uncomplacted rock on commercial basis and advising the possibility of availability of crude oil and reserves of other products for extraction of the earth.
2. To carry on the survey on commercial basis in the field of lithological/stratigraphical dismemberment of the wells, section distinguishing of reservoirs and estimation of their saturation; quantitative evaluation of porosity, oil and gas saturation and effective thickness of the rocks determination of daily oil and gas saturation; dynamic control of oil water and gas oil contracts; solving out an extensive scope of problems connected with drilling and testing of the wells and also commissioning, erection of equipments and related activities in the field of extraction of crude oil and other products of the earth.
3. The learned counsel explained that the business activities of the appellant-company can be broadly classified into four different categories:
I. Seismic Survey II. Work-Over Operations III. Undertaking Exploitation of Gas Field Exports
3.1 He drew our attention to the prospectus issued by the appellant-company on 31st March, 1994, in which it was, inter alia, stated that the commercial operations of the company commenced from April, 1992. The learned counsel drew our attention to the following contents of the said prospectus: The commercial operations of the company commenced from April, 1992. The nature of these operations being providing technical services and development of gas/oil fields, involves various stages such as:
(a) Collection of data
(b) Technical analysis of feasibility
(c) Commercial viability
(d) Preparation of bid documents for submission to ONGC/Govt. of India.
The documents for award of a contract by the ONGC/GOI being time consuming, the finalisation of a contract in effect takes 6 months to 1 year.
Although the company commenced commercial operations in April, 1992 the expenditure incurred for the above activities has been treated as revenue expenditure no income from these activities were however generated so far.
The company will be undertaking the activities of seismic survey and work over operations besides undertaking exploitation of Baola gas field.
The immediate object of the company is to render technical oil field services viz. seismic survey and work over operations.
3.2 The learned counsel thereafter invited our attention to various documents submitted in the compilation with a view to highlight various activities undertaken by the appellant-company in relation to seismic survey, work-over operation, bio-gas and other gas fields for which negotiations were being made by the assessee during the relevant years under consideration, The learned counsel also drew our attention to the documents submitted in the compilation, which shows that the assessee has executed first export order for export of medicine in February, 1994.
3.3 The learned counsel then drew our attention to the copies of audited statements of the relevant years to show that the appellant-company had itself capitalised the expenditure which are related to the specific projects. The pre-operative expenses have been capitalised and those were debited under misc. expenditure and have been shown on the asset aside. The assessee claimed deduction only in respect of expenses of revenue nature. He drew our attention to the following notes on accounts appended along with the audited statements of the respective years:
(i) All direct revenue expenditure for commissioning of specific projects are shown under pre-operative expenses pending allocation and same will be allocated to respective projects as and when commenced.
(ii) Company is implementing projects like seismic survey, work over rigs etc. and is also venturing into new business activities like development and exploitations of discovered oil and gas fields. Expenditure related to these activities is shown in P&L a/c whereas expenditure related to work over and seismic operations are covered in pre-operative expenses.
3.4 In asst. yr. 1993-94, the total debit balance in the misc. expenditure shown in the balance sheet was Rs. 15,60,299 which included previous years balance of Rs. 5,46,044. The details of income and expenditure shown by the assessee in its P&L a/c for asst. yr. 1993-94 are as under:
Particulars Sch.
Amount Rs.
31-3-1993 Income Income 10 9,56,337 9,56,337 Expenses Interest and financial charges 11 1,43,035 Administrative and general exp.12
8,12,465 9,55,500 Profit before taxes 837 Provision for taxes 500 Profit transferred to balance sheet 337 3.5 Further details of income and expenditure pertaining to asst. yr. 1993-94 are as under:
Schedule : 10 Income Particulars Amount Rs.
31-3-1993 Interest on fixed deposit with bank 8,24,087
--
Interest on loans 96,250
--
Miscellaneous income 36,000
--
9,56,337
--
Schedule : 11 Interest and finance charges Interest on overdraft 1,37,516
--
Bank charges 5,519
--
1,43,035
--
Administrative and general expenses Schedule: 12 \.
Vehicle Insurances 4,039
2.
Vehicle Expenses 17,150
3. Travelling Expenses 5,10,470
4. Conveyance Expenses 6,402
5. Books and Periodicals 260
6. Filing fees 100
7. Professional fees 18,265
8. Telephone charges 14,253
9. Office expenses 16,356
10. Licence fees 500
11. Rent 32,000
12. Electricity charges 9,427
13. Advertisement charges 1,105
14. Insurances charges 5,200
15. Miscellaneous expenses 4,000
16. Repairs and Maintenance 76,376
17. Consultation charges 32,046
18. Salary 44,314
19. Entertainment expenses 202
20. Telex expenses 5,000
21. Auditors Remuneration 15,000 8,12,465 3.6 In asst. yr. 1994-95, the total misc. expenses capitalised by the assessee increased to Rs. 34,35,665 including opening balance of Rs. 15,60,299. The assessee had disclosed income of Rs. 75,64,674 which includes export sales of Rs. 70,43,549. The balance amount of income represents interest on fixed deposit with bank, Interest on loans and dividend received by the assessee-company aggregating to Rs. 5,21,125 The expenses debited in the P&L a/c includes Rs. 59,06,950 representing cost of purchase of material which was sold by way of export sales. The remaining amount of expenditure relates to interest and financial charges Rs. 26,543 and administrative and general expenses aggregating to Rs. 15,96,932. The details of selling administrative and general expenses have been furnished at pp. 25 and 26 of the paper book.
3.7 In asst. yr. 1995-96, the assessee has shown total misc. expenses of Rs. 1,03,43,670 including opening balance of Rs. 34,35,665. The assessee has shown aggregate income of Rs. 26,35,277 mainly consisting of interest on fixed deposit, dividend and other interest income. The assessee has debited total expenditure amounting to Rs. 22,88,794 as per details mentioned below:
Rs.
Interest and financial charges 10 1,83,848
Administrative, selling 11 15,78,196
Preliminary expenses written off 8 5,26,750
-------------
22,88,794
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Further details of interest and financial charges, administrative and selling expenses have been given in separate schedule submitted in the paper book.
3.8 In asst. yr. 1996-97, the assessee has shown income of Rs. 42,41,742 which mainly consists of interest on fixed deposit with bank, dividend from UTI and interest on margin money, etc. The assessee has debited the following amounts in its P&L a/c:
Rs.
Interest and financial charges 10 7,83,571
Administrative expenses 11 18,34,792
Preliminary expenses written off 8 5,39,966
Depreciation for the year -- 4,18,559
Provision for taxation -- 4,50,000
-----------
40,26,883
-----------
The details of interest expenses and administrative expenses have been separately given at p. 41 of the paper book. It may be appropriate to give details of income and expenditure pertaining to asst. yrs. 1995-96 and 1996-97 as shown at pp. 40 and 41 of the paper book:
Schedule : 9 Income Asst. yr. 1996-97 Asst. yr. 1995-96 Interest on fixed deposit with bank 32,99,310 15,02,663 Interest on advances
--
3,94,520 Dividend from UTI 8,23,661 5,17,232 Interest on Margin Money 1,10,672 90,679 Kasar 3,224 8,002 Interest on Income-tax refund
--
1,282 Interest received on call money 4,875 5,377 Interest received from bank on share
--
1,15,522 Application Money Total 42,41,742 26,35,277 Schedule : 10 Interest and financial charges Interest on overdraft 7,62,342 33,233 Bank charges 21,229 75,615 Loan syndication expenses
--
75,000 Total 7,83,571 1,83,848 Schedule: 11 Administrative, Selling and general expenses Vehicle expenses 23,795 47,168 Travelling expenses 95,510 2,94,867 Conveyance expenses 60,821 57,554 Legal and professional fees 86,758 22,202 Telephone and telex charges 5,25,091 2,35,812 Postage expenses 88,418 27,933 Office expenses 76,926 55,264 Rent, and taxes 8,297 11,286 Electricity expenses 35,347 16,744 Advertisement expenses 15,731 6,345 Insurance charges 11,661 6,737 Repairs and maintenance 13,111 1,01,866 Consultation charges
--
2,23,000 Salary 86,085 84,403 Directors remuneration 2,81,063 2,40,000 Auditors remuneration 20,000 20,000 Prinding and stationery 79,956 80,694 Staff welfare expenses 27,135 4,545 Courier expenses
--
8,342 Listing fees 38,250
--
Tender fees 78,375
--
Foreign travelling 2,53,412
--
Legal fees 1,18,800
--
Miscellaneous expenses 10,250 33,434 Total 18,34,792 15,78,196 3.9 The learned counsel contended that the interest income derived by the assessee should be assessed as income from business and deduction in respect of revenue expenses claimed by the assessee should be allowed against such income. Even if the income from interest and dividend are assessed as income from other sources, the entire expenses debited in the P&L a/c should be allowed as deduction under Section 57(iii) of the Act. The learned counsel contended that business of the company is said to have been set up at a time when it is ready to commence its business. In the present case, the prospectus issued by the company on 31st March, 1994 clearly shows that commercial operations of the company had commenced from April, 1992. The prospectus also gives details of various projects undertaken by the assessee, progress in the fields of seismic survey, work-over operations and also in relation to exploitation of Baola gas field. The AO should have allowed deduction in respect of entire expenses, as the business of the appellant-company had already been set up from asst. yr. 1993-94. The learned counsel drew our attention to the following judgments:
(a) Sarabhai Management Corporation Ltd. v. CIT (1976) 102 ITR 25 (Guj) - approved by the Hon'ble Supreme Court in the case of CIT v. Sarabhai Management Corporation Ltd. (1991) 192 ITR 151 (SC)
(b) Hotel Alankar v. CIT (1982) 133 ITR 866 (Guj)
(c) Western India Vegetable Products Ltd. v. CIT (1954) 26 ITR 151 (Bom)
(d) CIT v. Saurashtra Cement & Chemicals Industries Ltd. (1973) 91 ITR 170 (Guj)
(e) Prem Conductors (P) Ltd. v. CIT (1977) 108 ITR 654 (Guj)
(f) CIT v. Western India Seafood (P) Ltd. (1993) 199 ITR 777 (Guj)
(g) CIT v. Ralliwolf Ltd. (1980) 121 ITR 262 (Bom)
(h) CIT v. Kanoria General Dealers (P) Ltd. (1986) 159 ITR 524 (Cal)
(i) Electrolytic Foil Ltd. v. ITO (1984) 7 ITD 635 (Hyd)
(j) ITO v. Hindustan Diamond Co. (P) Ltd. (1986) 19 ITD 184 (Bom)
(k) Bansidhar (P) Ltd. v. CIT (1981) 127 ITR 65 (Guj)
(l) CIT v. R.M. Maruthai Naidu & Sons (1991) 192 ITR 666 (Mad)
(m) CIT v. Modi Industries Ltd. (1993) 200 ITR 341 (Del)
(n) CIT v. Expanded Metal Manufacturers (1991) 189 ITR 317 (All) 3.10 The learned counsel strongly urged that the revenue expenditure debited in the P&L a/c should be allowed as deduction. The expenses are clearly allowable under Sections 28 to 37 and/or 57(iii) of the Act.
4. The learned senior Departmental Representative submitted that the assessee did not have necessary capacities during the years under appeal both in terms of technology/machinery as well as manpower to undertake the activities of seismic survey and work-over operations. He submitted the following written submissions in this regard:
"As per directions of the Bench I am submitting written submission on the issue of the activities of seismic survey and work over claimed to be carried by the assessee. The assessee, during the course of hearing, had claimed that it was carrying on with these activities during the years under appeal. The stand of the Department was that these activities being very technical in nature requiring specialised machinery and trained manpower was not within the capacity of the assessee.
Seismic survey--Seismic survey can be carried on both land and sea. The survey carried on land is called terrestrial seismic survey whereas that carried on the sea bed is called marine seismic survey. Since the case before the Tribunal was only with reference to the activity of seismic survey carried on land I shall restrict myself only to terrestrial seismic survey. There are two methods of doing seismic survey on land. They are:
1. Geophone method
2. Vibrosis method In the geophone method a large area having the potential of petroleum reserve is wired. These wires are connected to a geophone. A blast is caused in the area inside the earth. The geophone records the reflection of waves from the various layers of the earth crust. These are recorded on a graph by the geophone. The data is then analysed to determine whether the area has petroleum or gas reserves.
In the vibrosis method a truck mounted machine is used to determine the reserve of gas or petroleum. In this method also the sound vibrations from the machine is recorded on the on-board computer to analyse the data.
Work over--This is a method used to find out the potential of the oil bearing well. This is also used to determine the quantity of oil in a particular well. One of the technologies involved is the method of logging in which a machine is lowered in the well which sends electrical signals which are recorded and analysed to find out the potential of the well. Work over also involves methods of removing wax from a well.
2. From the above it would be clear that the assessee did not have the necessary capacities during the years under appeal both in terms of technology/machinery as well as manpower to undertake such jobs. Therefore the contention of the assessee that it had carried out these activities is not borne out from records.
4.1 Shri Sanjay Prasad, the learned senior Departmental Representative drew our attention to the schedule of fixed assets annexed with the audited statements to support his contention that the appellant did not have the required equipments, plant and machinery to carry out the aforesaid business activities. He drew our attention to a copy of letter dt. 12th March, 1993 sent by the assessee to additional director (ONGC) in which it was inter alia stated that they are proposing to set up a computer centre in India for seismic processing. Likewise our attention was also invited towards copy of letter dt. 31st Jan., 1992 sent by the assessee to ONGC in which it was indicated that the required equipments were readily available with their Russian partner, which according to the learned senior Departmental Representative, indicates that the assessee was undergoing the stage of making necessary preparations of setting up of the business. Such preparatory activities precede the actual setting up of the business. He also pointed out that ONGC vide letter dt. 25th Sept., 1995 (p. 134 of the paper book) refused to give the equipments to the assessee, which are necessary for carrying out the work over operations. In the absence of these equipments, the assessee was not in a position to carry out any work-over operations. It is true that ONGC renewed their offer for hiring of equipments and services for work-over operations vide letter dt. 4th Jan., 1996, for which a bid was again given by the assessee vide letter dt. 19th Jan., 1996 (p. 136 of the paper book). All these documents clearly indicate that the actual activities of work over operations did not commence during all the years under consideration.
4.2 The learned senior Departmental Representative further submitted that the activity of export of medicine carried out by the assessee only once in its lifetime cannot be considered as business activity of the appellant-company, as such activity of exporting medicine was clearly beyond the main object clause of the memorandum of association of the company.
4.3 As regards the business activity of oil fields are concerned, Shri Sanjay Prasad, the learned senior Departmental Representative drew our attention to the director's report dt. 1st Oct., 1996 submitted at p. 28 of the paper book, which shows that the commercial production of Baola gas field could not be started till that date due to various reasons stated in the director's report. The audit note No. 1 given along with the audited balance sheet for the year ended on 31st March, 1996 (p. 42 of paper book) shows that no capital equipment had been acquired by the company till 31st March, 1996. The learned senior Departmental Representative also drew our attention to Schedule 13 of the said audit report in which it was inter alia stated as under:
(i) The company is in the business of production of gas/oil at various proposed sites for which substantial expenses are required to be incurred and which are recoverable on successful implementation of such projects and as such have been debited to pre-operative expenses pending allocation over various contracts and shall be written off over a period of expected duration of the contract.
(ii) Similarly, the company has also incurred substantial expenditure whose benefits is expected to accrue over a long period classified under deferred revenue expenditure which shall be written off over a period of three years on commencement of production.
4.4 The learned senior Departmental Representative submitted that the award for bio-gas field was given on 5th April, 1995. The agreement for the same was executed on 2nd Aug., 1995. Copy of agreement executed between the assessee and the Government of India on 5th day of April, 1995 has been placed at p. 72 of the paper book. The learned senior Departmental Representative highlighted Article 8 of the said agreement, which inter alia, requires the assessee to obtain licences, permits etc. from the authorities of the State Government. Petroleum operations could not be carried out without fulfilment of conditions prescribed in Article 8.1(d) of the said agreement. An application for Baola mining lease was given by the assessee on 28th July, 1995. Baola gas in fact started commercial supply of natural gas in July, 2001 as per details furnished by the assessee at p. 66 of the paper book. The learned senior Departmental Representative likewise pointed out that Modhera oil field was also not set up in the years under consideration. Seismic data/information has been provided by ONGC on 13th Aug., 2001. The remaining two bids for other oil fields have not been accepted. All these facts clearly indicate that the assessee was only at a preparatory stage of setting up of their business in the year under consideration.
4.5 The learned senior Departmental Representative submitted that all the judgments relied upon by the learned counsel are clearly distinguishable on facts. For instance, he submitted that the judgment of the Hon'ble Gujarat High Court in the case of Sarabhai Management Corporation Ltd. v. CIT (supra) has been approved by the Hon'ble apex Court in the judgment reported in (1991) 192 ITR 151 (SC) (supra). He pointed out that the Hon'ble Supreme Court while affirming the said judgment has clearly pointed out that the first category of activity referred to by the Hon'ble High Court, viz., the acquisition of a property for being let out can be said to be only a preparatory stage analogous to the acquisition of buildings, plant and machinery in a manufacturing business, the subsequent activities certainly constitute activities in the course of the carrying on of the assessee's business. The Hon'ble Supreme Court has thus drawn clear distinction between the preparatory stage and subsequent activities in the course of carrying on of the assessee's business resulting in ' setting up of the business. The learned senior Departmental Representative submitted that the leading judgment on the aforesaid point is that of the Hon'ble Bombay High Court in the case of Western India Vegetable Products Ltd. v. CIT (1954) 26 ITR 151 (Bom), which has been discussed and referred to in various other judgments relied upon by the learned counsel. The company in that case was registered on 29th Dec., 1945 with the object of running an oil mill and it obtained a certificate of commencement of business on 20th April, 1946. The first purchase of raw material was made on 1st Sept., 1946, though the business really commenced only on 1st Nov., 1946, when it purchased the groundnut oil mill, the business should be treated as set up on 1st Sept., 1946. In the present case, the various activities carried out by the assessee were only of a preparatory stage and the company did not commence any of the actual business activities in all these years.
4.6 The learned senior Departmental Representative relied upon the following judgments in the case of CWT v. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478 (SC), Addl. CIT v. Speciality Paper Ltd. (1982) 133 ITR 879 (Guj), CIT v. Sarabhai Sons (P) Ltd. (1973) 90 ITR 318 (Guj), CIT v. Industrial Solvents & Chemicals (P) Ltd. (1979) 119 ITR 608 (Bom), CIT v. Priem Hotel (P) Ltd. and CIT v. Coromandal Fertilisers Ltd. (2003) 261 ITR 408 (AP) to support his contention that the business of the assessee had not been set up during the years under consideration. The AO has therefore rightly denied deduction in respect of entire expenses claimed as deduction by the assessee.
4.7 The learned senior Departmental Representative did not object to the entertainability of the additional grounds raised by the assessee for asst. yr. 1995-96 but submitted that those additional grounds are devoid of any merit, as no deduction can be granted in respect of any of the expenditure in question until setting up of the business by the assessee either under Section 28 to 37 or under Section 57(iii) of the Act or under any other provisions of the said Act. The learned senior Departmental Representative thus strongly supported the order of the CIT(A) for asst. yr. 1993-94 to asst. yr. 1996-97 and submitted that the CIT(A) has erred in accepting the contention of the assessee in asst. yr. 1997-98, as the position remained at the same stage, as it existed upto asst. yr. 1996-97.
5. We have carefully considered the submissions made by the learned representatives of the parties and have gone through the orders of the learned Departmental Representative as well as all the documents to which our attention was drawn during the course of hearing. We have also gone through all the judgments cited by the learned representative of the parties.
6. We will first like to understand the ratio of various judgments relied upon by the learned senior Departmental Representative. He has placed reliance on the judgment of the Hon'ble Supreme Court in the case of CWT v. Ramaraju Surgical Cotton Mills Ltd. (supra). This was a case relating to exclusion of net wealth employed in the new and separate unit under Section 5(1)(xxi) of the WT Act, 1957. The Hon'ble Supreme Court held 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. The word "set up" used in Section 5(1)(xxi) is equivalent to the word "established", but operations for establishment cannot be equated with the establishment of the unit itself or its setting up. This judgment of the Hon'ble apex Court does not in any manner go against the principles of law laid down in various judgments of the Hon'ble Gujarat High Court. In fact, the Hon'ble Gujarat High Court in the case of Sarabhai Management Corpn. Ltd. (supra) has specifically referred to various judgments including the above referred judgment of the Hon'ble apex Court. The learned senior Departmental Representative also relied upon the judgment of the Hon'ble Gujarat High Court in the case of Addl. CIT v. Speciality Paper Ltd. (supra). The said judgment has been elaborately explained by the Hon'ble Gujarat High Court in a subsequent judgment in the case of Hotel Alankar v. CIT (supra). The relevant extracts from the said judgment of the Hon'ble Gujarat High Court in the case of Hotel Alankar are reproduced below :
From p. 877 of 133 ITR:
"The learned counsel for the Revenue urged that in view of the decision of this Court in Addl. CIT v. Speciality Paper Ltd. (IT Ref. No. 205 of 1974 decided on 19th Oct., 1978, the Tribunal has rightly applied the test which was also recognised and approved by the Supreme Court in Ramaraju Surgical Cotton Mills' case (supra) as to whether an assessee has undertaken the business activities to put them in such a shape that he could be said to be ready to go into the business and it is only then that it can be said that the business has been set up. We are afraid that the learned counsel is reading more than what has been suggested in the test by the Supreme Court or by us in that Speciality Paper Ltd.'s case (see p. 879 infra). In the first place, it should be emphasised that whether a business has been set up or not is always a question of fact which has to be decided on the facts and in the circumstances of each case subject to the broad guidelines provided by the different decisions in that behalf. The decision in Speciality Paper Ltd.'s case turns on its own facts which were very eloquent and which we have enumerated in our decision. The company there had gone into a trial production and in that test and trial which they had taken for purposes of deciding whether they would be able to achieve the commercial production, and produce the product for which the business was set up, namely, of speciality paper, they found that the entire effort had misfired and unless some additional plant was erected and also the capacity raised, the company was not able to continue the business of production. It was in those facts that since the company could not achieve the quality or the quantity of the product for making it a commercial production that the Division Bench of this Court held that in the peculiar facts and circumstances of that case the company could not have been said to have set up the business. In our opinion, therefore, that decision turns on its own facts and would not be of any assistance to the case of the Revenue here."
6.1 The learned senior Departmental Representative also relied upon the judgment of the Hon'ble Gujarat High Court in the case of CIT v. Sarabhai Sons (P) Ltd. (supra), in which it was held that obtaining land on lease, placing orders for machinery and raw materials were operations for the setting up of the business. In that case, the business could not be said to have been set up until July, 1966, when the machinery had been installed and the factory was ready to commence business. This judgment of the Hon'ble Gujarat High Court has been explained by the same Division Bench in the case of CIT v. Saurashtra Cement & Chemical Industries Ltd. (supra) at pp. 178-179. This has also been considered by the Hon'ble Gujarat High Court in the case of Saiabhai Management Corpn. Ltd. (supra), which has been later on confirmed by the Hon'ble Supreme Court in the case of CIT v. Sarabhai Management Corporation Ltd. (supra). It will be appropriate to reproduce the relevant extracts from the judgment of the Hon'ble Gujarat High Court in the case of Sarabhai Management Corpn. Ltd. (supra) at pp. 32 to 34 :
"The decision in Sarabhai Sons (P) Ltd. has been explained by the same Division Bench in CIT v. Saurashtra Cement & Chemical Industries Ltd. in these terms :
"That decision raised the question as to when a certain business carried on by the assessee could be said to have been set up; whether it was set up prior to 31st March, 1966, or subsequent to that date."
and the Division Bench proceeded to observe:
"We fail to see how a decision given on one set of facts can bind us to reach a similar decision on a totally different set of facts. There is nothing in this decision which would deflect us from the view which we are otherwise inclined to take."
In CIT v. Saurashtra Cement & Chemical Industries Ltd., at p. 175 of the report, it is observed:
"It is necessary in order to determine this question to consider what constituted the business of the assessee. Loosely, it may be said that the business of the assessee was manufacture and sale of cement. But in determining questions arising under fiscal legislation, loose use of expression often tends to confound the real issue. To determine what was the business of the assessee, we must consider what are the activities which constituted such business without being misguided by loose expressions of vague and indefinite import. The activities which constituted the business of the assessee were divisible into three categories :
The first category consisted of the activity of extraction of limestone by quarrying leased area of land. This activity was necessary for the purpose of acquiring raw material to be utilised in manufacture of cement;
The second category comprised the activity of manufacture of cement by user of the plant and machinery set up for the purpose; and The third category consisted of the activity of selling manufactured cement.
These three activities combined together constituted the business of the assessee. Each one of these activities was as much essential for the purpose of carrying on the business of the assessee as the others. If the assessee ceased to carry on any one of these activities, the business would come to an end. Each one of these activities constituted an integral part of the business of the assessee. Why then can it not be said that the assessee commenced its business when it started the first of these activities? The activity of quarrying the leased area of land and extracting limestone from it was as much an activity in the course of carrying on the business as the other two activities of manufacture of cement and sale of manufactured cement. The business could not, in fact, be carried on without this activity. The activity came first in point of time and laid the foundation for the second activity and the second activity, when completed, laid the foundation for the third activity. The business consisted of a continuous process of these three activities and when the first activity was started with a view to embarking upon the second and the third activities, it clearly amounted to commencement of the business. It may be that the whole business was not set up when the activity of quarrying the leased area of land and extracting limestone was started. That would be set up only when the plant and machinery was installed, the manufacture of cement started and an organisation for sale of manufactured cement was established. But, as pointed out above, business is nothing more than a continuous course of activities and all the activities which go to make up the business need not be started simultaneously in order that the business may commence. The business would commence when the activity which is first in point of time and which must necessarily precede the other activities is started. Take, for example, a case where an assessee engages in the business of a trader which consists of purchasing and selling goods. The assessee must necessarily purchase goods in order to be able to sell them and purchase of goods must, therefore, necessarily precede their sale. Can it be said in such a case that when the assessee purchases goods for the purpose of sale, he does not commence his business? Is it necessary that he must start the activity of selling goods before be can be said to have commenced his business? We have to consider the question as to when an assessee can be said to have commenced business from a common sense point of view. We have to ask ourselves the question as to when a businessman would regard a business as being commenced? Would he not consider a business as having commenced when an essential activity of that business is started? The argument of the Revenue seeks to confound the commencement of a business with the establishment of the business as a whole and carrying on of all the activities of the business. This b2 confusion is the result of a loose description of the business of the assessee as a business of manufacture and sale of cement."
6.2 The learned senior Departmental Representative had also relied upon the judgment of the Hon'ble Bombay High Court in the case of CIT v. Industrial Solvents & Chemicals (P) Ltd. (supra). The AAC in this case had held that the business of the assessee had been set up in February, 1961, when trial runs had commenced. The Tribunal however found that the assessee-company did obtain some reasonable quantity of the finished product on the running of its factory on some days between 19th Aug., 1961 and 11th Sept., 1961, but the finished product obtained by the assessee could be termed as sub-standard. The Tribunal held that it cannot be contended that because the end product then obtained was not of proper standard, the business of the assessee cannot be said to have been set up though the plant was being worked. The Hon'ble Bombay High Court held that the assessee must be regarded as having set up its business by 19th Aug., 1961, and not in February, 1961. The Hon'ble Bombay High Court has referred to various judgments of the Hon'ble Gujarat High Court including the judgments in the case of CIT v. Saurashtra Cement & Chemical Industries Ltd. (supra), Prem Conductors (P) Ltd. v. CIT (supra) and Sarabhai Management Corporation Ltd. v. CIT (supra) as also the judgment of the Hon'ble Bombay High Court in the case of Western India Vegetable Products Ltd. v. CIT (supra). The Hon'ble Bombay High Court has observed that in each case the question as to when the business, can be said to be set up will be required to be answered on the facts of that case. On principle, the Hon'ble Bombay High Court held that only expenditure for carrying on the business after its set up is allowable as business expenditure. It will therefore depend on the facts of each case as to when the business can be said to have been set up. Various other judgments relied upon by the learned senior Departmental Representative lay down the same principle that the expenses incurred after setting up of the business including depreciation and investment allowance will be allowable if the assessee establishes that it had set up the business. It has also been approved in all those decisions that setting up of a business is not the same as commencement of the business. The question as to what activities constitute setting up of a business and commencement of a business, has to be decided on the facts of each case.
7. We will now briefly examine the principles of law laid down by the Hon'ble Gujarat High Court and the Hon'ble apex Court in various judgments cited by the learned counsel for the assessee.
Western India Vegetable Products Ltd. v. CIT (supra) :
In this case, the company was registered on 29th Dec., 1945. The certificate of commencement of business was issued by the registrar of joint stock companies on 20th April, 1946. The company purchased a groundnut oil mill on 1st Nov., 1946. The assessee made first purchase of groundnut in September, 1946. The Tribunal on these facts held that the business cannot be said to have been commenced merely on the ground that the certificate of commencement of business has been obtained by the company. Business can be said to have been commenced when some activity in relation to carrying on the business is done. It may be the purchase of raw material, placing an order for the raw material, sales and so on. Nor can the date of commencement of the business be correlated to the date of the purchase of the mill. The Tribunal on the facts of this case held that they will fix the 1st of September, 1946, as the date when the company started the business activity in relation to the carrying on of the business. The Hon'ble Bombay High Court on these facts held as under:
At p. 158 of 26 ITR:
"It seems to us, that the expression "setting up" means, as is defined in the Oxford English Dictionary, "to place on foot" or "to establish", and in contradistinction to "commence". The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions under Section 10(2). Now, applying that test to the facts here, the company actually commenced business only on the 1st Nov., 1946, when it purchased a ground nut oil mill and was in a position to crush ground nuts and produce oil. But prior to this there was a period when the business could be said to have been set up and the company was ready to commence business, and in the view of the Tribunal one of the main factors was the purchase of raw materials from which an inference could be drawn that the company had set up its business; but that is not the only factor that the Tribunal has taken into consideration. The Tribunal has, as pointed out in the statement of the case, scrutinised the various details of the expenses given in the order of the AAC and having scrutinised those expenses the Tribunal has come to the conclusion even on an interpretation more favourable to the assessee than the one we are giving to the expression "setting up" that these expenses do not show that the business was set up prior to the 1st of September, 1946. In our opinion, it would be difficult to say that the decision of the Tribunal is based upon a total absence of any evidence."
CIT v. Saurashtra Cement and Chemical Industries Ltd. (supra):
The head note of the above judgment is reproduced below:
"Business" connotes a continuous course of activities. All the activities which go to make up the business and not be started simultaneously in order that the business may commence. The business would commence when the activity is first in point of time and which must necessarily precede all other activities is started. A company was formed in 1956 for the manufacture and sale of cement. As part of its business the assessee obtained a mining lease for quarrying limestone and started the mining operations in 1958. It claimed the expenditure incurred for the purpose of extracting limestone as also depreciation and development rebate for the machinery installed for that purpose for the asst. yrs. 1960-61 and 1961-62:
Held, that the activities which constituted the business of the assessee were divisible into three categories, the first category consisted of the activity of extraction of limestone by quarrying the leased area of land. This activity was necessary for the purpose of acquiring the raw material to be utilised in the manufacture of cement. The second activity comprised the activity of manufacture of cement by user of the plant and machinery set up for that purpose; and the third category consisted of selling manufactured cement. These three activities combined together constituted the business of the assessee. The activity of quarrying the leased area of land and extracting limestone from it was as much an activity in the course of carrying on the business as the other two activities of manufacture of cement and sale of manufactured cement. This activity came first in point of time and laid the foundation for the second activity and the second activity when completed laid the foundation for the third activity. Hence, the assessee commenced its business when it started the activity of extraction of limestone. Since extraction of limestone commenced in 1958, the assessee was carrying on business during the relevant years of account. The expenditure incurred by the assessee in carrying on the activity of extraction of limestone as also depreciation allowance and development rebate in respect of machinery employed in extracting limestone were deductible in computing the trading profits of the assessee for the asst. yrs. 1960-61 and 1961-62."
Sarabhai Management Corporation Ltd. v. CIT (supra) :
The relevant extracts from this judgment have also been reproduced hereinbefore. This judgment has been approved by the Hon'ble Supreme Court in the case reported in CIT v. Sarabhai Management Corporation Ltd. (supra).
Prem Conductors (P) Ltd. v. CIT (supra):
The Hon'ble Gujarat High Court in this case has held as under at p. 663:
"Thus, it is clear in the light of the decisions of this High Court in Saurashtra Cement and Chemical Industries' case (supra) and Sarabhai Management Corporation Ltd.'s case (supra) that what the Court has to consider is, whether the business of the assessee consists of different categories and whether the activity which was started earlier than the actual commencement of the production in the instant case could be said to have been an essential part of the business activity of the assessee. The company can be said to have set up its business from the date when one of the categories of its business activity is started and it is not necessary that all the categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set up. Again, as Bhagwati C.J., has emphasised in Saurashtra Cement & Chemical Industries' case (supra), the test to be applied is as to when a businessman would regard a business as being commenced and the approach must be from a common-sense point of view."
Again, at p. 666, the Hon'ble Gujarat High Court has observed as under:
"The business of the company was to manufacture aluminium and other conductors and to sell them. In the instant case, the company has started securing orders well in advance of the date on which it actually started production of aluminium conductors. The selling of aluminium conductors manufactured by it is as much a part of the business activity of the assessee-company as the manufacture of the aluminium conductors. The orders acquired by the assessee-company from the different electricity boards ensured ready market for the company when the company actually went into production and it purchased raw materials and stock in advance so that it could go into production on an appropriate scale and supply the goods against the orders which it had already received. As has been pointed out by Bhagwati C.J. in Saurashtra Cement & Chemical Industries' case (supra), even the activity of acquiring raw materials can be part of the business activity of a manufacturing unit because, unless the raw materials are ready, the production cannot start and unless the production has started, the goods cannot be actually sold. All the time we have to bear in mind that the test is of common-sense and what in the eye of a businessman can be said to be the commencement of the business. Since selling the goods manufactured by the assessee-company is an important part of the business activity, it can be said that the assessee-company in the instant case commenced its business and its business was set up when it started securing orders against further production. One business activity may precede the other. What is required to be seen is, whether one of the essential activities for the carrying on of the business of the assessee-company as a whole was or was not commenced. In this case the assessee-company has commenced its business by securing orders first and going to production later on. While the orders were being secured simultaneously, the installation of machinery, putting up of the buildings, etc., was being attended to and when the company was ready to go into production, it actually started production and supplied goods against the orders which it had already booked. In view of this particular special feature of this case, namely, that the business activity of securing orders had practically started since the very date of incorporation of the company, it is obvious that the business activity of this assessee-company started from the day of its incorporation and not from the day when the production of aluminium conductors commenced. The Tribunal was, therefore, in error in not analysing the activities of the assessee-company in the instant case into the essential components of that business activity and ascertaining whether one or the other of those component activities had commenced before the actual date of going into production. As pointed out in Sarabhai Management Corpn. Ltd. 's case (supra) what is material is the date when the company went into one or the other business activity and started one or the other component business activities of the company. In the instant case that was certainly done from the very date of the incorporation of the company. Under these circumstances, the assessee-company was entitled to have the loss of Rs. 46,970 for asst. yr. 1965-66 treated as business loss and also to have the loss of Rs. 58,600 incurred by it during the period 1st Jan., 1965 to 26th June, 1965, in the previous year relevant to asst. yr. 1966-67, treated as a business loss. The Tribunal was in error when it overlooked this distinction between the component business activity and the business activity as a whole and the Tribunal was in error in holding that the assessee had not commenced its business prior to 26th June, 1965."
CIT v. Western India Seafood (P) Ltd. (supra):
The Hon'ble Gujarat High Court after referring to all the above referred judgments, has held as under:
"In the light of the aforesaid settled legal position, therefore, it is easy to visualise that for the setting up of the business of processing marine products, the assessee, during the assessment year in question, had to make all preparations and had also to provide on the spot the necessary infrastructure. Even conceding that entering into advance contracts with fishermen for collection of fish during the monsoon season may not be taken as a first step towards setting up of business, at least from 15th Aug., 1970, when the assessee acquired a godown where the processing or marine products could start when fish became available after the monsoon, it can be said that was the starting point of the setting up of the business of processing marine products. Actual arrival of fish later on would not postpone the setting up of such business. The Tribunal was, therefore, right in concurring with the view of the AAC that the expenditure incurred by the assessee after 15th Aug., 1970, and before 6th Oct., 1970, when collection of fish was to actually start, can be treated to be business expenditure and would get covered under Section 37 of the Act."
It may not be necessary to reproduce the facts and extracts from other decisions rendered by various Hon'ble Courts relied upon by the learned counsel, as in all those cases it has universally been held that the expenses incurred after setting up of the business are allowable as deduction and expenses incurred prior to that date are not allowable. The question as to when the business can be said to have been commenced or set up will depend on the facts and circumstances of each case.
8. The principles of law emerging from the various judgments cited by the learned representatives of both sides can be briefly summarised as under:
(a) There is a clear distinction between a person commencing business and a person setting up of the business. There may be an interval between setting up of business and the commencement of the business.
(b) When a business is established and is ready to commence, then it would be said that the business is set up.
(c) The expenses incurred during the intervening period between setting up of the business and the commencement of the business would be permissible deductions. However, expenses incurred during the preparatory stage prior to setting up of business would not qualify for deduction.
(d) The assessee can be said to have set up its business from the date when one of the essential categories of its business activities is started and it is not necessary that all categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set up.
(e) The question as to when business can be said to have been set up and commenced will depend on facts and surrounding circumstances of each case. The test to be applied is as to when a businessman would regard a business as being set up and/or commenced and the approach must be from a common-sense point of view.
9. Applying these tests to the facts of various cases, the Hon'ble High Courts have rendered the above referred decisions as to when on the facts of a particular case the business can be said to have been set up.
9.1 In the case of Western India Vegetable Products Ltd. v. CIT (supra), the company incorporated for running an oil mill purchased groundnut oil mill in a working condition on 1st Nov., 1946. But the assessee made purchase of raw material in September, 1946. It also started placing orders for raw materials and sales and so on prior to transaction of purchase of raw materials in September, 1946. The Hon'ble High Court held that the purchase of raw material and other activities prior to the commencement of the business were essential activities for commencing the said business and therefore it was held that the business of the company could be said to have been set up from 1st Sept., 1946. The expenses incurred during the intervening period from 1st Sept., 1946 to 1st Nov., 1946 were held to be allowable as deduction.
9.2 In the case of CIT v. Saurashtra Cement & Chemicals Industries Ltd. (supra), the company was incorporated for manufacture and sale of cement. The company was formed in 1956. It started mining operations for excavation of limestone in the year 1956. The company started manufacture of cement in October, 1960. The Hon'ble Gujarat High Court held that the activity which was necessary for the purpose of acquiring raw material to be utilised in the manufacture of cement started with the extraction of limestone in 1958 and expenses incurred thereafter should be allowed as deduction regardless of the fact that manufacture of cement commenced in October, 1960.
9.3 In the case of Sarabhai Management Corporation Ltd. v. CIT (supra), the Hon'ble Gujarat High Court held that the company formed with the main object of acquiring immovable property and to give it out on leave and licence basis should be treated to have been commenced its business activity after they have purchased the immovable property and carried out necessary repairs, installation of lift etc. so as to render premises more serviceable to its prospective licencees or lessees, which was done upto October, 1964 regardless of the fact that the premises were in fact given on leave and licence basis on 1st May, 1965. The Hon'ble High Court held that the expenditure of Rs. 48,004 incurred by the assessee between 1st Oct., 1964 to 31st March, 1965 should be allowed as business expenditure.
9.4 The facts in the case of Prem Conductors (P) Ltd. v. CIT (supra) are that the company was incorporated to carry on the business of manufacture and sale of aluminium conductors. The company started negotiations for purchase of raw materials since incorporation. The company also started securing orders well in advance of the date on which it actually started production of aluminium conductors. The company actually started production of conductors on 27th June, 1965, which falls in asst. yr. 1966-67. The company claimed deduction in respect of expenses incurred during asst. yr. 1965-66 and claimed it as business loss and also claimed deduction in respect of expenses incurred from 1st Jan., 1965 to 26th June, 1965. The Hon'ble High Court held that one of the essential activities of the business viz., the activity of securing orders had practically started since very date of incorporation of the company and it was obvious that the business activity of the company started from the day of its incorporation and not form the day when the production of aluminium conductors commenced. The Hon'ble High Court held that the assessee was entitled to get the deduction of business expenditure and was eligible to treat such loss as business loss.
9.5 The facts of all these cases very aptly demonstrate the illustrations as to how the various principles and tests laid down in these judgments should be applied, on the basis of which one can arrive at a proper decision as to when the business can be said to have been set up on the given facts and circumstances.
10. Let us now examine the facts of the present case on the basis of principles of law emerging from the above referred decisions by applying the tests laid down by the Hon'ble Courts in the above referred judgments.
11. The appellant-company was incorporated on 29th Aug., 1991. The main object of the company is to render technical oil field services viz., seismic survey and work-over operations besides undertaking exploitation of gas fields. In asst. yr. 1993-94, the learned counsel pointed out that the prospectus issued by the company on 31st March, 1994 inter alia shows that the commercial operations of the company commenced from April, 1992. He also brought to our notice that the appellant-company had given a tender for participation of seismic processing to ONGC on 31st April, 1992. The second tender to ONGC for seismic processing was also given on 12th March, 1993 which falls in asst. yr. 1993-94. He also pointed out that the company was promoted by Indian promoters as well as representatives of foreign collaboration M/s Zapadneftegeofizika (ZNGF) and foreign nationals having long and rich experience in this line of business. It is true that the company was promoted by persons having technical qualifications and rich experience but the activities carried out till end of asst. yr. 1993-94 can only be treated as preparatory activities and the company was in the process of setting up of its business. The main object of the appellant-company is to render technical oil field services viz. seismic survey and work-over operations. The technical collaboration agreement with ZNGF was executed on 25th Oct., 1993 which has been taken on record by the RBI, Ahmedabad on 8th Jan., 1994 as mentioned in para-8 of the prospectus issued by the company. The MOU with ZNGF was executed on 28th Oct., 1993 for forming of a joint venture with M/s Gyanberg Production Corporation inc. (GPC) of USA. Another MOU was signed with Hindustan Oil Exploration Co. Ltd. (HOEC) on 8th Oct., 1993 for oil field services. The approval was received from the Ministry of Finance, Govt. of India for availing suppliers' credit of US$ 1.00 million from ZNGF vide letter dt. 14th Feb., 1994. All these important agreements and MOUs were executed in the financial year 1993-94, which falls in asst. yr. 1994-95.
12. The commercial bid for seismic processing given to ONGC on 31st Jan., 1992 had undergone onwards negotiations. The learned counsel did not point out as to how without executing the technical collaboration agreement with ZNGF and MOU with ZNGF, the assessee was ready to provide such technical services, requiring specialised machinery and trained manpower. The bank guarantee in respect of both the commercial bid given for seismic processing to ONGC was given after certain negotiations on 2nd July, 1993. The aforesaid facts viz. technical collaboration agreement executed on 25th Oct., 1993 approved by the RBI on 8th Jan., 1994, and MOU with ZNGF for joint venture executed on 28th Oct., 1993 and various documents referred to above, show that the assessee can be said to have set up its business of starting activity of seismic survey only in asst. yr. 1994-95 and not in asst. yr. 1993-94.
13. The activity of work-over operations as per chart submitted by the assessee at p. 122 of paper book shows that the very first tender for hiring of equipments and services for work-over operations was given by the assessee on ONGC on 12th Nov., 1993 and bank guarantee for Rs. 5,85,300 was given on 19th Nov., 1993. Subsequently, the extended bank guarantee for Rs. 5,85,300 was furnished on 30th March, 1995. The original bid was returned back by ONGC for cancellation on 25th Sept., 1995. The offer was renewed by ONGC on 4th Jan., 1996 and thereafter the subsequent developments took place in January, 1996. These facts stated on behalf of the assessee also clearly show that the first effective activity in the field of work-over operations viz. submission of tenders for hiring of equipments which was essential for carrying put the work-over operations was given on 12th Nov., 1993, which also falls in asst. yr. 1994-95 and not in asst. yr. 1993-94.
14. The activity in the field of oil gas fields also did not commence in asst. yr. 1993-94. At p. 66 of the paper book the assessee has given details of participation for Baola gas field. The date of bid given in the year 1992 has not been mentioned. The copy of bid submitted has also not been produced before the Departmental authorities nor before us. The said bid was approved by the Govt. on 27th Dec., 1993. This also falls in asst. yr. 1994-95. The assessee was awarded the contract for Baola gas field on 5th April, 1995. Subsequently, there were some problems and the MOU signed with the first customer for supply of gas for setting up power project had become a subject-matter of litigation. A new customer was found and ultimately commercial supply of natural gas started in July, 2001. These facts also clearly indicate that the approval of the Govt. for awarding of contract relating to Baola gas field in favour of the assessee was given on 27th Dec., 1993. The first effective event in relation to Baola gas field also took place in asst. yr. 1994-95 and not before that.
15. The bid for Hazira field given on 30th March, 1993 concluded on 19th May, 1994 and contract was not awarded by the Government to the assessee. The bid for Modhera field was given on 3rd Oct., 1994 and production sharing contract has been signed between the Government and IPL (the assessee) on 23rd Feb., 2001. The bid for Rajasthan oil field was submitted on 14th Sept., 1995, which was not awarded to the assessee.
16. It is clear from the facts discussed above that no effective activity for any of the oil fields had taken place in asst. yr. 1993-94. However, some effective steps have been taken in respect of Baola gas field on 27th Dec., 1993 when Government accorded its approval for finalisation of contract with the assessee, which falls in asst. yr. 1994-95.
17. The activity of exports of medicines have taken place in the month of February, 1994. The assessee has exported medicines to the tune of Rs. 70,43,549 in the month of February, 1994. It is true that the export of medicines is not covered by the main object clause of the appellant-company. The learned senior Departmental Representative is therefore right in contending that this export activity is not one of the authorised business of the appellant-company. But the uncontroverted fact is that the assessee did in fact made export sales of Rs. 70,43,549 in asst. yr. 1994-95. The assessee may be liable for consequences contemplated in the Companies Act for carrying out an unauthorised business but this activity of export of medicines carried out by the assessee in asst; yr. 1994-95 has generated profit on such export sales, which has been held to be liable to tax as income from business by the CIT(A) in asst. yr. 1994-95. The Revenue has not preferred any appeal or cross-objections against such finding given by CIT(A) before the Tribunal. The finding so given by CIT(A) in asst. yr, 1994-95 have thus achieved finality. No sales were made by the assessee in asst. yr. 1993-94. No income from business has been derived by the assessee in any of the years under consideration except the profit on two transactions of export of medicines made in the month of February, 1994.
18. It may now be necessary to make a reference to the technical collaboration agreement executed by the assessee with ZNGF on 25th Oct., 1993. The appellant-company in their prospectus issued on 31st March, 1994 has stated the following facts:
D. Technical collaboration Zepadneftegeofizika (ZNGF) has its registered office at 8, Artillery Street, Gomel 246 022, Belorussia. ZNGF is one of the foremost companies specialising ingeophysical studies in the erstwhile USSR. It was established in 1968 under the Ministry of Oil and Gas Industry of USSR and is presently Belorussian owned association. ZNGF is associated with the discovery of large oil fields in Belorussia. ZNGF also operated in various oil regions of Belorussia, Ukraine, Armenia, Korea, Iraq, Cuba, Algeirs, Vietnam etc. ZNGF is very active in 2D/3D seismic survey, field data processing and interpretation, logging techniques and lithological/stratigraphical analysis all very vital oil field services.
The company has signed collaboration agreement on 25th Oct., 1993 with ZNGF which has been taken on record by RBI, Ahmedabad on 8th Jan., 1994.
Main provisions of the collaboration agreement
1. ZNGF will provide complete technology for seismic survey available with ZNGF. It also includes transfer of any improvement and modernisation brought throughout the duration of the agreement.
2. Access to the technology available with any of ZNGF group companies like Sojuzpromgeofizika, Belorusneft and Machine Import.
3. No lumpsum fees or running royalties are payable to ZNGF.
4. Exclusive territory rights of all Asian countries and non-exclusive rights of middle east countries.
5. Training of Indian technicians during pre-commencement stage at the cost of the company.
6. Assistance in selection and installation of equipments.
7. Initial period of the agreement is 10 years from 1st Nov., 1993.
8. Deputation of ZNGF engineers during post-commencement stage at the cost of the company.
The company has received the necessary consent from the Government of India for the foreign collaboration. The necessary consent from ZNGF for quoting them in the form it appears in the prospectus has also been received by the company.
19. It is clear from the gist of technical collaboration agreement as given in the prospectus that the company was ready to provide technical oil field services viz. seismic survey on the strength of the said collaboration agreement. The company had also started effective steps by giving tenders for seismic survey and work-over operations. The prospectus issued on 31st March, 1994 inter alia indicates that the company upto that date had submitted bids for various oil field services and contracts aggregating to Rs. 800 lakhs besides the bid given for development of Baola gas field located near Ahmedabad.
20. The promoters and directors of the company possess technical qualifications and rich experience in this line of business. The details, of such qualifications and experience of various promoters and directors, technical advisors have been given at pp. 9-10 of the said prospectus.
21. The details of administrative and general expenses placed at pp. 25-26 of the paper book inter alia show that the company has paid directors remuneration of Rs. 60,000 in asst. yr. 1994-95 as against nil remuneration to directors in asst. yr. 1993-94. The said details also indicate that the company has incurred various other expenses of revenue nature Which were necessary for corporate existence, necessary for carrying out various activities for setting up of the assessee's business, expenses necessary for earning income from interest, dividend etc. A mere look at the details of various administrative and general expenses and the interest expenditure incurred by the assessee shows that all such expenditure debited in the P&L a/c are expenditure of revenue nature. It will be imperative to repeat that all direct revenue expenditure incurred for commissioning of specific projects have been shown under the head "pre-operative expenditure" and have been capitalised by the assessee and shown under the head "misc. expenditure" on the asset side of the balance sheet. The assessee has not claimed any deduction in respect of such pre-operative expenditure capitalised by them and shown in the balance sheet. They have claimed deduction only in relation to expenditure of revenue nature in the P&L a/c. The various expenditure of revenue nature incurred by the assessee shows that they have employed various persons, buildings have been constructed by the company which is being used for the purpose of business. The assessee has incurred expenditure for travelling and other activities which are necessary for setting up/commencement of assessee's business.
22. On a careful consideration of the entire relevant facts in the light of principles laid down by the Hon'ble Courts in the various judgments referred to hereinbefore, we are of the considered opinion that it cannot be validly accepted that the assessee had set up its business in asst. yr. 1993-94.
23. However, the assessee had effectively carried out various essential activities which constitute part of the business activities of the assessee in asst. yr. 1994-95, such as that they had made effective negotiations in relation to bids for seismic processing, gave bank guarantee in support of such tenders for seismic services, entered into technical collaboration agreements with ZNGF in October, 1993, executed various MOUs in asst. yr. 1994-95, exported medicines in the same year, contract for Baola gas field was also approved by the Government of India on 27th Dec., 1993 etc. The initial steps taken in asst. yr. 1993-94 or prior to that, achieved the stage of setting up of the said business in asst. yr. 1994-95, in the light of principles laid down in the various judgments referred to hereinbefore.
23.1 It would be imperative to state here that the CIT(A) in asst. yr. 1994-95 has inter alia given a definite finding in para 3.3(2) that the assessee's net income from export sales has to be calculated and brought to tax as income from business. The Revenue has not preferred any appeal against such finding given by the CIT(A) nor they have filed any cross-objection. Therefore, the finding of the CIT(A) that the net income from export sales is assessable as income from business, has achieved finality.
23.2 After giving our deep and thoughtful consideration to the entire relevant facts and material, we are of the considered opinion that the business of the assessee was set up in asst. yr. 1994-95. The assessee is therefore entitled to grant of deduction in respect of revenue expenditure incurred for the purposes of aforesaid business from asst. yr. 1994-95 and onwards. The loss arising due to such permissible deduction of revenue expenditure should be treated as a business loss and the same should be set off against current year's income from other sources assessed by the AO as per Section 71 of the Act and the unabsorbed amount should be carried forward as business loss in subsequent years as per relevant provisions of the Act.
24. We will now give our findings in relation to each of the grounds raised in all these appeals keeping in view the findings given in relation to the aforesaid main point.
25. ITA No. 3678/Ahd/2002 for asst. yr. 1993-94 :
25.1 The first ground relating to alleged invalidity of proceedings initiated under Section 147 was not pressed by the learned counsel for the assessee at the time of hearing. Hence, ground No. 1 is rejected, as not pressed.
Ground No. 2:
25.2.1 As regards ground No. 2, the view taken by the AO that the income of Rs. 9,56,337 is assessable under the head "income from other sources" is upheld, as such income represents interest on fixed deposit, interest on loan and misc. income as per details already reproduced in earlier part of this order. Such income derived by the assessee cannot be said to be profits and gains of business, in view of the principles laid down by the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT (1997) 227 ITR 172 (SC) and the judgment of the Hon'ble High Court in the case of Sarabhai Sons (P) Ltd. v. CIT (1993) 201 ITR 464 (Guj).
25.2.2 We, however, consider it just and proper to direct the AO to allow deduction of 10 per cent of the total expenditure of Rs. 9,55,500 debited in the P&L a/c i.e. Rs. 95,550 as expenditure incurred for purpose of earning such income from other sources. The ad hoc deduction of 10 per cent of the total expenditure is allowed as deduction out of the income from other sources assessed by the AO keeping in view the provisions contained in Clause (baa) of Explanation below Sub-section (4B) of Section 80HHC which provides that 90 per cent of the receipts by way of brokerage, commission, interest, rent, etc. should be excluded from the profits of business for purpose of computing deduction under Section 80HHC. This impliedly means that the legislature thought it proper to provide ad hoc 10 per cent deduction for the expenses required to be incurred for earning such income. The AO is therefore directed to grant deduction of 10 per cent of total expenditure debited in the P&L a/c while computing the income from other sources assessed by him under Section 57(iii) of the Act.
25.2.3 The balance 90 per cent of the total expenditure debited in the P&L a/c and claimed as deduction on the ground that business had already been commenced by the assessee in asst. yr. 1993-94, is not acceptable as the business cannot be treated as having been set up in asst. yr. 1993-94. The disallowance of 90 per cent of the total expenditure debited in the P&L a/c and claimed as deduction is therefore confirmed.
25.3 Ground No. 3 raised by the assessee is correct. The income of Rs. 840 shown by the assessee in its return of income is already included in the total income of Rs. 9,56,337 credited in its P&L a/c. Since the entire income of Rs. 9,56,337 has been assessed by the AO as income from other sources, the inclusion of the sum of Rs. 840 shown in the return of income once again has resulted in double addition. The AO is directed to exclude the income of Rs. 840.
25.4 Ground No. 4 and 5 for asst. yr. 1993-94 are argumentative in nature. We have already given finding that the business cannot be treated to have been set up in asst. yr. 1993-94. We have also given our finding with regard to assessability of interest income etc. under the head "income from other sources" and deduction of 10 per cent of the total expenditure out of such income. Hence, ground No. 4 and 5 do not require any separate finding. Our findings given in relation to the main issue and in relation to ground No. 2 will cover these grounds also.
25.5 Ground No. 6 relating to deduction under Section 42 was not pressed by the learned counsel for the assessee at the time of hearing. Hence, the same is rejected, as not pressed.
25.6 Ground No. 7 is also general in nature. All the submissions made by the learned counsel in relation to the main point have been elaborately considered hereinbefore. Ground No. 7 is therefore devoid of any merit and is accordingly rejected.
25.7 No arguments were addressed in respect of ground No. 8 relating to levy of interest under Section 234A/B/C. The AO is however directed to grant consequential relief.
25.8 As regards ground No. 9, no appeal is maintainable against initiation of penalty proceedings under Section 271(1)(c) while dealing with the quantum appeal. Hence, ground No. 9 is not entertainable in the quantum appeal.
26. ITA No. 3679/Ahd/2002 for asst. yr. 1994-95 :
26.1 The first ground relating to alleged invalidity of proceedings initiated under Section 147 was not pressed by the learned counsel for the assessee at the time of hearing. Hence, the same is rejected, as not pressed.
26.2 As regards ground Nos. 2 and 3, the learned CIT(A) in para 3.3 of his order for asst. yr. 1994-95, has given the following findings:
"3.3 On consideration of the facts of the case, I find that in the details of income in Schedule X, export sales of Rs. 70,43,549 is clearly mentioned and also under the head expenses purchase for resale of Rs. 59,06,950 has been mentioned. It appears that the AO has overlooked these details in the audited accounts filed along with the return of income. It is also seen that this is a single case of export sales. If it is true that the appellant has made trading export sales then this would constitute business activity in itself and for taxing any income out of such trading activity, the expenses relating thereto have to be allowed. The expenses would mainly consist of the purchase price of the goods which have been allegedly sold on export and other expenses relatable to this business activity and only the net income has to be considered for the purpose of taxation. As this issue has not been dealt with by the AO through oversight, he is directed to do the following:
1. To verify the export sales and the related expenses including expenses on purchase of goods etc.
2. After that, the net income from export sales has to be calculated and brought to tax as income from business.
3. Income by way of interest and dividend to be taxed under the head "income from other sources".
4. Other expenses not related to export sales will not be allowed as the main business of the appellant has not commenced during the year.
The AO is therefore, directed to recalculate the amount of income after proper verification on the lines suggested above and to subject that amount to income-tax.
26.2.1 We agree with the finding given by the learned CIT(A) that the income from export sales has to be computed after allowing deduction in respect of purchase of goods and other expenses incurred in relation to such exports, as assessee's income from business.
It would be worthwhile to state that the Revenue has not preferred any appeal against the order of the CIT(A) for asst. yr. 1994-95. Therefore the finding given by the CIT(A) that the net income from export sales has to be brought to tax as income from business, has achieved finality and the same cannot be disturbed in the absence of cross-appeal or cross-objection by the Revenue in relation to this point.
26.2.2 We also agree with the finding of the learned CIT(A) that the income by way of interest and dividend shown in the P&L a/c has to be taxed under the head "income from other sources". The AO should however grant deduction at the rate of 10 per cent of total expenses after excluding the expenses incurred for purchase of goods and expenses incurred for exports, as has been held in asst. yr. 1993-94 under Section 57(iii) of the Act.
26.2.3 However, we do not agree with the finding of the learned CIT(A) that the other expenses not related to export sales will not be allowed as deduction as the main business of the appellant has not commenced. We have already given a finding after consideration of the entire relevant facts and material that the business of the assessee should be treated to have been set up from asst. yr. 1994-95. The assessee is clearly entitled to deduction of all the revenue expenditure debited in the P&L a/c. It is however clarified that 10 per cent of the total expenditure (excluding the expenditure incurred for exports) should be allowed as deduction against income by way of interest and dividend liable to be taxed under the head "income from other sources". Therefore the balance 90 per cent of the said expenditure debited in the P&L a/c (excluding the expenditure incurred in relation to exports) should be allowed as business expenditure and the net loss arising from such business expenditure should be set off against income from other sources. The unabsorbed amount of business expenditure will be eligible to be carried forward as business loss for being set off against income of future years in accordance with the relevant provisions of the IT Act, 1961.
26.3 As regards ground No. 4 for asst. yr. 1994-95, no arguments were advanced by the learned counsel in relation to deduction under Section 80HHC on export sales of Rs. 70,43,549. It may also be relevant here to refer to the order under Section 154 passed by the AO on 27th Sept., 2002 for asst. yr. 1994-95. The relevant findings given by the AO in paras 6 to 8 are reproduced below:
"6. I have considered the contention of the assessee. The assessee's contention that the whole export profit is entitled to hundred per cent deduction under Section 80HHC that the assessee has neither made any claim for deduction on Section 80HHC in the original return nor at the time of reassessment proceedings. Since this is not a mistake apparent from the records, this contention of the assessee is rejected.
7. The assessee's contention that the income from export sales amounting to Rs. 70,43,549 has been treated as income from other sources and that no expenditure related to earning of export income has been allowed to the assessee, it is seen that the export sales amounting to Rs. 70,43,549 cannot be treated as income from other sources, as this is a business income of the assessee. It is also seen that the assessee has debited in its P&L a/c, purchases for resale amounting to Rs. 59,06,950 and clearing and forwarding amounting to Rs. 5,96,238 totaling to Rs. 65,03,188 which are directly related to the export sales and hence allowable, which has remained to be allowed while passing the order under Section 143(3) r/w Section 147. Since this is a mistake apparent from records, the same is rectified under Section 154 of the Act.
8. Subject to above, the total income of the assessee is revised as under:
Rs.
Rs.
Export Sales 70,43,549 Less: Purchase for resale and clearing and forwarding charges 65,03,188 5,40,361 Add: Income from other sources: Balance c/f 5,40,361 (i) Interest on FD with bank 1,19,761 (ii) Interest on loans 41,184 (iii) Dividend 3,60,180 5,21,125 Revised total income . 10,61,486 i.e. 10,61,490
26.3.1 Since the assessee did not make any claim for deduction under Section 80HHC in the original return nor at the time of re-assessment proceedings, such a claim cannot be allowed at the stage of appeal before the Tribunal against reassessment order. The learned counsel has not pointed out as to whether the assessee has complied with the various conditions prescribed in Section 80HHC. The assessee's claim for grant of deduction under Section 80HHC is therefore devoid of any merit and is accordingly rejected.
26.4 Ground Nos. 5 and 6 are argumentative in nature and do not require any separate finding or decision. Our findings in relation to the main ground will cover these grounds also.
26.5 Ground No. 7 relating to deduction under Section 42 was not pressed by the learned counsel for the assessee at the time of hearing. Hence, ground No. 7 is rejected, as not pressed.
26.6 Ground No. 8 is general in nature and no arguments were addressed by the learned counsel for the assessee. The arguments raised in ground No. 8 have also been discussed while dealing with the main ground. Hence, ground No. 8 is also rejected, being devoid of any merit.
26.7 No arguments were advanced by the learned counsel for the assessee in relation to one more ground marked as ground No. 8 relating to levy of interest under Section 234A/B/C. The AO is directed to grant consequential relief.
26.8 Ground No. 9 relating to initiation of penalty proceedings under Section 271(1)(c) is not maintainable in quantum appeal. Hence, the same is rejected.
27. ITA No. 1298/Ahd/1998 for asst. yr. 1995-96 :
27.1 As regards ground No. 1, the action of the CIT(A) of confirming the assessability of interest income and dividend income of Rs. 25,36,596 as income from other sources is confirmed as in asst. yrs. 1993-94 and 1994-95. The AO is however directed to allow deduction of 10 per cent of the total revenue expenditure debited in the P&L a/c on similar basis as has been directed in asst. yrs. 1993-94 and 1994-95.
27.2 As regards ground No. 2, the AO is directed to allow 90 per cent of the total business expenditure debited in the P&L a/c which are expenditure of revenue nature, as the business had been set up by the assessee in asst. yr. 1994-95. The balance 10 per cent of the total expenditure debited in the P&L a/c will be allowed as deduction under Section 57(iii) against income from other sources assessed by the AO. The AO should also consider the allowability of amortisation of preliminary expenses as per the relevant provisions in the IT Act. The business loss arising due to allowability of business expenditure as aforesaid will be eligible to be set off against income from other sources of the current year under consideration in accordance with Section 71 of the IT Act.
27.3 As regards ground No. 3, since the business of the assessee had already been set up in asst. yr. 1994-95, the assessee would be entitled to grant of depreciation on depreciable assets in accordance with the provisions of law.
28. Additional Grounds for asst. yr. 1995-96 :
28.1 The assessee has raised various additional grounds for asst. yr. 1995-96 which have been mentioned in para 6 of this order. The additional ground relating to deduction under Section 42 of the Act was not pressed by the learned counsel for the assessee at the time of hearing. The other additional grounds raised by the assessee for asst. yr. 1995-96 have already been discussed and decided hereinbefore, which mainly relate to dedutcibility of various expenditure either as business expenditure or as deduction allowable under Section 57(iii) of the Act. The allowability of all such expenditure will depend on the main finding as to when the business can be said to have been set up. The findings in relation to the aforesaid main ground and allowability of expenditure have already been given. The finding given in para 26.7 and 26.8 will similarly apply in relation to additional grounds No. 4 and 5 relating to interest under Section 234A/B/C and initiation of penalty under Section 271(1)(c). The additional grounds so raised by the assessee thus already stand decided by the findings given hereinbefore.
29. Revenue's Cross-appeal (ITA No. 1582/Ahd/1998 for asst yr. 1995-96)
29.1 The learned senior Departmental Representative submitted that the addition in respect of unexplained share application money can be validly made in the hands of the company in view of the decision in the case of Cas Card Finance Ltd. v. Asstt. CIT (2003) 78 TTJ (Ahd)(TM) 55 : (2003) 84 ITD 1 (Ahd)(TM) and the judgment of the Hon'ble Calcutta High Court in the case of Hindustan Tea Trading Co. Ltd. v. CIT (2003) 263 ITR 289 (Cal). The Hon'ble Calcutta High Court in this judgment has considered all the earlier decisions on this point.
29.2 We have carefully considered the submissions made by the learned representative of the parties and have gone through the various decisions cited by the learned senior Departmental Representative and the judgments referred to in the order of the CIT(A). The aforesaid judgment as well as judgment of the Full Bench of Tribunal (High Court) Delhi in the case of CIT v. Sophia Finance Ltd. (1994) 205 ITR 98 (Del)(FB) have held that once the assessee establishes the identity of the shareholders and prima facie proves the genuineness of the credit in relation to share application money, the burden will shift on the Revenue to prove that the amount in question belongs to the company and not to the respective shareholders. The Hon'ble Calcutta High Court in the said case of Hindustan Tea Trading Co. Ltd. (supra) has also considered the decision in the case of CIT v. Steller Investment Ltd. (1991) 192 ITR 287 (Del) which was affirmed by the Hon'ble Supreme Court in the case reported in CIT v. Stellar Investment Ltd. (2001) 251 ITR 263 (SC). After taking into consideration all the above referred judgments, the Hon'ble Calcutta High Court observed that when the assessee had furnished income-tax file numbers of the various subscribers, it was for the ITO to enquire into the same and find out the creditworthiness of the subscribers and genuineness of the transaction. Even though despite service of notices, 14 persons failed to respond, it was incumbent on the income-tax authority to ascertain from the income-tax file numbers, whether the files were in existence and on the basis of such files whether the identity of the shareholders could be established. Until such enquiry was made, it could not be said that the income-tax authority had acted upon the materials so disclosed.
29.3 The principles of law laid down by the Full Bench of Hon'ble Delhi High Court in the case of CIT v. Sophia Finance Ltd. (supra) have been followed by the Ahmedabad Bench of Tribunal in the case of Gas Card Finance Ltd. (supra). Similar principles have been laid down by the Hon'ble Calcutta High Court in the case of Hindustan Tea Trading Co. Ltd. (supra). The principles of law so well settled by the above referred decisions are binding on the IT authorities and the Tribunals. We will therefore have to examine the facts of the present case in the light of the principles laid down by the Hon'ble Delhi High Court and the Hon'ble Calcutta High Court cited supra. The learned CIT(A) in paras 9 and 10 of his order has observed that the assessee furnished full details such as folio numbers, name and address of the shareholders, number of shares subscribed by them, copy of share application form, cheque numbers and date and the name of the brokers. It has also been mentioned in para-10 of the appellate order that most of the share application money had been received by cheque and the applicants had subscribed from all over the country and that the cheques had been received through banks in the country and through brokers. The AO has simply given list of 13 shareholders to whom notices sent were returned back with the remarks "not known". The AO should have thereafter ascertained from the banks as to from which bank those amounts had been remitted. The identity of the subscribers of the shares could have been ascertained by making necessary enquiry from the concerned banks. The AO could also examine the brokers through whom such share application money had been received. It was mega public issue brought by the appellant-company and it may be impossible for the appellant-company to provide the latest address of hundreds of shareholders. Since the assessee had furnished all the necessary particulars before the AO, it was incumbent upon the AO to make further enquiry to prove that the share application money received by the assessee from these persons did not really belong to those respective shareholders but it belongs to the appellant-company. The CIT(A) has given convincing reasons while deleting the aforesaid addition of Rs. 2,29,000. We therefore do not find any justification to interfere with the view taken by the CIT(A) in relation to this ground raised by the Revenue. The Revenue's appeal for asst. yr. 1995-96 (ITA No. 1582/Ahd/98) is therefore dismissed. 30. Assessee's appeal for Asst. yr. 1996-97 (ITA No. 981/Ahd/2003) 30.1 The first ground relating to alleged invalidity of proceedings initiated under Section 147 was not pressed by the learned counsel for the assessee at the time of hearing. Hence, the same is rejected, as not pressed.
30.2 Ground Nos. 2 to 5 relate to the main issue i.e. allowability of various expenditure of revenue nature debited in the P&L a/c either as business expenditure under Section 28 to 37 or as deduction under Section 57(iii) and also the issue relating to assessability of interest income and dividend income etc. under the head "income from other sources" as against income from business claimed by the assessee. We have already held that the interest income and dividend income received by the assessee is assessable as income from other sources. Accordingly the aggregate income of Rs. 42,41,742 derived by the assessee by way of interest on fixed deposit with bank, dividend from UTI, interest on margin money and other interest/kasar income has rightly been assessed by the AO as income from other sources in view of the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT (supra) and the judgment of the Hon'ble Gujarat High Court in the case of Sarabhai Sons (P) Ltd. v. CIT (supra).
30.3 We have however directed the AO to allow deduction of 10 per cent of total expenditure of revenue nature debited in the P&L a/c under Section 57(iii) out of such income from other sources. We have also held that the business of the assessee should be treated as having been set up from asst. yr. 1994-95. Therefore, the remaining 90 per cent of the expenditure of revenue nature debited in the P7L a/c should be allowed as deduction as business expenditure. The AO should also consider the question relating admissibility of depreciation and amortisation of preliminary expenses written off in P&L a/c in accordance with the relevant provisions of the IT Act, 1961. The business loss arising due to such permissible deduction of business expenditure etc. should be set off against income from other heads in accordance with Section 71 of the Act. We would like to clarify that the CIT(A) has directed the AO to allow deduction of Rs. 50,000 as business loss for maintaining corporate office etc., which will now not be separately allowed as we have directed that 10 per cent of total expenses of revenue nature debited in the P&L a/c should be allowed as deduction under Section 57(iii) against income from other sources and balance 90 per cent of business revenue expenditure should be allowed as business expenditure. The AO should compute the relief accordingly.
30.4 Ground No. 6 relating to deduction under Section 42 was not pressed by the learned counsel for the assessee at the time of hearing. The same is rejected, as not pressed.
30.5 Ground No. 7 is general in nature. No arguments were addressed by the learned counsel. This is only an argument in support of the main ground, which has already been discussed and decided hereinbefore. Ground No. 7 is also rejected.
30.6 No arguments were addressed relating to ground No. 8 with regard levy of interest under Section 234A/B/C. The AO is however directed to grant consequential relief.
30.7 Ground No. 9 is not entertainable as no appeal relating to initiation of penalty proceedings under Section 271(1)(c) is maintainable in a quantum appeal. Hence, ground No. 9 is rejected.
31. Revenue's appeal for asst. yr. 1997-98 being ITA No. 1722/Ahd/2001 :
31.1 We will now deal with the Revenue's appeal for asst. yr. 1997-98 being ITA No. 1722/Ahd/2001 The ground raised by the Revenue relates to the main issue common for asst. yrs. 1993-94 to 1997-98 which has been elaborately discussed and decided hereinbefore. The CIT(A) in asst. yr. 1997-98 has held that the business activities of the assessee have started from asst. yr. 1997-98. He has therefore directed the AO to allow deduction in respect of business expenditure, as claimed by the assessee. We have held in this order that the business of the assessee should be treated to have been set up from asst. yr. 1994-95. The assessee is therefore entitled to get deduction in respect of business expenditure of revenue nature from asst. yr. 1994-95 and onwards. We will however like to add that the income of the assessee aggregating to Rs. 13,41,562 representing interest income and dividend income and share processing charge as per details mentioned in para 2 of the assessment order should be assessed as income from other sources. Deduction of 10 per cent of the total revenue expenditure debited in the P&L a/c should be allowed under Section 57(iii) against such income from other sources. The balance 90 per cent of the expenditure of revenue nature debited in the P&L a/c should be allowed as deduction as business expenditure. Consequent business loss arising due to such permissible deductions in respect of business expenditure should be set off against income from other sources in accordance with Section 71 of the Act. The balance amount will be eligible to be carried forward as business loss in accordance with the relevant provisions of the IT Act. The ground raised by the Revenue in asst. yr. 1997-98 is reproduced below once again:
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in allowing the set off, the income from other sources against the business loss."
In view of our findings given in relation to the main point, the aforesaid ground raised by the Revenue is devoid of any merit, as we have held that the business of the assessee should be treated as having been set up from asst. yr. 1994-95. The business loss is eligible to be set off against income from other sources in view of the clear provisions contained in Section 71 of the Act. We therefore do not find any merit in Revenue's appeal for asst. yr. 1997-98.
32. In the result, all the appeals filed by the assessee are partly allowed and the appeals filed by the Revenue are dismissed.