Kerala High Court
K. Sreedharan And Co. vs Commissioner Of Income-Tax And Anr. on 24 November, 1992
Equivalent citations: [1993]202ITR796(KER)
JUDGMENT K.K. Usha, J.
1. The petitioner, a firm, filed its return for the assessment year 1984-85 declaring a loss of Rs. 1,41,960. The second respondent-Income-tax Officer, by exhibit P-1 order dated February 13, 1987, determined the income of the petitioner at Rs. 1,26,450. Deduction claimed by the petitioner as expenses to the extent of Rs. 1,91,040 in arrack and brandy business was disallowed by the assessing authority. Aggrieved by the above assessment order, the petitioner filed a revision before the first respondent under Section 264(1) of the Income-tax Act, 1961. The revisional authority affirmed the assessment order and rejected the revision petition as evidenced by exhibit P-2. The above orders are under challenge in this original petition.
2. A perusal of exhibit P-1 assessment order would show that the assessee was running a hotel by name Savoy-Lodge, a theatre by name Kavita Theatre, and also doing business in arrack and brandy. It is an admitted case that the assessee was carrying on a business in purchasing, selling and distributing liquor and arrack for the past many years prior to the assessment year and also continued the same business in the year immediately following the assessment year. It is also the admitted case that the assessee had to borrow money in March, 1984, for the purpose of resuming the arrack and brandy business for the immediately following assessment year. The only dispute is whether the assessee is entitled to claim the expenditure incurred for obtaining such loan and interest on such loan as expenses during the year 1984-85. The first respondent-assessing authority took the view that the petitioner's claim cannot be allowed as no arrack and brandy business was carried on by it during the relevant year of assessment.
3. It is contended on behalf of the petitioner that, even though during the relevant assessment year, it could not carry on the business in buying and selling arrack and brandy, having failed in the auction conducted for getting licence to do the above business, it was doing the same business during the previous years and subsequent year to the assessment year and, therefore, should be treated as continuously in business. It was further submitted that for the purpose of conducting the business in the following assessment year, the petitioner had to participate in the auction which would be conducted before March 31, 1984, in accordance with the Kerala Abkari Act and Rules. For participating in the auction and to have the auction confirmed in its name, the petitioner has to pay substantial amounts even during the accounting period which ended on March 31, 1984. In such circumstances, the petitioner contends that it is entitled to claim the amount as expenses during the relevant assessment year. In support of the above contention, learned counsel relied on the decision of the Supreme Court in CIT v. Sarabhai Management Corporation Ltd. [1991] 192 ITR 151. In the above case, the assessee was carrying on business in acquiring immovable property and giving it out either on leave and licence basis or on lease as residential or, in the alternative, business accommodation, with all appurtenant amenities. The assessee acquired a property with building on March 28, 1964, and after making necessary repairs, modifications, etc., for the purpose of converting the residential accommodation into a business, accommodation, let out the same on May 1, 19G5. The Supreme Court held that, even if the acquisition of property for being let out could be said to be only a preparatory stage, the subsequent activities constituted activities in the course of the carrying on of the assessee's business and it was not correct to treat the assessee as having commenced business only when the licensee or lessee occupied the premises or started paying rent. Learned counsel for the petitioner submits that, in the present case also, since the petitioner bad participated in the auction during the relevant assessment year by incurring expenses and had to take a loan for the above purpose, it should be considered that it was carrying on the business even though the licence to vend arrack was to come into effect only from April 1, 1984.
4. The petitioner relied on a decision of the Allahabad High Court also in support of the above contention. In CIT v. Expanded Metal Manufacturers [1991] 189 ITR 317, the Allahabad High Court had an occasion to consider a case the facts of which are more or less similar to the facts of the present case. The assessee, in the above mentioned case, which was engaged in the business of expanding of iron metal by mechanical process and its supply, started a new business of manufacture of rubber products and, for that purpose, raised a loan. Even though, during the assessment year 1976-77, the rubber factory had not started functioning, the assessee claimed deduction of the interest paid on the loan for the above year. The Division Bench of the Allahabad High Court noted that assessment was being made not unit-wise but assessee-wise. The assessee raised the loan for the purpose of starting a new unit and, for that purpose, it had to incur expenditure by way of interest. It was, therefore, held that the assessee was entitled to deduct the said amount out of its income and there was no legal objection for such a claim. An earlier Division Bench decision of the same High Court in Prem Spg. and Wvg. Mills Co. Ltd. v. CIT [1975] 98 ITR 20 (All) was followed by the learned judges in coming to the above conclusion.
5. I find merit in the contention raised on behalf of the petitioner and the reliance placed on the above-mentioned decisions. In the present case also, the assessment is not unit-wise but assessee-wise. Admittedly, the petitioner had to participate in the auction which was conducted during the relevant assessment year for the purpose of carrying on the business for the following year. The assessee had to incur expenses for the above purpose. It is admitted that the assessee had taken the loan and had to pay interest for the purpose of raising money to participate in the auction and to acquire the licence for the purpose of conducting the business of buying and selling arrack during the following year. It is also an admitted fact that, for many years previous to the assessment year, the assessee had been carrying on the same business. Under these circumstances, the petitioner is perfectly justified in contending that it is entitled to claim deduction in respect of the amount paid as interest for raising the loan during the relevant assessment year.
6. In the result, exhibits P-1 and P-2 are set aside to the extent it has refused the claim of the petitioner regarding allowable expenses only on the ground that the petitioner had no business activity in arrack and brandy during the assessment year 1984-85. The second respondent is directed to pass fresh assessment order in the light of the findings in this judgment. The original petition stands allowed as above.