1984-VIL-65-ITAT-HYD

Equivalent Citation: TTJ 020, 503,

Income Tax Appellate Tribunal HYDERABAD

Date: 29.03.1984

COROMANDEL EXPORTS (P) LTD.

Vs

INCOME TAX OFFICER.

BENCH

Member(s)  : S. RAJARATNAM., T. V. RAJAGOPALA RAO.

JUDGMENT

These are three appeals filed by the assessee which is a private limited company against the common order of the CIT (A), Hyderabad, dt. 31st Jan., 1983 and they relate to asst. yrs. 1979-80, 1980-81 and 1981-82.

2. The only question involved in all these three appeals is whether the assessee company had set up its business and whether the expenditure incurred after the business is set up is allowable business expenditure. The facts are few and they may be stated as under. The assessee is a private limited company and it is incorporated under the Companies Act on 7th April, 1975. Copy of memorandum and articles of association is filed before us. The main object of the assessee company is stated to be to carry on business of exporters of all kinds of goods produced, manufactured, grown in India and importers of all kinds of goods permitted by the government of India and generally to carry on the business of exporters and importers and Act as manufacturer representative. At the time of hearing of these appeals it is stated by the assessee's counsel Shri M.J. Swamy that the man contemplated business of the assessee was export of tobacco. The previous year for 1979-80 is ended with 30th June, 1978, for 1980-81 it ended with 30th June, 1979 and for 1981-82 it ended with 30th June, 1980. The assessee company had set up an office first in Trunk Road, Ganapavaram, Chilakaluripet and it was changed to D. No. 47 10 Brodipet, Guntur, after 30th June, 1979 profit and loss account for every year disclose net loss as the assessee did not do any business. The profit and loss account for the year ending with 30th June, 1978, 30th June, 1980 stand as follows:

30-6-1968

30-6-1979

30-6-1980

From the above figures in the profit and loss account for the accounting periods relevant to the assessment years under consideration it would be clear that the assessee took on rent a building, incurred some expenses like filing fees, audit fee, postage and telegram and legal expenses. We were supplied with the directors report for the accounting period ending with 30th June, 1979 and 30th June, 1980. In the former report it is stated that the company could not secure any potential order during the accounting year in spite of the efforts made by the directors. However, it is made very clear that they started the company with great enthusiasm and zeal with a view to do business in import and export of all kinds of goods. It is also stated that they incurred a loss of Rs. 562.50. in the directors' report for the period ending with 30th June, 1980 it is informed to the shareholders that the company could not secure any business in spite of the efforts made by the directors of the company and it had incurred a loss of Rs. 741.29. it is the case of the assessee that for these three assessment years the company was set up and every requirement to carry on business was fulfilled. However, no business was transacted. That means, according to the assessee, the business of the company was set up but there is no commencement of business under the circumstances, it was the claim of the assessee that the losses determined in the earlier assessment years should be ordered to be carried forward by the ITO. The ITO did not agree with this submission of the assessee. In asst. yr. 1979-80, for instance, he had refuted the claim of the assessee by observing that "even though obviously some small expenditure was incurred on account of setting up of office, I do not think that the business as such is set up. I, therefore, treat the loss as on account of capital nature and is not allowed for carry forward." The same comments were made even while completing the assessments for two other years by the ITO. Ultimately while framing the assessments for the three assessment years under consideration the ITO refused to carry forward the losses and assessed the assessee at nil income.

3. Aggrieved against he assessments the assessee preferred appeals before CIT (A), Hyderabad. It is contended before him that the expenses incurred after the business is set up and before the business is commenced should be held to be deductible expenditure based upon the decision of the Bombay High Court in Wester India Vegetable Products Ltd. vs. CIT (1954) 26 ITR 151 (Bom) and of the Supreme Court in CWT vs. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478 (SC). However, the ld. CIT (A) held that the ratio of both the decisions cited on behalf of the assessee are not clearly applicable to the facts on hand and in that he found the case of the assessee as follows:

"The appellant company was ostensibly promoted to carry on business or exporters of all kinds of goods produced, manufactured or grown in India etc. To achieve this objective, an office was set up by renting a premises, equipping the premises with furniture, typewriter, telephone etc., and by employing some people to maintain the office. By doing all this, the appellant merely brought into existence the business apparatus and it could be said to have set up business being ready to commence business in the sense that the expression "setting up the business" was explained by the Supreme Court and the Bombay High Court in the cases cited supra. The expenses incurred were merely laid out for maintaining the apparatus. There is no evidence of any kind, admittedly, of any business having been carried on by the appellant in any of the three years under consideration. Setting up office by itself would not amount to commencement of a business. By setting up an office one could at best say, the business was set up by the appellant was ready to commence business."

As can be seen from the above, the ld. CIT (A) though that by taking premises on rent, equipping it with furniture, typewriter, telephone etc., and by employing some people to maintain office the assessee could be said to have brought into existence the business apparatus and it could be said to have set up business. But setting up of office by itself would not amount to commencement of business. Therefore, it is clearly seen that in the thinking of the ld. CIT (A) there should be commencement of business before expenses incurred in between the date of setting up and commencement of business are to be allowed as legitimate business deduction. The question that crops up for our consideration is whether this thinking of the CIT (A) is in tune with the correct legal position on the subject.

4. In Western India Vegetable Product Ltd. vs. CIT (1954) 26 ITR 151 (Bom) the assessee company was incorporated on 29th Dec., 1945 and it obtained a certificate of commencement of business on 20th April, 1946. The assessee company purchased a groundnut oil mill on 1st Nov., 1946. The assessee claimed various expenses aggregating to Rs. 27,894,11.9. the ITO disallowed all the expenses which were incurred prior to 1st Nov., 1946. The AAC substantially confirmed the ITO 's order. In second appeal the Tribunal took into consideration the date of the purchase of raw materials for the purpose of being crushed in the mill which is to be executed and it was found out to be at the end of September, 1946. So they had disallowed the expenses incurred prior to 1st Sept., 1946 but allowed expenses subsequent to that date. The matter was carried in reference to the Bombay High Court and in that case Chief Justice Mr. Chagla laid down the following law:

"There is a clear distinction between a person commencing a business and a person setting up a business and for the purposes of the Indian IT Act the setting up of the business and not the commencement of the business is to be considered. It is only after the business is set up that the previous year of that business commences and any expenses incurred prior to the setting up of a business would not be a permissible deduction. 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. There may, however, be an interval between the setting up of the business and the commencement of the business and all expenses incurred during that interval would be permissible deduction."

In CWT vs. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478 (SC) no doubt the case turns upon the provisions of WT Act, i.e. on the wording of s. 5(1)(xxi) and the words used in that sub-section were 'date of commencement of operation for establishment of unit'. Even while interpreting the true meaning of those words the Supreme Court approved the dicta of the Bombay High Court in (1954) 26 ITR 151 (Bom). In Sarabhai Management Corporation Ltd. vs. CIT (1976) 102 ITR 25 (Guj) the facts are nearer to the facts on hand. There the company was incorporated on 24th March, 1964. The main object of the company was to acquire immovable property and to give it out either on leave and licence basis or on lease as residential accommodation or office accommodation with all appurtenant amenities. The assessee company purchased a bungalow belonging to Ambalal Sarabhai in the Retreat' compound, Ahmedabad together with the appurtenant land and the document of purchase was registered on 28th March, 1964. It was the case of the assessee that it had been procuring material for providing necessary facilities with which the building was to be given on licence. It is also the case of the assessee that it was in a position to offer services to licensee on and from October, 1964. From 1st Oct., 1964 to 31st March, 1966 the assessee company incurred an expenditure of Rs. 48,004. The assessee claimed it as a business expenditure and also claimed that it is entitled to carry forward the loss shown in its return for asst. yr. 1965-66 for which the previous year ended by 31st March, 1965. The ITO refused to carry forward the loss on the ground that the assessee company was found to have commenced business only from 1st May, 1965, on which date the assessee company gave a part of the said building on leave and licence basis. The AAC confirmed the ITO 's order. So also, the Tribunal. The question before the Gujarat High Court was whether Rs. 48,004 could be allowed as business expenditure. The Gujarat High Court approved the decision of Bombay High Court approved the decision of Bombay High Court in (1954) 26 ITR 151 (Bom). The Gujarat High Court ultimately held that from October, 1964, the assessee could be said to have commenced its business activity and, therefore, the assessee had commenced business on that date. At p. 32 of the reported decision the Gujarat High Court held that when business is established and is ready to start business it can be said to be set up. The business must be put into such a shape that it can start functioning as a business or a manufacturing organisation.

5. Applying the ratio of the above three decisions it can be easily seen that the business sought to be set up by the assessee company was export of tobacco. What all is needed for setting up of the said business is to secure a business place or an office, to provide it with furniture, etc., to have a telephone to maintain the office and make ready everything to start business. If no intended exporter approached the assessee and got his product exported through the assessee it is not the fault of the assessee. Ultimately, it may be his bad luck but in legal terms it cannot be said that he had not set up his business. Therefore, we are of the opinion that all the expenses incurred after the business is being set up are excludable business expenditure. When once they are allowable as business expenditure and consequently the loss is to be determined in each year there is no escape from the conclusion that the losses are to be carried forward. The assessee had shown that it had incurred a loss of Rs. 3,294.36 up to 30th June, 1976. After going through the paper book filed on behalf of the assessee we are definitely of the opinion that the business of the assessee was already set up even prior to the commencement of the accounting period relevant to the asst. yr. 1979-80. Therefore, the losses incurred by the assessee are to be allowed as business expenditure and they are also to be carried forward. The legal premise on which the CIT (A) proceeded to determine the issue appears to be not correct. Therefore the appeals are allowed and the impugned orders are set aside.

 

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