Commissioner Of Income-Tax v. Kanoria General Dealers (P.) Ltd.

Dipak Kumar Sen, J.:— Messrs. Kanoria General Dealers (P) Ltd., the assessee, was assessed to income-tax for the assessment years 1966–67 and 1969–70, the accounting periods ending on June 30, of the calendar years of 1965 and 1968. In the said assessment year 1966–67, the assessee claimed allowance on depreciation and deduction of business expenditure. The Income-tax Officer found that during the accounting period ending on June 30, 1965, the total purchase of raw materials was worth only Rs. 1,220, consumption of raw materials was worth only Rs. 120 and stores and spares to the extent of only Rs. 70 had been consumed. The Income-tax Officer held that the assessee had not commenced manufacturing and that production, if any, during the period was only on an experimental basis. On that ground, the Income-tax Officer disallowed depreciation and deduction of business expenditure.

2. For the assessment year 1969–70, the Income-tax Officer found that the plant and machinery of the assessee did not work for the whole year. Total consumption of raw material during the year was also low and a very limited quantity of finished goods were produced.

3. On the ground that the factory of the assessee had worked for less than thirty days, the claim of the assessee for depreciation was disallowed.

4. Being aggrieved, the assessee went up in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner considered the directors' report as also the profit and loss account of the assessee and found that the plant and machinery of the assessee were in use though on a very small scale in the assessment year 1966–67. He held that the assessee had set up its business during the relevant accounting year as it had commenced production and following the decision of the Bombay High Court in Western India Vegetable Products Ltd. v. CIT, [1954] 26 ITR 151, and of the Supreme Court in the case of CWT v. Ramaraju Surgical Cotton Mills Ltd., [1967] 63 ITR 478, held that the Income-tax Officer was not justified in disallowing the depreciation and expenditure on the ground that it was prior to the commencement of the assessee's business.

5. On the basis of the aforesaid finding for the assessment year 1966–67, the Appellate Assistant Commissioner also held that in the assessment year 1969–70, the appellant having set up its business earlier, the Income-tax Officer should have allowed depreciation as also development rebate.

6. Being aggrieved, the Revenue went up in appeal before the Income-tax Appellate Tribunal. Before the Tribunal, the Revenue relied on a decision of the Allahabad High Court in Sir Shadi Lal Sugar & General Mills Ltd. v. CIT, [1967] 63 ITR 72, where it was held that where erection of plant had been completed and only a small quantity of raw material was consumed without any actual turning out of finished products, it could not be said that the business of manufacture had commenced. The consumption of raw materials, if any, would be only by way of experiment and the deduction of the amount claimed as business expenditure could not be allowed.

7. The Tribunal held that the Allahabad High Court did not have occasion to consider the decision of the Supreme Court in the case of Ramaraju Surgical Cotton Mills Ltd., [1967] 63 ITR 478, where the Supreme Court had allowed the claim of the assessee to deduction of business expenditure where the business had actually been set up. On that ground, the Tribunal rejected the contentions of the Revenue. The Tribunal held further that as the business had been set up in the year 1966–67, the claim for depreciation in the subsequent assessment year 1969–70 should be allowed automatically.

8. On the application of the Revenue under section 256(1) of the Income-tax Act, 1961, the following question has been referred as a question of law arising out of the order of the Tribunal for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the business was set up within the meaning of the Income-tax Act during the accounting year relevant to the assessment year 1966–67 and, as such, whether the assessee was entitled to depreciation and expenses claimed for the assessment year 1966–67 and depreciation for the assessment year 1969–70?”

9. At the hearing before us, learned counsel for the Revenue drew our attention to the decision cited earlier in the proceedings below. He relied, in particular, on the decision of the Allahabad High Court in the case of Sir Shadilal Sugar & General Mills Ltd., [1967] 63 ITR 72 and invited us to follow the same. The other decisions are as follows:

(a) CWT v. Ramaraju Surgical Cotton Mills Lid., [1967] 63 ITR 478 (SC):

In this case, the Supreme Court held that where a business unit had been set up by the assessee which was ready to commence production, the assessee was entitled to claim deduction of the expenditure which could not be disallowed on the ground that the same had been incurred prior to the commencement of the actual business of commercial production. The Supreme Court made a distinction between setting up of a unit and the operational function of the unit as a business.

(b) CIT v. Saurasmra Cement and Chemicals Industries Ltd., [1973] 91 ITR 170 (Guj):

In this case, the assessee was incorporated with the object of manufacture and sale of cement in the relevant assessment year. The assessee obtained a mining lease for quarrying limestone and started mining operations. In its assessment to income-tax, the assessee claimed deduction of expenditure incurred for extracting limestone and also depreciation and development rebate for its machinery. It was held by a Division Bench of the Gujarat High Court that the business of the assessee consisted of three types of activities, viz., acquiring raw materials, manufacturing of cement and sale of cement. It was held that the activity in quarrying limestone was a part of the assessee's business which came first in point of time and that the assessee had commenced business when it started its activity of extraction of limestone. The expenditure incurred and the depreciation and development rebate claimed were held to be deductible in computing the trading profits of the assessee.

(c) Commissioner Of Income-Tax, West Bengal-Iii v. Incheck Tyres Ltd., [1983] 141 ITR 937 (Cal):

In this case, a Division Bench of this court following the decision of the Supreme Court in the case of Ramaraju Surgical Cotton Mills Ltd., [1967] 63 ITR 478, held that where a business had been set up by the assessee, the expenses incurred in such setting up could not be disallowed” on the ground that the assessee had not commenced commercial production in such business.

10. In the case before us, the Appellate Assistant Commissioner and the Tribunal have come to a finding that the assessee had set up its business in the assessment year 1966–67. This finding has not been challenged as perverse and has become final. In the face of such finding, following the decision of the Supreme Court referred to above, the question referred has to be answered in the affirmative and in favour of the assessee. The business having been set up in the earlier assessment year, it also must be held that the same position continued in the subsequent assessment year 1969–70.

11. There will be no order as to costs.

Mukul Gopal Mukherji, J.:— I agree.