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C.I.T. v. M/S Mohan Steel Ltd. - INCOME TAX REFERENCE No. 192 of 1983 [2004] RD-AH 684 (31 August 2004)


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Income Tax Reference No.192 of 1983

Commissioner of Income Tax (Central), Kanpur v.

M/s. Mohan Steel Limited, Kanpur

Hon'ble R.K.Agrawal, J.

Hon'ble K.N.Ojha, J.

(Delivered by R.K.Agrawal, J.)

The Income Tax Appellate Tribunal, Allahabad has referred the following questions of law under Section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") for opinion to this Court:-

"Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the expenditure incurred by the assessee before the commencement of the actual production was allowable as a revenue expenditure and not as a capital expenditure?"

Briefly stated, the facts giving rise to the present reference are as follows:-

The reference relates to the assessment year 1977-78. The relevant previous year ended on 31st March 1977. For the assessment year in question, the respondent filed its return of income declaring a loss of Rs.986734. As it had not commenced any manufacturing activity. The I A.C.(Assessment) called upon the respondent to show cause as to why various expenses debited in the profit and loss account should not be disallowed and its income should be assed at nil. The respondent submitted that it had set up its steel plant on 15th February 1975 but could not commence the production due to non-availability of supply of electricity by the State Government and as soon as the electricity was supplied on 4th November 1978, it had started its manufacturing activity within 45 minutes of the supply thereof. It also pointed out that in the immediately preceding two years, the Assessing Officer had framed the assessment under Section 143(3) of the Act and had treated the expenses claimed by it as revenue expenditure and computed the loss which was allowed to be carried forward. It was submitted that once the Revenue had already accepted that it had commenced its business a couple of years back, it would not be fair and reasonable to hold that the expenses claimed by it for the assessment year in question should not be allowed and instead of loss shown by it the income should not be assessed at nil. The Assessing Officer did not agree with the contention of the respondent and assessed the income at nil. In appeal, the Commissioner of Income Tax (Appeals) held that the items of expenditure shown by the respondent are revenue expenditure and are allowable. However, he remanded the matter for recomputation of loss. The Tribunal has upheld the order passed by the Commissioner of Income Tax (Appeals).

We have heard Sri A.N.Mahajan, the learned counsel for the Revenue. No body has appeared on behalf of the respondent.

Sri Mahajan, learned counsel, submitted that admittedly the respondent had not commenced its production during the previous year relevant to the assessment year in question as it had commenced the production only on 4th November 1978 which fell in the assessment year 1979-80 and, therefore, in the absence of any business, the expenses could not be claimed as a deduction. He referred to the express provision of Section 37 of the Act.

It is not in dispute that the respondent had commenced production only on 4th November 1978. Section 37 of the Act under which the expenditure incurred wholly and exclusively for the purposes of business, is allowed as deduction, presupposes that the business had commenced or is being carried on.

The Bombay High Court in the case of Commissioner of Income Tax, Bombay City - II v. Industrial Solvents and Chemicals Pvt. Ltd., (1979) 119 ITR 608; Commissioner of Income Tax, Bombay City - III v. Forging & Stamping Pvt. Ltd., (1979) 119 ITR 616 and J.R.Mehta v. Commissioner of Income Tax, Bombau City - II, (1980) 126 ITR 476 has held that if during the relevant period there was no business, the question of allowability of expenses would not arise. Similar view has been taken by the Andhra Pradesh High Court in the case of Commissioner of Income Tax, A.P. - I v. Omer Khayyam Wineries (P.) Ltd., (1979) 120 ITR 859 and the Kerala High Court in the case of S.P.B. Bank Ltd. v. Commissioner of Income Tax, (1980) 126 ITR 773 and T.M.Chachko and Partners v. Commissioner of Income Tax, (1992) 195 ITR  904.

The Apex Court in the case of Eimco K.C.P.Ltd. v. Commissioner of Income Tax, (2000) 242 ITR 659 (SC) while considering the scope of Section 37 of the Act has held as follows :-

"A plain reading of the above provision makes it clear that it is a residuary provision and allows an expenditure not covered under Sections 30 to 36 in computing the income chargeable under the head "Profits and gains of business or profession", on fulfillment of the other requirements, namely (i) the expenditure should not be in the nature of capital expenditure or person expenses of the assessee; (ii) it should have been laid out or expended wholly and exclusively for the purposes of the business or profession; (iii) it should have been expended in previous year."

It has held as follows :-

"What in effect was done by the appellant in allotting equity shares of Rs.2,80,000 to Eimco, was to reimburse the contribution of Eimco by way of know-how, which can never be treated as expenditure, much less an expenditure laid out wholly and exclusively for purposes of the business of the appellant. It is not a case where after the incorporation, the appellant-company in the course of carrying on its business, spent the said amount for acquiring any asset."

The aforesaid decision has subsequently been followed by the Apex Court in the case of Commissioner of Income Tax v. Reinz Talres, (2001) 259 ITR 637.

We are in respectful agreement with the view taken in the aforesaid cases.

Respectfully following the principle laid down by the Apex Court, we are of the considered opinion that the expenses incurred by the respondent before the commencement of the business, cannot be considered as a revenue expenditure under Section 37 of the Act. We, therefore, answer the question, referred to us, in the negative, i.e., in favour of the Revenue and against the assessee. There shall be no order as to costs.




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