1. The captioned appeal is late by one day only. Application for condonation has been filed. Since the delay is nominal and the reason given appears to be adequate, delay is condoned.
2. Ground Nos. 1 to 3 relate to the rejection of the assessee's claim in respect of loss amounting to Rs. 8,66,670. The assessee was engaged in the business of manufacture of gas cylinders. Return was filed, showing loss of Rs. 8,66,670. As per the return, 'previous year' ended on 30-6-1984. The Assessing Officer was of the view that the assessee had in the earlier years shown the closing date of the accounting period on December 31; whereas it had not to be changed to June 30, without seeking permission, as required under Section 3(4) of the Income-tax Act. The assessee's plea, however, was that the production had commenced only on December 1, 1983 and the assessee had a right to exercise option in respect of the previous year. The plea was not accepted and consequently the loss was rejected. The Assessing Officer took the view that in the earlier three assessment years, the assessee had adopted the calendar year as the accounting period. Since there was a change in the accounting period, necessary permission should have been obtained. The assessee had taken a plea that it was a new source of income and assessee had a right to adopt a different period as the accounting period. The Assessing Officer further noticed that no return had been filed for the period 1-1-1983 to 31-12-1983 and, instead, return had been filed, adopting the closing period as June 30. The Assessing Officer, while passing the assessment order, adopted the accounting period as December 31. Since no return had been filed for the calendar year 1983, loss arrived at in that year was held to be not determined. Thereafter, the Assessing Officer declined to determine the loss for the calendar year 1984 also, on the ground that the assessee had failed to obtain permission from the department while making a change in the accounting period. The assessee went in appeal but failed.
3. The Ld counsel has submitted that the assessee had actually set up its business and commenced production w.e.f. 1-12-1983 only and there was no question of making change in the accounting period. In the earlier three years, no income whatsoever had been shown and it was only the expenditure which had been incurred there. Assessments had been completed in assessment years 1981-82, 1982-83 and 1983-84, under Section 143(3) at 'nil' because the assessee had not done any business.
In assessment orders, the Assessing Officer had made specific mention that the assessee had not done any business during the year. The Ld counsel has contended that it was not a case of any new business because no business had at all been commenced prior to 1-12-1983. Our attention had been drawn to Section 3(1) of the Act. We have examined the scheme of the said section and notice that it is open to an assessee to have one previous year for one business and another for the second business, even though both the sources may fall under the same head of business. The general rule is that the 'previous year' means the financial year immediately preceding the assessment year. An option has been given to the assessee in Section 3(1)(&) to have a previous year different from the financial year and that option can be exercised where the assessee has made up his accounts, up to a date within the financial year immediately preceding the assessment year and the period of his 'accounting year' is a period of twelve months. In the case of the assessee before us, it is Section 3(1)(e) of the Act, which is found to be attracted. We notice that Clauses (d) and (e) of Section 3(1) specified two different provisions, which have application according as the date of set up of the business may happen to fall in different financial years. If a new business is set up on any date not within a financial year relevant to the assessment year in question, the matter will fall under Section 3(1)(d). The other provision contained in Section 3(1)(e) shall come into play where the business is newly set up on any date prior to the beginning of the financial year relevant to the assessment year. In that case, if the accounts are made up from the date of set-up to any subsequent date, the case will fall within Section 3(1)(e)(z). That provision gives an option to such business to have such an accounting year for its previous year. In this case, the assessee had commenced the business w.e.f. 1-12-1983 and opted to close the accounts on June 30.
4. Here, we may refer to the decision of the Supreme Court in the case of CIT v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478. In order to ascertain as to what is the meaning of the words 'setting up'.
It was 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. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing organisation that it can be said that the unit has been set up. In the light of said decision, we are of the view that the assessee's plea has to be accepted in respect of setting up of the business. It was not a case where the assessee was earning any income in any of the earlier three assessment years and there can be no assumption that any business had already been set up or commenced by the assessee. Even if the assessee had shown the calendar year as the previous year in respect of the earlier assessment years, that could not debar it from taking the plea that the case was covered under Section 3(1)(e). In the case of CIT v. Patiala Sales Corporation (P.) Ltd. [1970] 77 ITR 443 (Punj. & Har.), question relating to exercise of option by the assessee in respect of separate source of income, was under examination. It was observed that it was not necessary for the assessee to have a separate books of account in respect of the income from the separate source. The said observation makes it clear that if there was a separate source of income, the assessee could very well claim a right to exercise the option in respect of that new source. The same High Court had again an occasion to examine the question of change in the previous year, in the case of Karnal Kaithal Co-op. Transport Society Ltd. v. CIT[1972] 84ITR 46 (Punj. & Har.). It was held that where the assessee had already filed returns showing the year ending 30th September of each year as the previous year, then the assessee could not file a return for the next assessment year showing the year ending March 31 as the previous year.
In that situation, permission from the Assessing Officer was necessary for the change of the previous year. That was a case where the assessee was already carrying on business and, in that light, the change in the previous year did require specific permission from the Assessing Officer. The question about the setting up of business came to be examined by the Gujarat High Court also in the case of CIT v. Sarabhai Sons (P.) Ltd. [1973] 90 ITR 318. It was observed that there was clear distinction between commencing a business and setting it up. For the purpose of Section 3(1)(d), what is required to be considered is the setting up of a business. When a 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. Obtaining land on lease, placing orders for machinery and raw materials were merely operations for the setting up of the business. It is thus clear that in the earlier assessment years, the assessee was also making preparations and the business could not be said to have been set up unless there was some evidence to show that the assessee had really entered into certain business transactions. In the present case, there is no evidence on record to show that the assessee had commenced business prior to 1-12-1983. Merely because the assessee filed returns of income in earlier three years, that will not go to establish that the business had already been commenced. We may also refer to a decision of the Allahabad High Court in the case of Rattan Lal Ved Prakash v. CIT [1983] 144 ITR 135. That was a case where no application had been filed by the assessee and the return filed for the changed period of previous year had been acted upon by the Assessing Officer. It was held that the consent of the ITO was implied and there was no requirement to sign any application in a particular form. In the light of this observation also, we reach the conclusion that the assessee, in case of a change, could only file a return of income showing such a change and, even an application was not required to be made. If such a return is accepted, that is to be treated as sufficient compliance of law.
5. The Ld D.R. has, in reply, contended that the assessee has already exercised the option while filing returns for earlier years and it was necessary to seek permission while making a change in the accounting period. Our attention has been drawn to the assessee's explanation, whereunder it was stated that the change has been effected on account of new source of income. The Ld. D.R. has placed reliance on a decision of the Gauhati High Court in the case of Assam Frontier Tea Ltd. v. IAC [1987] 164 ITR 253. That was a case where there was a change in the previous year and the Assessing Officer declined to give consent. It was held that it was for the Assessing Officer to give or to withhold his" consent for the change in the previous year. We, however, find that the said decision is not on the issue before us. In the case of Shreepati Distributors Ltd. v. ITO[l 987] 168ITR 530, the Calcutta High Court was also examining the powers of the ITO to allow or refuse the change of the previous year. That case also appears to be not relevant to the issue before us. Reliance is next placed on the decision of the Punjab and Haryana High Court in the case of CIT v. Ravinder Kumar [1989] 180 ITR 203. That was a case where the assessee was already in business and made certain additions thereto. The assessee was already having agricultural income and was maintaining his books of account.
The assessee made a change in respect of the previous year relating to the agricultural income. It was held that the assessee did not have any right to exercise his option for adoption of a different previous year in respect of his agricultural income. The facts of the said case are also entirely different. Reliance is also placed on the decision of the Bombay High Court in the case of Fort Properties (P.) Ltd. v. CIT[1994] 208 ITR 232. In that case, the relevant question related to the source of income in the hands of the assessee. It was held that the head of income was not relevant for determining the previous year. 'Source of income' was different from 'head of income'. This decision is also on a different issue and does not help the revenue at all.
6. In the present case, the only controversy to be determined is whether the assessee did commence business w.e.f. 1-12-1983 If it was so, the assessee had a right to exercise option in respect of adoption of the previous year under Section 3(1)(e)(i) of the Act. There was no other source of income prior to 1-12-1983. There was no question of any new source of income in the hands of the assessee. The Ld counsel has explained that it was only by mistake that the assessee, while explaining justification for the change in the previous year, took the plea that it was a new source of income. But that plea should not damage the assessee's case, on the basis of actual facts. This was also pointed out by the Ld counsel that even if the previous year adopted by the assessee was not acceptable and the accounting period was treated as having ended on 31-12-1983 or 31-12-1984 loss could have been determined and allowed to be carried forward accordingly. By way of alternative plea, the Ld counsel has contended that the loss up to the period 31-12-1984, should have been allowed. It is also explained that the loss from 1-1-1983 to 31-12-1983 had been shown in the books of account at Rs. 1,63,080. Loss from 1-1-1983 to 30-6-1984 had been shown at Rs. 8,66,671. Loss from 1-1-1984 to 31-12-1984 had been shown at Rs. 18,02,848. The plea of the Ld counsel is that if the loss up to 30-6-1984 was not allowed after rejecting the assessee's plea. In regard to the adoption of previous year, the loss should have been allowed, treating the accounting year having been closed on 30-12-1984.
But that has also not been allowed. In assessment year 1986-87, the year ending has been shown by the assessee as 30-6-1985, and that has been accepted. In view of this also, the Ld counsel has claimed that the revenue, by its very conduct, has allowed the previous year adopted by the assessee in subsequent assessment years. We are in agreement with the Ld counsel that no miscellaneous income had been shown at all in any of the three earlier years and there was no question of having any source of income for those years. We also find substance in the assessee's plea that there was no new source of income, though it was explained mistakenly before the Assessing Officer that from 1-12-1983, the assessee had started earning income from a new source. Since the facts are said to be otherwise, the assessee's mistaken belief is said to be of no relevance and of no consequence. Looking to the entire facts, we are of the view that when the business had commenced w.e.f.
1-12-1983, the assessee-company had a right to exercise the option and to adopt a previous year under Section 3(1)(e)(i) of loss Act. We, therefore, accept the assessee's plea that the claim of the shown up to 30-6-1984, has to be allowed, treating the 'previous year' as ending on 30-6-1984.
7. Ground No. 4 relating to the refusal to allow carry forward of loss of earlier years, was not pressed by the Ld counsel and it is rejected as such.
8. Ground No. 5 relates to the refusal of the investment allowance. The Ld counsel has contended that if the assessee's plea relating to 'previous year' is accepted, investment allowance could be allowable, as a consequential relief, in accordance with law. We hold and direct accordingly.
9. Ground No. 6 relates to the depreciation claim. The Ld counsel has submitted that the Assessing Officer allowed depreciation at Rs. 3,62,137, as shown by the assessee in depreciation chart enclosed with the balance-sheet. The assessee had, however, prepared another depreciation chart, as per Income-tax Rules and had claimed depreciation at Rs. 16,48,226. The Ld counsel has conceded that depreciation, as allowable under the Income-tax Act/Rules should be allowed. We have heard the Ld D.R. also and we are in agreement with the assessee's plea that the depreciation, as allowable under the Act, should be computed. We direct the Assessing Officer to work out depreciation in accordance with law.
10. Ground No. 7 relates to the additional depreciation on new machine.
The Assessing Officer was of the view that the new machine installed up to 31-3-1985 was not eligible for the purpose of investment allowance inasmuch as the accounting period had ended on 31-12-1984. The Ld counsel has stated that there was no question of claiming investment allowance up to 31-3-1985 but it was claimed only on the machinery installed up to 30-6-1984. We are of the view that the additional depreciation is also to be worked out afresh. We restore this issue also to the file of the Assessing Officer with a direction to work out additional depreciation on new machinery in accordance with law.