Judgment:
1. This appeal has been filed by the Department against the order of the CIT(A)-XII, Kolkata giving relief to the assessee.
The assessee company is engaged in the manufacture of low ash metallurgical coke at its plant at Khambhalia, Gujarat. For the assessment year in appeal, the assessee filed its return for asst. yr.
2004-05 on 11th Oct., 2004 showing total income of Rs. 22,10,62,757.
Subsequently, the assessee company filed a revised return showing net total income at Rs. 21,30,91,725. The return was selected for scrutiny assessment Under Section 143(3) of the Act, and assessment was completed on 29th Dec, 2006 at the figure of total income of Rs. 28,21,61,831 after making various additions. The assessee went in appeal against the additions made by the AO. The CIT(A) allowed relief to the assessee against some of the additions made by the AO and sustained some of the additions. The Department is in appeal against some of the additions deleted by the CIT(A).
2. Whether on the facts and in the circumstances of the case learned CIT(A) was correct to allow set off of brought forward losses of M/s Aparna Projects (P) Ltd. violating the conditions Under Section 72A as the company was not engaged in business for the last three years prior to the relevant assessment year? 3. Whether on the facts and in the circumstances of the case learned CIT(A) was correct in allowing the payment of insurance premium which does not pertain to the relevant previous year? 4. That on the facts and under the circumstances of the case learned CIT(A) erred in allowing air fare of Rs. 37,126 in absence of details and failure on the part of the assessee to show that the air travel was for business purposes.
5. Regarding ground 1, the learned Departmental Representative contended that as per the provisions of Section 72A, the amalgamating company was required to be engaged in the business in which the loss was sustained for a minimum period of 3 years before amalgamation for the assessee to be eligible for deduction. In the assessee's case the amalgamating company i.e. Aparna Projects (P) Ltd. which amalgamated w.e.f. 1st Nov., 2003, was not engaged in production for the required period of 3 years and had only started production from the asst. yr.
2003-04. He submitted that in view of the provisions of Section 72A, the assessee was not entitled to the deduction of cumulated losses of Aparna Projects (P) Ltd. since it did not fulfil the conditions as required by Section 72A. He submitted that in view of the same, the order of the CIT(A) be reversed on this account.
6. Regarding ground 2, the learned Departmental Representative contended that insurance premium for an amount of Rs. 58,20,079 out of the total claim of Rs. 96,39,496 did not pertain to the assessment year in question and therefore was required to be disallowed and treated as prepaid expenses only to be allowed as deduction in the subsequent year. He submitted that only expenses pertaining to the assessment year in appeal could be allowed as deduction in computing income and therefore, the proportionate insurance premium for subsequent year was required to be disallowed even though the insurance company had raised the bill in this year for a period of 12 months, including part of the period of next year. He submitted that in this view of the matter, the CIT(A)'s order be reversed.
7. Regarding ground 3, the learned Departmental Representative contended that since the assessee had not produced any evidence before the AO that the expenses on travel of Mr. Raja and Mrs. Preeti Agarwalla were for the business purpose of the assessee, therefore, the CIT(A) had erred in allowing relief of Rs. 37,126 to the assessee and the order of the CIT(A) be reversed on this account.
In his rebuttal, Sri Tulsiyan firstly addressed ground 1 of the appeal.
He submitted that what is required Under Section72A(2)(a)(i) is that the amalgamating company should be "engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for three or more years". He submitted that the expression used in the section is "engaged in the business" as against "started manufacturing or production". He submitted that "engaged in the business" is much wider in term than "engaged in manufacturing" and submitted that engagement in business must be reckoned with reference to the point of time when the business activities were started, which would include also the preparatory stage for manufacturing activity, which is just one of the stages or ingredients of the business. He emphasized that the AO had wrongly equated "engaged in business" with "start of manufacturing" although the section itself did not specify the same. He submitted that the latter is a much narrower process and it alone cannot be termed as "engaged in business". He further submitted that "business" is of much wider import and encompasses within its told all the steps for starting the manufacturing operations. In this particular case, M/s Aparna Project (P) Ltd. was clearly in business when it undertook the steps to acquire the plant and machineries and that step itself has to be considered to be the commencement of business. He submitted that the legislature clearly did not intend for the start of production as the criteria for allowing deduction as the AO had interpreted and in support of the same he submitted that in certain sections of the Act, the legislature has made a difference between pre-commencement of manufacturing activity arid post-commencement thereof and in the matter of allowance of certain benefits under the Act, commencement of the manufacturing activity is a prerequisite. But where no such specific mention is made in the relevant section and only a condition is laid down that the assessee should be engaged in the business, a broader view about the definition of "engaged in business" has to be adopted. He placed reliance of the decision of the Special Bench of Tribunal, Calcutta Bench in the case of Peerless Securities Ltd. v. Jt. CIT , wherein the Bench observed that "a business is said to have been set up as soon as the essential activities of the business are started.... In case of a manufacturer, the manufacture commences as soon as he undertakes the activity required for manufacture". It has further been held in the said judgment, "Expenditure incurred after business is set up is allowable although business has not commenced". He submitted that it was clear from the above observation that the Special Bench of Tribunal had made a clear distinction between the date of commencement (set up) of the business and the commencement of manufacturing activities. It has also been held by the Special Bench that the expenditure incurred during the period of interregnum between the commencement of business and the commencement of manufacturing activities is allowable business expenditure meaning thereby that the business will have to be said to be in existence during this period of interregnum. He further placed reliance on the following case law in support of his argument that business is set up as soon as the first integral activity is performed by the assessee for the purpose of the said business:CIT v. Stones & Mineral Associated Ltd. He submitted that in all the above cases the various Courts have held that the first activity integral to the carrying on of business leads to a set up or start of business and makes the assessee eligible for deduction of expenses as revenue expenses. He submitted that once a business is said to have been set up, then the assessee shall have to be deemed to be "engaged in that business" from that moment on and would meet the criteria as required Under Section72A. He submitted that in the instant case, the AO had held that the business of M/s Aparna Project (P) Ltd. had not been in existence before the actual manufacturing activities were started by that company, which was directly against the decisions of the various Courts as cited above. He submitted that M/s Aparna Project (P) Ltd. had been carrying on its business since April, 2000 i.e. the moment it applied for license to manufacture coke being the first integral and necessary activity for the purpose of carrying on of the business. He therefore submitted that since M/s Aparna Project (P) Ltd. was engaged in its business since April, 2000, it had fulfilled the necessary condition for allowability of benefit Under Section72A of the Act and the assessee was eligible for the benefit of allowance of brought forward loss and also unabsorbed depreciation of the amalgamating company i.e., M/s Aparna Project (P) Ltd. 8. Sri Tulsiyan thereafter took up ground 2 for his arguments. He submitted that the alleged advance payment of premium was not actually an advance in nature. He submitted that the insurance companies raise their bills for payment of premium for a period of 12 months irrespective of the date of start of the policy. The assessee company has no option but to pay part of the premium related to the assessment year in which the bill is raised and pay the part related to the subsequent year in the next year. The entire amount of premium has to be paid at a time when the bill is raised by the insurance company and in the event of non-payment of the entire amount, the insurance policy lapses and the assessee does not get any benefit of insurance coverage.
The liability in respect of payment of insurance premium has got to be allowed even under mercantile system on the basis of the 'due date' for making the payment and for the entire amount of the premium and not a part thereof. He submitted that the assessee company follows mercantile system of accounting and has to account for all expenses as and when they accrue. In this case, the expense for premium accrues as soon as the insurance company raises its bill for payment of premium for the entire 12 months and therefore, the assessee is required to account for the same in its P&L a/c. He further submitted that in computing the income for the purpose of income-tax, a revenue expense has to be allowed as a deduction in its entirety in the year of payment and cannot be treated as a prepaid expense to be allowed partly in any subsequent year other than the deductions expressly provided as such, like the deductions Under Section 35D. There is no scope for apportionment of a revenue expense for the purpose of income-tax other than the said specific provisions. In view of the above, he submitted that the CIT(A)'s order be confirmed on this aspect.
9. The Authorised Representative thereafter took up ground 3 for his rebuttal. He submitted that the amount of Rs. 37,126 pertains to the foreign travel expenses of Mr. Raja and Mrs. Preeti Agarwalla, who are consultants of the appellant company. The expense was incurred for travel of consultants of the company for business purposes to the factory of the assessee and cannot be treated as personal in nature on any account since the abovementioned two persons were not related to the company in their personal capacity. He submitted that since no personal expense can be alleged in regard to the expense for travel of the consultants of the company, the disallowance was unwarranted and only based on suspicion and the CIT(A) had rightly deleted the same.
10. We have heard the rival parties, considered their rival submissions and perused the records available with us. Ground 1 of the appeal mainly pertains to the allowance of brought forward loss and unabsorbed depreciation of the amalgamating company viz. Aparna Projects (P) Ltd. as per the provisions of Section 72A. The relevant provisions of Section 72A state as under: (1) Where there has been an amalgamation of a company owning an industrial undertaking or a ship or a hotel with another company or an amalgamation of a banking company referred to in Clause (c) of Section 5 of the Banking Regulation Act, 1949 (10 of 1949), with a specified bank, then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.
(2) Notwithstanding anything contained in Sub-section (1), the accumulated loss shall not be set off or carried forward and the unabsorbed depreciation shall not be allowed in the assessment of the amalgamated company unless-- (i) has been engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for three or more years; (ii) has held continuously as on the date of the amalgamation at least three-fourths of the book value of fixed assets held by it two years prior to the date of amalgamation; There appears to be no dispute in this case regarding the other requirements of Section 72A for eligibility of set off of the brought forward loss and unabsorbed depreciation of Aparna Projects (P) Ltd. except the requirement of being engaged in the business, in which the accumulated loss occurred or depreciation remains unabsorbed, for three or more years. The moot question in this case is the point in time from which a person shall be treated as being engaged in a business. The Black's Law Dictionary defines engage as "To employ or involve oneself; to take part in; to embark on". Therefore, the dictionary meaning of the word 'engage' implies a situation where a person embarks on some activity or employs oneself in some work.
Now let us examine the argument advanced by the learned Authorised Representative that a person shall be treated as being engaged in a business when the business itself is said to have been set up. We find that there can be no doubt that a person shall be termed to be engaged in business if the business has been set up or it has come into existence. "Engaged in business" does not imply "engaged in production". If the legislature in its wisdom has not used the words "engaged in production", it is not open to the AO to import such words or meaning to the term "engaged in business". The basic postulate of interpretation of statutes requires that the literal construction of a statute has to be accepted if there is no ambiguity in the said statute. It is not open to the Courts to import words into the provision and give it a meaning different from the meaning as borne out by a literal reading of the section. In this case, the AO appears to have imported the word "production" into the statute in place of the word "business" and thereby changed the entire requirement of the said section. Section 72A(2)(a)(i) clearly uses the words "engaged in business" and there is no requirement of start of production to be eligible for deduction. There may be many instances where the business may have commenced but the actual production may not have commenced but that would not imply that the business itself had not commenced and that an assessee would not be engaged in production. Therefore, it appears, the AO has narrowed down the requirement of the section without there being any such intendment within the section itself. In this case, therefore, it needs to be examined whether Aparna Projects (P) Ltd. had been engaged in business for a period of 3 or more years.
In this case, the said company had applied for license to manufacture coke, being the first integral and necessary activity for the purpose of carrying on of the business, in the month of April, 2000. The brought forward losses and unabsorbed depreciation sought to be set off pertain to the said business of manufacturing coke. Therefore, the assessee had performed the first integral and necessary activity for start of business in the month of April, 2000 without which it could not have carried on its business of manufacture of coke. It needs to be examined whether such an activity in itself shall qualify for being called as the business having commenced and therefore the condition of Section 72A having been fulfilled.
11. We have examined the following case law cited by the learned Authorised Representative above on the issue of set up of business:CIT v. Western India Sea Food (P) Ltd. In all of the abovementioned case law, the various Courts have held that a business is said to have been set up as soon as the essential activities of the business are started. It has been held that in case of a manufacturer, the manufacture commences as soon as he undertakes the first activity required for manufacture.CIT v. Sarabhai Management Corporation Ltd. (supra) affirming the decision of the High Court, held that, "even if the acquisition of the 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 respondent's business. It was not correct to treat the respondent as having commenced business only when the licensee or lessee occupied the premises or started paying rent. The Tribunal had proceeded on a misapprehension regarding the nature of the respondent's business and the High Court was right in interfering with the finding of the Tribunal which was based on a misdirection in law."CIT v. Western India Sea Food (P) Ltd. That though the assessee had not actually carried out purchases or sales it had carried out all the requirements of the provisions and advances, etc., towards purchases and did not actually carry on the purchasing as the importer could not arrange for the transport of the goods. Therefore, the expenses of Rs. 23,698 incurred by the assessee in procurement of materials for exports could be allowed as revenue expenditure.
The other cases relied on by the learned Authorised Representative have held similarly that when the assessee has performed the first initial steps being integral for the carrying on of the business, the business is deemed to have been set up and expenses are allowable as revenue expenses.
In this connection, the case of CIT v. Saurashtra Cement & Chemical Industries Ltd. is of relevance. The Hon'ble Gujarat High Court held as under: 'Business' connotes a continuous course of activities. All the activities which go to make up the business need not be started simultaneously in order that the business may commence. The business would commence when the activity which is first in point of time and which much necessarily preceded all other activities is started.
(i) whether a business has been commenced or not is a question of fact. However, what activities constitute commencement of business is a mixed question of law and fact and it has to be decided on the facts of each case; (ii) there is a distinction between setting up of business and commencement of business. A business is said to be set up when it is ready to commence; (iii) where the business consists of a continuous course of activities, for commencement of business all the activities which go to make up the business need not be started simultaneously. As soon as an activity which is the essential activity in the course of carrying on the business is started, the business must be said to have commenced.
If we analyse the abovementioned decisions of the Gujarat High Court and the Andhra Pradesh High Court then the same are squarely applicable to the case of the assessee. As already held by us above, an amalgamating company is required to be engaged in business for a period of 3 or more years to be eligible for the benefits of Section 72A and the requirement is not the start of production. An assessee has to be held to be engaged in business from the point in time when the business is said to have commenced. The abovementioned decisions have also held this view and have held that where the business consists of a continuous course of activities, for commencement of business all the activities which go to make up the business need not be started simultaneously. As soon as an activity which is the essential activity in the course of carrying on the business is started, the business must be said to have commenced. In the present case before us, the company Aparna Projects (P) Ltd. can be said to have commenced its business as soon as it. had applied for a license to enable it to start manufacturing coke since the said company could not have started manufacturing without the said requisite permission from the Government authorities. Thereafter, the said company had initiated steps to set up its plant required for production and had started manufacturing coke from the asst. yr. 2003-04. Therefore, we hold that Aparna Project (P) Ltd. was engaged in the business of manufacturing of coke from April, 2000 and therefore, was engaged in the business for a period of 3 or more years as required by Section 72A(2)(a)(i). This being the case, we hold that the assessee was entitled to set off of brought forward loss and unabsorbed depreciation of Aprna Projects (P) Ltd. as rightly held by the CIT(A). We dismiss this ground and decide this issue against the Revenue and in favour of the assessee.
12. We have considered the arguments of both sides in regard to ground 2 raised by the Revenue. We find that there is no dispute regarding the fact that the insurance company had raised a single bill for a period of 12 months on the assessee for the payment of premium and the assessee had no option to pay part of the premium relating to this year in the year in appeal and the balance in the subsequent year. We have considered the argument advanced by the learned Authorised Representative that the raising of bill by the insurance company for the period of 12 months leads to an accrual of liability on the date of receipt of the bill as per the mercantile system of accounting. In mercantile system of accounting, an expenditure is said to have accrued when the said expense becomes due for payment. In this case we find that the premium for a period of 12 months, partly attributable to subsequent year, had become due for payment in this year itself and therefore has to be held as having accrued during the year. An expense has to be allowed as deduction in the year it has accrued to an assessee. The benefits of such an expense may be enjoyed by the assessee over a period which may extend beyond the relevant assessment year but the expense has to be allowed in its entirety in the year of accrual unless specifically barred by any provision of the IT Act, 1961. A good example would be an advertisement expense incurred by an assessee, the benefits of which may be available to the assessee for more than one year but the same has to be allowed as a deduction in the assessment year in which the expense had accrued. In this case, we find that since the expenditure for payment of premium had accrued during the relevant assessment year in appeal, therefore, the same was allowable as a deduction in its entirety in this year itself and the AO had wrongly disallowed part of the expense as being not related to this year. In view of the same, we hold that the CIT(A) had rightly deleted the addition made by the AO and decide the issue against the Revenue.
13. We have gone through the arguments advanced by both the parties in respect of ground 3. We find that the AO has disallowed the expense only on account of the fact that the assessee had not produced any evidence to show that the said expense was related to the business of the assessee. The learned Authorised Representative has submitted that the said expense was incurred on consultants appointed by the company for their travel to the factory premises of the assessee. He submitted that the said persons were not related to any of the directors of the company and therefore it could not be presumed that the expense was not incurred for the business of the assessee. We find the argument of the Authorised Representative to have due force and in the absence of any evidence to the contrary brought on record by the Department to show that the expenses incurred on the consultants were, personal in nature or not allowable as deduction, we uphold the deletion made by the CIT(A) and decide this ground against the Revenue.