Altek Lammertz Needles Ltd. Vs. Asstt. Cit - Court Judgment

Excerpt:
counsels: k. rair, for the assessee r. venkataraman, for the revenue in the itat, madras b bench a. kalyanasundharam, senior v. p. & bhavnesh saini, j.m. - constitution of india article 141; [a.p. shah, c.j., f.m. ibrahim kaliffulla &v. ramasubramanian, jj] reference to larger bench - precedent - full bench decision held, it is binding on the division bench. only if the full bench comes to conclusion that earlier full bench decision is incorrect, there is scope for making reference to larger bench. division bench doubting correctness of full bench decision cannot direct registry for placing papers before chief justice to make reference to larger bench. ordera. kalyanasundharam, senior v.p.these are two appeals preferred by the assessee, limited company, aggrieved by the common order of the commissioner (appeals)-iv, chennai, dated 28-6-1999, wherein he had upheld the orders of the assessing officer in treating the entire expenditure claimed by the assessee as deduction as in the nature of pre-operative expenses.2. the submission made by the learned counsel for the assessee before us was that the fact that the assessee-company was incorporated in 1988 is not in dispute and the same has been accepted by the department. the company that was incorporated in 1988 had several objects and also certain objects which were ancillary or incidental to the main object. the first of those objects was to discount bills, to advance money on security of goods lying with or under the control of the company, etc. the company for the various years from 1988 was carrying on the activity of discounting of bills and other consultancy and financial activities. in the previous year relevant to the assessment year 1994-95 the assessee proposed that it should diversify its activities and accordingly came to decide that it should manufacture industrial sewing machine needles in india. this required setting up of an industrial unit and also capital. the assessee accordingly called for capital from the public and issued shares. the assessee-company explored the project of setting up of a unit for the manufacture such sewing machine needles and in that connection incurred several expenditure. the assessee had been incurring expenses in regard to its activities namely, bill discounting, financial and other consultancy activities. in addition, as a limited company, there are certain expenditure which do not depend on any other activity but with regard to compliance of the provisions of the companies act. the authorities below have not allowed, any expenditure in regard to any of the income-earning activities namely, bill discounting and other financial activities as well as interest income and totally ignored that there are certain administrative expenses which have no connection whatsoever with the project of setting up of a needles manufacturing unit. he drew our attention to the balance-sheet and the profit and loss account and the notes attached thereto and submitted that all expenditure relating to the setting up of the needles manufacturing unit had been capitalised.3. the learned departmental representative on his part had filed a paper book that comprises of correspondence that were exchanged in connection with the assessment proceedings. he was emphatic that the authorities have justifiably treated the entire expenditure as capital in nature. he referred to the decision of the supreme court in godhra electricity co. ltd. v. cit : [1997]225itr746(sc) for the proposition that income was rightly taxed. our attention was also drawn to the decision of the supreme court in tuticorin alkali chemicals and fertilizers ltd. v. cit : [1997]227itr172(sc) for the proposition that the interest income on investment of borrowed funds prior to commencement of business was taxable. our attention was also drawn to another decision of the supreme court in cit v. bokaro steel ltd. : [1999]236itr315(sc) for the proposition that till the setting up of the unit, interest income is taxable. in this regard our attention was also drawn to the decision of the delhi high court in addl. cit v. indian drugs and pharmaceuticals ltd. : [1983]141itr134(delhi) .4. rival contentions on the point at issue have been very carefully considered. at the outset we may observe that the assessee is not at all disputing the fact that the income that has been offered by it namely, bill discounting, interest, etc., are taxable. the dispute of the assessee is that the expenditure that is relatable to the setting up of the needle manufacturing unit has been capitalised and that there are other expenses incurred by it on the administration and for purposes of earning of interest income and bill discounting income, which should not have been capitalised. the other dispute is that the assessee, being a company, has to incur certain administrative expenses irrespective of its activities. in our opinion, there is considerable merit in the claim of the assessee. the company has been earning income from bill discounting and investments for the last several years and all along the same had been taxed and the expenses had been allowed and this is not in dispute. therefore, the expenses other than what the assessee had capitalised, are clearly relatable to the earning of interest and for its normal functioning to comply with the requirements under the companies act, income tax act and other statutes. the assessability of the income under section 56 is also not in dispute and as observed above, the assessee is seeking deduction of certain expenses. the claim of the assessee, in our opinion, is allowable because the expenses have been partly incurred in the normal course with the setting up of the needles manufacturing unit. the expenses relatable to the new unit have been identified and have been capitalised. we, therefore, direct the assessing officer to allow deduction of the expenses as claimed by the assessee.5. the other issue, which is consequential, namely, levy of interest under sections 234b and 234c of the act, in our opinion, can be considered in the light of our above directions while giving effect to this order.6. in the result, the appeals are partly allowed.

Judgment:
ORDER

A. Kalyanasundharam, Senior V.P.

These are two appeals preferred by the assessee, limited company, aggrieved by the common order of the Commissioner (Appeals)-IV, Chennai, dated 28-6-1999, wherein he had upheld the orders of the assessing officer in treating the entire expenditure claimed by the assessee as deduction as in the nature of pre-operative expenses.

2. The submission made by the learned counsel for the assessee before us was that the fact that the assessee-company was incorporated in 1988 is not in dispute and the same has been accepted by the department. The company that was incorporated in 1988 had several objects and also certain objects which were ancillary or incidental to the main object. The first of those objects was to discount bills, to advance money on security of goods lying with or under the control of the company, etc. The company for the various years from 1988 was carrying on the activity of discounting of bills and other consultancy and financial activities. In the previous year relevant to the assessment year 1994-95 the assessee proposed that it should diversify its activities and accordingly came to decide that it should manufacture industrial sewing machine needles in India. This required setting up of an industrial unit and also capital. The assessee accordingly called for capital from the public and issued shares. The assessee-company explored the project of setting up of a unit for the manufacture such sewing machine needles and in that connection incurred several expenditure. The assessee had been incurring expenses in regard to its activities namely, bill discounting, financial and other consultancy activities. In addition, as a limited company, there are certain expenditure which do not depend on any other activity but with regard to compliance of the provisions of the Companies Act. The authorities below have not allowed, any expenditure in regard to any of the income-earning activities namely, bill discounting and other financial activities as well as interest income and totally ignored that there are certain administrative expenses which have no connection whatsoever with the project of setting up of a needles manufacturing unit. He drew our attention to the balance-sheet and the profit and loss account and the notes attached thereto and submitted that all expenditure relating to the setting up of the needles manufacturing unit had been capitalised.

3. The learned Departmental Representative on his part had filed a paper book that comprises of correspondence that were exchanged in connection with the assessment proceedings. He was emphatic that the authorities have justifiably treated the entire expenditure as capital in nature. He referred to the decision of the Supreme Court in Godhra Electricity Co. Ltd. v. CIT : [1997]225ITR746(SC) for the proposition that income was rightly taxed. Our attention was also drawn to the decision of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT : [1997]227ITR172(SC) for the proposition that the interest income on investment of borrowed funds prior to commencement of business was taxable. Our attention was also drawn to another decision of the Supreme Court in CIT v. Bokaro Steel Ltd. : [1999]236ITR315(SC) for the proposition that till the setting up of the unit, interest income is taxable. In this regard our attention was also drawn to the decision of the Delhi High Court in Addl. CIT v. Indian Drugs and Pharmaceuticals Ltd. : [1983]141ITR134(Delhi) .

4. Rival contentions on the point at issue have been very carefully considered. At the outset we may observe that the assessee is not at all disputing the fact that the income that has been offered by it namely, bill discounting, interest, etc., are taxable. The dispute of the assessee is that the expenditure that is relatable to the setting up of the needle manufacturing unit has been capitalised and that there are other expenses incurred by it on the administration and for purposes of earning of interest income and bill discounting income, which should not have been capitalised. The other dispute is that the assessee, being a company, has to incur certain administrative expenses irrespective of its activities. In our opinion, there is considerable merit in the claim of the assessee. The company has been earning income from bill discounting and investments for the last several years and all along the same had been taxed and the expenses had been allowed and this is not in dispute. Therefore, the expenses other than what the assessee had capitalised, are clearly relatable to the earning of interest and for its normal functioning to comply with the requirements under the Companies Act, Income Tax Act and other statutes. The assessability of the income under section 56 is also not in dispute and as observed above, the assessee is seeking deduction of certain expenses. The claim of the assessee, in our opinion, is allowable because the expenses have been partly incurred in the normal course with the setting up of the needles manufacturing unit. The expenses relatable to the new unit have been identified and have been capitalised. We, therefore, direct the assessing officer to allow deduction of the expenses as claimed by the assessee.

5. The other issue, which is consequential, namely, levy of interest under sections 234B and 234C of the Act, in our opinion, can be considered in the light of our above directions while giving effect to this order.

6. In the result, the appeals are partly allowed.