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Judgment
N. R. PRABHU, A. M. :
There are two appeals by the Department relating to the asst. yrs. 1982-83 and 1983-84. There is also a cross-objection by the assessee relating to the asst. yr. 1983-84.
We will take the departmental appeal for 1983-84 first for disposal. The first ground of appeal is that the CIT(A) erred in holding that the provision of S. 40C and not those of S. 40A(5) are applicable in the case of employee directors.
We have heard the parties to the dispute and in our opinion the order passed by the CIT(A) cannot be assailed. The findings of the CIT(A) can find support from the Special Bench decision of the Tribunal in the case reported in 3 SOT 40. This ground is, therefore, rejected.
The next ground of appeal is that the CIT(A) erred in holding that the perquisite value of chauffeur driven car should be adopted on the basis of the Rule under IT Rules for the purpose of computing disallowance under S. 40A(5) as against the value worked out by the IAC on the basis of the actual expenses incurred by the assessee though that rule is for quantifying addition in the hands of employees and not employer. Here again, we find that the order of the CIT(A) is not supported by the decision of the Bombay High Court reported in Bombay Burmah Trading Corporation Ltd. Vs. Commissioner of Income Tax, Bombay City-IV, . We, in the circumstances, shall reverse the same and restore that of the ITO.
The next ground of appeal is that the CIT(A) erred in holding that the assessee is entitled for weighted deduction under S. 35B of the Act though there was nothing which was to be exported by the assessee as the assessee is a company running a hotel in India and was not entitled for weighted deduction under S. 35B of the Act. We find that an identical issue had come up before the Tribunal in assessees own case for the asst. yr. 1982-83. The claim has been allowed by the Tribunal in respect of foreign travel expenses, foreign advertisement expenses and subscription of foreign journals. We find that for this year the CIT(A) admitted the claim of the assessee except in regard to a sum of Rs. 55,050 which is the foreign travelling expenses of Shri Dastur, Shri Sampat Kumar, Shri Das and Shri Traver DSouza who were the chiefs and other employees of the food department. We feel that the order passed by the CIT(A) is not in variance with the order passed by the Tribunal for the asst. yr. 1982-83 and we for that reason shall uphold his order.
The next ground of appeal is that the CIT(A) erred in holding that Rs. 3,45,000 being development expenses are revenue in nature and were allowable in earlier assessment year i.e., 1982-83.
Here again we have heard the parties to the dispute. The Assessing Officer added back a sum of Rs. 3,45,000 under the head "development expenses". The CIT(A) had found that this amount was not claimed as an expenditure in the revenue account. He also found that in the asst. yr. 1982-83, he had allowed a deduction of Rs. 10,60,000 under the head "development expenses" and the impugned sum of Rs. 3,45,000 was a part of the same. It was for this reason that the deletion of the amount of Rs. 3,45,000 was ordered by the CIT(A). We cannot have any quarrel with the findings of the CIT(A). When the amount has not been claimed as a deduction the CIT(A)s findings that the entire development expenses of Rs. 10,60,000 are deductible for any earlier year are not open to any challenge, we see no reason to interfere.
The next ground of appeal is that the CIT(A) erred in holding that the assessee was entitled for E. S. A. on air-conditioning plant, lift and kitchen equipments. Here again, we find that a similar claim has been allowed by the Tribunal for the asst. yr. 1976-77. The Tribunal following its own order for 1974-75 had upheld the claim of the assessee. We have no material to consider a departure necessary. We, in the circumstances, decline to interfere.
The next ground of appeal is that the CIT(A) erred in holding that expenses in respect of the following were revenue expenses :
(a)
Repairs to cold storage plant
Rs. 4,10,000
(b)
Re-routing of other cables on alterations carried out
Rs. 1,05,442
(c)
Re-routing of cables on relocation of telephone exchange
Rs. 1,32,802
(d)
Replacement of 400 MPS and 800 MPS change over switches, etc., for control room emergency panel
Rs. 94,000
We have heard the parties to the dispute and in our view the order passed by the CIT(A) cannot be assailed. The expenditure in question has not resulted in creation of an asset of an enduring nature in the capital field. It is only when such is the case the same could be disallowed. Where the expenditure is in the nature of repairs and replacements and the same has been incurred to restore the efficiency of the plant and machinery to its original level, the expenditure incurred cannot be considered as capital expenditure. The concept, that current repairs would take within their folds only repairs of petty nature, has been discarded long ago. The Courts have been consistently taking the view that the real test whether an expenditure is in the nature of capital expenditure or revenue expenditure, is whether, as observed earlier, the same has resulted in the creation of an advantage of an enduring nature in the capital field or not. The quantum of expenditure is totally irrelevant. Even if the outlay is of a very large amount, the same will be regarded as revenue expenditure if it is in the nature of repairs and/or replacements. On going through the details filed by the assessee, we find that assessee has not secured and advantage of enduring nature. What has happened is replacement of worn out parts and rerouting of cables. We may in this connection refer to the decision of the Supreme Court Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., where the Court has approved the view of Tribunal that expenditure for case blank casablanka conversion system was in the revenue account. In the case Empire Jute Co. Ltd. Vs. Commissioner of Income Tax, , the Supreme Court has again explained the distinction between the revenue expenditure and capital expenditure. The Court has held that it was not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid down in the test applied by the Supreme Court, viz., that an outlay of a business in order to carry it on and to earn a profit out of the same as an expenditure incurred in carrying it on and that it was part of the cost of operating the profit earning apparatus and was clearly in the nature of revenue expenditure. In the case Nathmal Bankatlal Parikh and Company Vs. Commissioner of Income Tax, the Full Bench of the Andhra Pradesh High Court has again held that replacement of old diesel engine by a new one did not bring any new asset into existence and, hence, the expenditure incurred fell within the meaning of current repairs. In the light of these decisions, there cannot be any doubt that the impugned expenditure is in the nature of revenue expenditure. We, in the circumstances, shall uphold the order of the Assessing Officer.
The last ground is that the CIT(A) erred in holding that in respect of plant and machinery at Hotel Taj Residency, Bangalore, the assessee was entitled for depreciation and investment allowance.
Assessee had set up a new hotel by the name Hotel Taj Residency at Bangalore. The claim before the Assessing Officer was that the new hotel started functioning w.e.f. 22nd March, 1983. Assessee claimed depreciation of Rs. 46,32,738. The Assessing Officer found has observed in his order that Hotel Taj Residency was still under installation construction and only trial runs were undertaken during the year. The Assessing Officer it strange that there was no formal inauguration of the hotel. Though it was a gigantic project there were no advertisements inserted in the news papers inviting customers. The total collection of the room rent during the year was Rs. 5,100 and the sale of food items was Rs. 14,050 and these were mostly from persons who were either directors of assessee-company or the employees of sister-concern. Several items of plant and machinery were still under installation and, therefore, according to the Assessing Officer it was inconceivable that the hotel could be opened for public. He for that reason, disallowed the claim.
When the matter was carried in appeal, the CIT(A) observed that a unit could not be said to have been set up unless it was ready to discharge the functions for which it was being set up. It was only when the unit had been put into such a shape that it could start functioning as a business or a manufacturing organisation that it could be said that the unit had been set up. These observations of the CIT(A) were based on the decision reported in (1967) 63 ITR 678 . He further relied on the decision reported in Commissioner of Income Tax, Gujarat Vs. Suhrid Geigy Ltd., wherein the Court had held that the word "ready to commence" would not necessarily mean that all the integrated activities were fully carried out or wholly complied with. On the basis of the evidence produced before him, he came to the conclusion that the test laid down by the Courts in the matter of determining whether a business had been set up or not was fully satisfied in this case and in this view reversed the order of the Assessing Officer and directed him to allow the claim of depreciation and investment allowance. The Department is aggrieved.
It is contended by the learned Departmental Representative that the view taken by the CIT(A) is erroneous. The learned Departmental Representative heavily relies on the order of the Assessing Officer wherein he had highlighted the fact that there were no insertions in the news papers to the effect that the hotel was ready to receive the customers. There was no formal inauguration and further large number of items of plant and machinery was in the process of erection and further the receipts were too title to give credence to the claim that the business had already been set up. Normally the opening of a five star hotel would be accompanied by lot of fanfare and publicity, because the very existence and survival of the hotel would depend on such publicity. It is, therefore, difficult to believe that there was an actual setting up of the business during the year under consideration. This would also be evident from the fact that substantial additions to the capital assets were made in the subsequent years. Bills from various suppliers were of the dates in March and early April, 1983 and these items of equipment since they were purchased in the fag end of the accounting year would not have been actually installed during the year. Adverting to the cl. 5.1 of the agreement between the assessee and Naveen Hotels Ltd., who owned the building and which was taken over for the purposes of setting up of a hotel by the assessee, it is submitted, that the licence was to commence only on 1st April, 1983 and the fees were also payable from 1st April, 1983. According to the Departmental Representative the above evidence is so overwhelming that it would be futile for the assessee to contend that there was a commencement of the business in March, 1983. The learned Departmental Representative has pressed into service several decisions of the High Courts, which according to him, support the view canvassed by him before us. These decisions are as under :
(i) Western India Vegetable Products Ltd. Vs. Commissioner of Income Tax, Bombay City, ;
(ii) Commissioner of Income Tax Vs. Sarabhai Sons Pvt. Ltd., ;
(iii) Commissioner of Wealth-tax, Bombay City-I, Bombay Vs. Andhra Valley Powder Supply Co. Ltd., ;
(iv) COMMISSIONER OF Income Tax Vs. JIWAJI RAO SUGAR CO. LTD., ; and
(v) Commissioner of Income Tax, Gujarat Vs. Suhrid Geigy Ltd., .
In particular our attention was invited to the decision reported in Commissioner of Income Tax Vs. Sarabhai Sons Pvt. Ltd., where the Gujarat High Court had held that a business could be said to be ready to discharge the function for which it was established only after the machinery necessary for that purpose was installed. In that connection, the Court, according to the Departmental Representative, observed that obtaining land on lease, placing orders for machinery and raw materials were merely operations for the setting up of the business. In the light of this decision, there cannot be any doubt that assessees business was in the process of being set up. Again adverting to the decision reported in COMMISSIONER OF Income Tax Vs. JIWAJI RAO SUGAR CO. LTD., , the Departmental Representative contends, that depreciation should result as a consequence of the machinery being actually used or employed in the earning of income. Our attention in particular is invited to the observations of the Bombay High Court in the case Commissioner of Income Tax, Bombay City-III Vs. Forging and Stamping Pvt. Ltd., . In the said case the Court has observed that in the case of a manufacturing company, the installation and erection of machinery was not sufficient by itself and till some end product could be obtained, it could not be said that the company is ready to commence production and it was the readiness which was equivalent to setting up of a business. In the light of these decisions, according to the learned Departmental Representative, there can be no doubt that there was no setting up of business as has been alleged by the assessee all along. Facts, in the decisions relied upon by the CIT(A) while giving relief can easily be distinguished. At least one of the decisions was under the provisions of WT Act and that decision could not be of much help in deciding the issue regarding the setting up of the business.
The learned counsel for the assessee, on the other hand, contends that the assessee had produced before the Assessing Officer and the CIT(A) clinching evidence in support of its claim. Assessee had received during the previous year a certificate from the Ministry of Tourism that the hotel building constructed by the assessee was used by them as a hotel. It is the Ministry of Tourism which is the relevant authority in the matter. Assessee had also received a certificate as early as January, 1983 permitting them to approach the Bangalore Water Supply and Sewerage Board for the connection of water supply. The registration from the Employees State Insurance Corporation was received on 21st March, 1983. The bar licence was granted to the hotel on 5th March, 1983. The money changers licence was obtained from the Reserve Bank of India as early as 14th March, 1983, and the statement which was required to be filed in that connection was infact filed by the assessee in the month of March. The sales-tax authorities granted registration from 9th March, 1983. Assessee had also filed a return under the Karnataka Tax Luxuries (Hotels and Lodging Houses) Act, 1979, in the month of March, 1983. The Ministry of Tourism approved the tariff for the hotel at Bangalore on 12th March, 1983. It is then submitted that it was wrong on the part of the Assessing Officer to allege that there was no lift in operation. Only two of the floors were operational and there was one lift catering to the requirements of the customers and the staff members. It is then contended that the assessee had produced before the Assessing Officer a special notice received by it under S. 112 of the Karnataka Municipal Corporation Act, 1976, dt. 4th March, 1983, fixing the assessment of the newly constructed building of the hotel. Usual remission has been allowed in respect of the property tax upto 23rd Feb., 1983 only being the initial setting-up stage. It is then submitted that on 21st March, 1983 the management performed a Pooja and in support of it several documents including the travelling bills of the two Pandits were produced before the Assessing Officer. A copy of the hierarchy chart which would go to indicate that assessee had sufficient men-power in the month of March was also made available to the Assessing Officer. When such were the facts, there was absolutely no justification for the Assessing Officer to reject the contention of the assessee. It was in these circumstances the CIT(A) thought it necessary to intervene. Assessee in this connection relies on several decisions which are as under :
(i) 49 ITR 171 ;
(ii) Whittle Anderson Ltd. Vs. Commissioner of Income Tax, Bombay City I, ;
(iii) Western India Vegetable Products Ltd. Vs. Commissioner of Income Tax, Bombay City, ;
(iv) Commissioner of Wealth-tax Madras Vs. Ramaraju Surgical Cotton Mills Ltd., ;
(v) Prem Conductors Pvt. Ltd. Vs. Commissioner of Income Tax, Gujarat-I, ;
(vi) Sarabhai Management Corporation Ltd. Vs. Commissioner of Income Tax, Gujarat, ; and
(vii) Hotel Alankar Vs. Commissioner of Income Tax, Gujarat, .
These decisions clearly go to indicate that what is necessary before it could be said that the business is set up is that it should be ready to commence business. The evidence produced by the assessee would clearly go to show that the assessee was not only ready to commence the business, but in fact, it had transacted some business in the month of March. The formal inauguration in the form of a Pooja had taken place as early as on 21st March, 1983. Assessee had also recruited the minimum necessary man-power to run the hotel business. The debits by way of salary and wages and contribution to the provident fund were to the tune of Rs. 1,77,921 miscellaneous expenses which included repairs to building and repairs to machinery etc., came to Rs. 1,88,538. In the light of these facts, there cannot be any doubt that the business was not only set up but the hotel had started functioning also. The Assessing Officer has laid a lot of store by the provisions of cl. 5.1 of the agreement between the assessee and Naveen Hotels Limited, who were the owners of the building. Clause 5.1 makes a mention that the licence granted by the Naveen Hotels Ltd., which was for a period of 30 years, would commence from 1st April, 1983. It was on the strength of this clause the Assessing Officer contended in his order that there was no setting up of a business prior to 1st April, 1983. He failed to appreciate that in cl. 4.1 licence was granted to the assessee to enter and to occupy the hotel premises from 1st April, 1983 or earlier. In fact, assessee pursuant to this clause had entered into the said building much earlier and was in possession of the building long before it was inaugurated on 21st March, 1983 by a quiet religious function. The Departmental Representative has argued that the inauguration of a five star hotel is normally accompanied by lot of fanfare and publicity and this was not there in the month of March, 1983. There was no such publicity or fanfare even in subsequent year. This alone would go to show that there is no merit in Revenues case. The CIT(A) who granted the relief had examined the evidence produced in an objective manner and it was only thereafter the relief was granted.
We have heard the parties to the dispute. At the very outset it appears to us that the controversy raised by the parties to the dispute at this stage would be of an academic nature because the assessment relates to the year 1983-84 and even if the depreciation is not to be allowed in that year but in the subsequent year as on today there would be no impact to the revenue since the assets on which the depreciation was claimed in 1983-84 must have been almost totally depreciated long ago. The cumulative effect can hardly be substantial. Be that as it may, we are of the view that the order passed by the CIT(A) deserves to be upheld. The short question for decision is whether the business was set up, in December, 1988 (sic) as has been claimed by the assessee, or not. The arguments advanced by the Department to demolish assessees case rest on a slippery ground. It has been submitted by the learned Departmental Representative that there was no advertisement in the paper and that there was no inaugural ceremony to mark the advent of the new hotel. But it has to be remembered that at no stage there was any such ceremony. There was an unostentatious pooja on 21st March, 1983 and this is supported by travel documents. There is also evidence to the effect that the assessee did prepare food for some of its customers though they were from its sister concern. Assessee was fair enough to concede that only two floors were ready for occupation. In the course of the appeal hearing, assessee filed a paper book giving copies of the various certificates received by the assessee in the month of March, 1983 or earlier. They include certificate from The Ministry of Tourism and Municipal Corporation of Bangalore, etc. Assessee had also registration certificate from the employees State Insurance Corporation, a bar licence from the Corporation of Bangalore and a licence for a boarding and restaurant & bakery confectionary products also from the Corporation of Bangalore. At the time the assessee claimed that it set up the business it was already in possession of money changing licence from the R. B. I. and also a registration certificate from the said tax authorities. Assessee had filed a return under the Karnataka Tax Luxuries (Hotels and Lodging Houses) Act, 1979, in the month of March, 1983. It is also seen that modest expenditure was incurred under the head operation expenses. Payments by way of salary, bonus, etc., were to the tune of Rs. 1,77,000. Operating expenses include expenditure of fuel, power & light, repairs to building, stores & supplies repairs to machinery etc., aggregating to Rs. 1,88,000. The other general expenses were as high as Rs. 4,11,796. A business can be said to be set up when it is established and when it is ready to commence. In the case of a manufacturing concern the same could be said to be set up when the manufacture is ready to begin. This is the consistent refrain of the Court decisions and this well settled principle of law does not admit of any dissent. What is necessary for this purpose is that the business must be in such a shape that it would be able to function as a business. In the light of the massive evidence produced by the assessee, it cannot be gain said that the business, in fact, had been set up. The decisions relief upon by the learned counsel for the assessee and also by the CIT(A) in his order support this view. Even some of the decisions relief upon by the learned Departmental Representative do in fact, as has been pointed out by the assessee, support the case of the assessee. In the light of the evidence produced before us, we have no hesitation to hold that the business has in fact been set up and we, for that reason, shall uphold that order of the CIT(A).
That takes us to the appeal for the year 1982-83. The only ground raised herein is that the CIT(A) erred in holding that the amount of Rs. 3,45,000 was part of Rs. 10,60,000 and further that is was allowable as revenue expenditure in the asst. yr. 1982-83.
The facts have been set out by the CIT(A) in para 3 of his order. In brief, assessee had initially claimed a deduction of Rs. 7,15,000 as development expenses. Before the assessment was finalised this claim was revised to Rs. 10,60,000. The Assessing Officer did not allow any part of this expenditure and the assessee filed an appeal before the CIT(A). The CIT(A) has dealt with the claim of the assessee in his order. He has stated therein that the grievance related to the non-allowance of a deduction of Rs. 10,60,000. After considering the merits of the case, the CIT(A) allowed the claim of the assessee. However, while giving effect to CIT(A)s order, the deduction allowed by the Assessing Officer was only of a sum of Rs. 7,15,000. Assessee again appealed. The CIT(A) having regard to the order passed by his predecessor which had become final held that the assessee would be entitled to a deduction of Rs. 10,60,000 and it is in these circumstances that an additional deduction of Rs. 3,45,000 was allowed. We do not see how the Department could be said to be aggrieved. The initial order of the CIT(A) granting assessee deduction of Rs. 10,60,000 was unequivocal. It was in these circumstances in the impugned appellate order the CIT(A) has directed the Assessing Officer to entertain the claim of the assessee to the extent of Rs. 10,60,000. We, in the circumstances, shall uphold his order.
C. O. No. 73/Bom/1987
The first cross-objection is that the CIT(A) erred in holding that in the case of employee directors provisions of S. 40A(5) would apply instead of S. 40(c) of the Act.
We have heard the parties to the dispute and we are of the view that the CIT(A) was in error in holding that for limiting the expenditure for provision of salary to the employee directors the applicable provisions are those that are contained in S. 40A(5). We are in agreement with the contention of the assessee that the same has to be allowed in terms of the provisions of S. 40(c) and in this connection reliance can be placed on the Tribunals decision reported in 3 SOT 40.
The next cross-objection is that the CIT(A) erred in holding that in the case of Mr. L. M. Nagpal and Mr. R. M. Nagpal the two-employee directors of the company who have their own personal cars, for the purpose of disallowance under S. 40A(5) the perquisite value is to be adopted in accordance with the relevant Rule under IT Rules, 1962 and thereby applying the decision of the Calcutta High Court in the case of Commissioner of Income Tax Vs. Britannia Industries Co. Ltd., instead of holding that since the directors have their own cars, no perquisite value is to be disallowed to the company under the provisions of S. 40(c) of the IT Act.
We have heard the parties to the dispute. The mere fact that Mr. M. L. Nagpal and Mr. R. M. Nagpal, the two employee directors have their personal cars, will not rule out the disallowance under S. 40A(5) of the perquisite value of the cars provided by the company. There is nothing to indicate that these cars were not used by these two employees for personal purposes. It is in these circumstances that the CIT(A) directed that the perquisite value of the cars may be taken by applying the IT Rule made in this regard. We have no material to dispute his findings.
The next cross-objection is against the disallowance of travelling expenses of Shri Dastur, Shri Sampat Kumar, Shri Das and Shri Traver DSouza of Rs. 55,050 under S. 35B of the Act. There is absolutely no material except a bald statement on behalf of the assessee that tour of persons involved among other things preparation of items of Indian cuisine which would be exposed to the tourist and this in a way would help promotion of exports. We find that there is not much substance in what the assessee contends. As rightly pointed out by the CIT(A) in a short stay there is no scope for exposing the talents of the persons in foreign countries so as to attract customers in India. The foreign tour, to our mind, appears to be a study tour and we for that reason shall uphold the order of the CIT(A).
The next cross-objection is against the disallowance of investment allowance of Rs. 47,61,129 under S. 32A of the Act. Parties to the dispute are agreed that an identical question had come up for adjudication before the Tribunal for the year 1982-83 and the matter was restored to the file of the CIT(A) for de novo adjudication. We can do no better in the circumstances than refer the matter back to the file of the Assessing Officer to redecide the issue after taking into consideration the submissions of the assessee in this regard.
The last cross-objection is against the imposition of interest under Ss. 139, 215 and 216 of the Act. The prayer is for consequential relief and we direct the Assessing Officer to allow the same.
In the result, the appeals by the Department and the cross-objection by the assessee are allowed in part.