TaxTMI 
TaxTMI 
2012 (9) TMI 300
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....at, Narmada Development Department's Resolution No. NMD/1073(86)/ 33(2)/H dated 21-3-1988, which reads as under: "PREAMBLE: With a view to execute the works of the Sardar Sarovar (Narmada) Project, the State Government has decided to set up a Public Limited Company namely the Sardar Sarovar Narmada Nigam Limited. The proposed Sardar Sarovar Narmada Nigam Limited will have its head office at Gandhinagar and its main objects would be to execute the works of the Sardar Sarovar (Narmada) Project. RESOLUTION: The Government is, therefore, pleased to set up the Sardar Sarovar Narmada Limited with its registered office at Gandhinagar with an authorized share capital of Rs. 2,000 crores to be divided into 2 crores shares of Rs. 1,000/- each. The entire capital will be scribed by the Government and accordingly the Nigam will be a wholly owned Government Company. The Company should be registered as Public Limited Company under the Companies Act, 1956...." 3. Thereafter, the assessee Corporation was incorporated under the Companies Act, 1956 on 24th March, 1988. The Registrar of Companies ("ROC"), Gujarat issued Certificate of Incorporation. The assessee Corporation, thereafter....
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....t of Gujarat made total share capital contribution of Rs. 650.10 crores of which Rs. 533.10 crores is in the form of assets transferred to the Corporation and the balance amount of Rs. 117 crores was received in cash. Against this, the Corporation has allotted equity shares of Rs. 563.50 crores. Further equity shares of Rs. 53.50 crores were allotted in April, 1989. The allotment of the equity shares against the balance amount of Rs. 33.10 crores was to be made on receipt of the report of the Committee appointed to give details regarding the categories of the assets transferred by the Government of Gujarat. 7. No profit and loss account was prepared by the assessee in any of the years (AY 1989-90 to 2000-01) and in Note No. 7 forming part of the accounts in the Annual Report 1988-89 it was mentioned as follows: "(a) No Profit and Loss Account for the period from 24th March, 1988 to 31st March, 1989 has been prepared as the Projects of the Company are under construction and the Company's operation of supply of water and power has not commenced by 31st March, 1989. (b) Most of the items classified under incidental expenditure during construction, according to the....
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....y, 2003 one by one at interval of four months." 10. Again under head "Narmada Main Canal" it was observed that "The construction of Narmada Main Canal (NMC) upto Mahi river crossing (i.e. reach 0 to 144 kms.) is in completion stage. Total 767.23 LCM earthwork (99.17% of revised qty.) 150.55 lsm lining (99.98% and 20.96 LCM structured concrete (97.66%) are completed upto March, 2000. The Narmada Main Canal works from 144 kms. To 264 kms. Reach (i.e. from Mahi river crossing to Saurashtra Branch Canal off-take) are in progress. Total 633.89 LCM excavation (96.35%, 12.19 LSM lining (95.28%) and 4.73 LCM (92.38%) structural concrete are completed upto March, 2000. The works of six major canal siphons on major rivers i.e. Shedhi, Saidak, Mohar, Watrak, Meshwo and Sarbarmati are in progress and on Khari is completed." While in the Report under head 'Distribution System' it is stated that "Phase-I-"Sardar Sarovar (Narmada) Project Command under Phase-I (i.e. area under NMC ch. 0 to 144 km) covers culturable command area of 4.47 lac Ha. Between the rivers Narmada & Mahi. The survey, investigation, planning, designing and estimating of distribution system upto 40 Ha. Block has been compl....
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....sted all the expenditure and income to work-in-progress account. Pursuant to the notice Under Section 148, the assessee filed return of income for the years under consideration, claiming all expenditure incurred by it as business expense, even though in the books of account, the expenditure was capitalized and carried and debited to work-in-progress. The assessee corporation/Nigam contended that it was incorporated with the sole purpose of construction of dam, canals and power houses and there is no provision to continue to operate, once construction is complete and, therefore, the Nigam was carrying on the construction business, and therefore, the moment it had put first bricks for construction and started its first activity with regard to construction, it has commenced its business activity. As a consequence it claimed that the all revenue expenditure incurred by it for the purpose of carrying on its business have to be allowed as deduction. If it is so allowed as claimed by the Assessee, then the result of computation under the head "Income from Business" would be a loss. Even if interest income is taxed under the head "Income from other sources", the loss under the head "Income....
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....he claim of the assessee. The assessee has not commenced/set up its business and therefore any expenditure before setting up/commencement of business cannot be allowed as deduction. The project of the assessee was under construction in all the previous years and the construction has not been to such an extent as to enable one to say that it was ready to commence its business or that it had set up its business. 23.16 The Certificate of Incorporation as a Company and/or Certificate of Commencement of Business in 1998, do not establish anything except the fact that the assessee can operate as a company or it is authorized or permitted to commence the business. Whether the company has commenced its business or not depends upon the activities it carries on and not on what it can do or authorized to do. It had engaged in activities during these years only in construction of dams, which is the infrastructure with which it has to conduct its business on completion. No doubt, it is true that it had completed a major part of the mega project, but it has not completed the dams to such an extent that it can be exploited for starting supply of water and/or electricity nor it can be said to h....
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....er completion, even though which have been utilized for making short term deposit for earning interest cannot be allowed as deduction as the same could not be said to have been incurred for making or earning income from interest within the meaning of Section 57 of the Act." (emphasis supplied) 17. In this appeal which relates to AY 2001-02, similar issues as was decided by the Tribunal in AY 89-90 to 2000-01 came for consideration before the AO. The Assessee took a stand before the AO that the main object for the formation of the company was to construct dams and canals etc., and the business has commenced from the very first year of incorporation of the Assessee. The AO held that the Assessee was not a contractor and therefore the contention that on formation and beginning of construction activities, it cannot be said that the business of the Assessee has commenced. 18. The Assessee claimed before the AO that receipts by way of rent, tender fees, miscellaneous recovery, interest etc., are incidental and inextricably linked with the project and hence have to be set off against the sums that have to be capitalised and cannot be brought to tax as "Income from other sources". In....
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.... stated in the earlier paragraph of this order are not disputed. 19. The AO without referring to the contentions of the Assessee in the earlier paragraph of this order and after referring to the fact that the Assessee had not earned income from supply of Narmada water as the said income belonged to the Government of Gujarat for supply of water through Shedhi branch canal which was transferred to Government of Gujarat, concluded that the Assessee has not commenced its business. The AO thereafter referred to the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkalies, Chemicals & Fertilizers Ltd. 227 ITR 172 (SC) and held that interest income earned by the Assessee has to be brought to tax under the head "income from other sources". Thereafter the AO held as follows: "It is seen that the assessee has earned the following interest income during the year: Interest on deposits with Banks : Rs. 1,90,86,976/- Interest on deposits : Rs.24,22,36,641/- Other interest : Rs. 49,27,591/- Rs. 26,62,51,208/- During the course of scrutiny, it was found that other ....
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....INCOME Rs.26,13,28,117/- 20. Before CIT(A) the Assessee submitted that the business of the Assessee commenced and therefore revenue expenditure have to be allowed as deduction. On the above plea, the CIT(A) followed the order of CIT(A) for AY 90-91 wherein it was held that business of the Assessee would commence only when the water starts flowing from the canals and/or when power houses start generating electricity. Following the same, the CIT(A) rejected the plea of the Assessee. Before CIT(A) the Assessee raised a specific plea that water had started flowing from canals and drinking water was supplied and therefore business has commenced. On the above plea, the CIT(A) held as follows: "The claim of the appellant that mere flow of water through Narmada Canal amounted to commencement of business hardly has any merit. The reference made by the ld. counsel for the appellant to the observations of the Assessing Officer in earlier years in this regard is not of much relevance. This is evident from the elaborate findings on the issue in this regard in the appellate order for the assessment year 1990-91, which have been reproduced in para-3.2 above. Mentioning of flow ....
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....vities: (1) Honble Madras High Court in the case of K. Sampath Kumar v.. CIT (158 ITR 25) held that mere purchase and erection of machinery does not amount to starting of business. (2) Hon'ble Bombay High Court in the case of CIT v. Forging & Stamping (P) Ltd. (119 ITR 616) held that mere installation of machinery and its trial run cannot amount to setting up business. (3) Hon'ble Gujarat High Court in the case of Addl. CIT v. Speciality Paper Ltd. (133 ITR 879) held that if after the Installation of plant and machinery, it is found that assessee could not go into commercial production, business cannot be said to have been set up. (4) Honble Bombay High Court in the case of Bhodilal Mengharaj & Co. (P) Ltd. v. CIT (119 ITR 968) held that where factory had been erected but power connection had not been received, business could not be considered to have been set up. From the foregoing, I therefore find that the Assessing Officer was justified in rejecting the claim of the appellant. These two grounds of appeals are also therefore rejected." (emphasis supplied) 21. Before CIT(A) the Assessee claimed that interest income of Rs. 26,13,28,117/- w....
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....r, as the various expenses were basically incurred by the appellant Corporation for the capital work in progress of the project, no part of the same can be allowed as deduction against the Interest income. I am, therefore, of the view that the action of the Assessing Officer in this regard was fully justified and no interference was called for in the matter. These grounds of appeal are accordingly rejected."(emphasis supplied) 22. The Assessee also took a stand before CIT(A) that it was an authority within the meaning of Sec.10(20A) of the Act and therefore its income is exempt from tax. On the above plea the CIT(A) held as follows: "6.2 I find that there is no adjudication by the Assessing Officer on this issue in the assessment order. It is therefore not ascertainable whether the appellant made such a claim during the course of assessment proceedings. However, this was purely a legal issue and similar ground of appeal was preferred by the appellant in Asst. Year 90-91 and the same was rejected in accordance with the following observations in para 9.4 of the appellate order for Asst. Year 90-91 as reproduced below: "9.4 I have carefully considered the relevant facts and f....
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....t from the stage of construction. It is submitted that it be so held now. 2.3 The learned CIT(A) has erred in holding that Supreme Court decision in the case of Tutikorin Alkalies reported in 227 ITR 172 is squarely applicable. It is submitted that in the facts and circumstances of the case, the business has commenced and therefore, the said judgment is not applicable. It be so held now. 3. The learned CIT(A) has erred in not appreciating the facts that during the year, water has started flowing from Canals and drinking water was supplied and therefore, business has commenced during the year. It be so held now. 4. The learned CIT(A) has erred in not giving direction to the learned A.O. to compute the income under the head "Profit and gains of Business or Profession". It is submitted that expenditure and income shown under the head "Incidental expenditure pending capitalization" were in the nature of business expenditure and the learned CIT(A) ought to have given direction to the learned A.O. to compute the income under the head "Profit and gains of Business or Profession". It be so done now. 5. The learned CIT(A) has erred in not allowing depreciation on Canals and othe....
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....20A) of the Act. It is submitted that in the facts and circumstances of the case, CIT(A) ought to have granted the exemption. It be so held now. 11. The learned CIT (A) erred in confirming the order of Assessing Officer in charging interest u/s. 234B of the Act for Rs.4,52,17,930. It is submitted that no interest ought to have been charged. It be so done now. Your appellant prays for leave to add, alter, omit and/or to amend any grounds before the final hearing of the appeal." 24. Originally a Division Bench heard the appeal on 24.3.2010. On the issue raised by the Assessee in Gr.No.9 viz., administrative expenses, vehicles expenses, interest expenses etc., which were debited in the books of accounts as "Incidental Expenditure Pending capitalisation" ought to be allowed as deduction u/s.57 of the Act while computing income under the head "income from other sources", the Division Bench found that in Assessee's own case for AY 89-90 to 2000-01 the Tribunal had by its order dated 31.8.2004 disallowed similar claim of the Assessee. The order of the Tribunal is since reported as JCIT v. Sardar Sarovar Narmada Nigam Ltd. 93 ITD 321 (Ahd.). The Division Bench found that in subseq....
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....tment. According to him the appeal of the Assessee, in so far as it relates to grounds other than the one referred for consideration by a Special Bench by the Division Bench, has already been decided by the Tribunal in Assessee's own case in the earlier assessment years and therefore there is no reason for referring the issues raised in those grounds for consideration by a Special Bench. According to the learned DR, consideration by the Special Bench of those issues other than the question referred to Special Bench by the Division Bench would be virtually reviewing the earlier order of the Tribunal. He sought time to make application to the President to reconsider his order referring the entire appeal for consideration by the Special Bench. In this regard, it was also submitted that as against the order of the Tribunal on those issues, the Assessee has already preferred appeal before the Hon'ble Gujarat High Court and the same is pending consideration by the Hon'ble High Court. It was his submission that in the circumstances, reference of the entire appeal for consideration by the Special Bench would require reconsideration and for this purpose, the Revenue should be afforded oppor....
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...., shows that it is the administrative function of the President to constitute Benches from amongst the members of the Tribunal for exercising the powers and functions of the Appellate Tribunal. Similarly, sub-section (3) empowers the President for disposal of any particular case to constitute a Special Bench consisting of three or more members, one of whom shall necessarily be a Judicial Member and one an Accountant Member. The functions entrusted under sub-sections (1) and (3) of section 255 to the President of the Appellate Tribunal are obviously administrative functions. They have nothing to do with the exercise of any judicial power. Under sub-section (5), the Appellate Tribunal can regulate its own procedure and the procedure of Benches and for that purpose can frame appropriate regulations. In exercise of that power the Income-tax Appellate Tribunal has framed regulations. In terms of regulation 98A, the concerned Bench which is seized of the matter may in exercise of its judicial functions in an appropriate case make a reference to the President to constitute a Special Bench. The exercise of that function by the Bench of the Tribunal hearing the matter is of course a judicia....
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....of the fact that the aforesaid decision of the Tribunal for the earlier years are pending for consideration by the Hon'ble High Court of Gujarat. We would, therefore, confine ourselves to the issues raised by the assessee in the grounds of appeal, keeping in mind the facts and circumstances as it prevailed in the assessee's case during the previous year relevant to A.Y. 2001-02. 31. We have already set out the various grounds of appeal raised by the assessee. Ground Nos. 1, 2, 2.1, 3 & 4 relates to the issue which deals with the question as to whether in the facts and circumstances of the case, it can be said that the business of the assessee has commenced. On the above issue, the ld. counsel for the assessee drew our attention to the decision of the CIT (Appeals) in assessee's case for the A.Y. 1990-91, wherein the CIT(A) had held that the business of the assessee would commence only when the water starts flowing from the canal and/or when power houses start generating electricity. Without prejudice to the contention of the assessee that the business of the assessee commenced from the A.Y. 1989-90 itself when the Assessee took over construction of the project, the construction ....
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....ns of the Assessing Officer that the business of the appellant would commence only when water starts flowing from the canals and/or when power houses start generating electricity., This finding of the Assessing officer is accordingly confirmed. This ground of appeal is therefore rejected" In the absence of revenue out of water supply the release of water to a small sector of the entire project should be considered as trial process and the observations made by CIT(A) in A.Y. 1990-91 is not squarely applicable in your case. You are, therefore requested to furnish supporting records/documents to justify your claim of commencement of business." 33. It was submitted by the ld. counsel that when flow of water through Narmada canal was achieved by the assessee, the revenue has now taken a stand that there should be revenue generation out of supply of water. According to the ld. counsel for the assessee, this has been an inconsistent stand which the revenue should not be permitted to take. 34. Our attention was also drawn to the fact that the findings of the AO with regard to supply of water from Shedhi branch canal are totally irrelevant and what is relevant is the supply of wate....
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.... that as per own submissions business has not commenced since we have admitted that there was no supply of water during F.Y. 2000-01. In this connection we would like to submit that our said statement was in respect of supply of water for irrigation from Shedhi branch. However, in the said letter at Para 4 it is clearly submitted that supply of drinking water was started from February, 2001. This makes it clear that there is no misrepresentation of the facts." 36. The ld. counsel for the assessee submitted that the revenue's objection is therefore that only on generation of income, it can be said that the business of the assessee has been set up/commenced. In this regard, our attention was drawn to page 5 of the Assessing Officer's order, wherein the AO has made the following observations:- "Thus, it is clear that the assessee has not earned income from water supply and the income which has claimed to have been earned from supply of Narmada water was in fact income which belong to Government of Gujarat from supply of water through Shedhi branch canal and which was transferred to Government of Gujarat." 37. The ld. counsel drew our attention to the impugned order of the CIT....
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....of manufacture and sale of cement can be said to have commenced laid down certain principles. (ii) Prem Conductors Pvt. Ltd. v. CIT 108 ITR 654 (Guj), wherein the Hon'ble Gujarat High court on the question whether business can be said to have commenced when there was actual production or earlier steps like securing orders. (iii) Sarabhai Management Corporation Ltd. v. CIT 102 ITR 25 (Guj.), wherein the Hon'ble Gujarat High Court laid down principles on when it can be said that the business has been set up. Reference was also made to the following other decisions:- (a) CIT v. Sarabhai Management Corpn. Ltd. v. CIT 192 ITR 151 (SC) (b) CIT v. Aavaram Ltd. 197 ITR 22 (Guj.) (c) CIT v. Western India Seafood (P) Ltd. 199 ITR 777 (Guj.) 39. The ld. counsel also submitted that the CIT(A)'s reliance on the following decisions are erroneous:- (1) ACIT v. Speciality Paper Ltd. 133 ITR 879. It was submitted that the aforesaid decision has been explained in Hotel Alankar v. CIT 133 ITR 866. Our attention was drawn to the following passage of the Hon'ble Gujarat High Court in the case of Hotel Alankar (supra) in this regard:- "We are afra....
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....ion was drawn to the fact that installation of machinery, obtaining of power connection and purchase of raw material by an assessee who wanted to carry on the business of manufacturing was held to have commenced even at the stage of obtaining power connection and purchase of raw material. It was his submission that the above decision supports the case of the assessee, rather than the case of revenue. 40. On the issue as to whether the business of the assessee can be said to have been set up/commenced, the ld. DR made the following submissions. He drew our attention to the Annual Report of the assessee for 2000-01 wherein the progress of the project has been highlighted by the assessee as follows:- "DAM AND APPURTENANT WORKS Excavation and concrete works are two major components of the Main Dam works. Upto March, 2001 a total of 63.34 lac cubic meters excavation and 59.51 lac cubic meters concrete works has been done. HYDRO POWER 96.91% open excavation and 90.27% underground excavation for the River Bed Power House have been completed. The work of Canal Head Power House (CHPH) with its auxilliaries and ancillaries equipments is completed in all respect and is now read....
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....lanned to take up these works during year 2001-2002. BRANCH CANAL AND DISTRIBUTION SYSTEM In Phase - 1 area. Total 379.48 LCM earthwork (100%), 90.36 LSM lining (100.0%) and 471.44 THCNM structure concreting (100%) are completed upto March-2001. In Phase II - area. Total 89.97 LCM earthwork (93.08%) and 0.97 LCM concreting (88.99%) are completed upto March-2001. In Shedhi branch canal total 80.88 LCM earthwork (92.64%), lining 20.59 LSM (100%) and 0.92 LCM (98.02%) structure concrete are completed upto March, 2001. The earthwork of Saurashtra Branch Canal (SBC) in reach 0 to 46 km. is completed and earth work of SBC from 46 to 88 km. and 103 km. to 104 km. is in progress. In addition to this the earth work of Narshipura, Vallabhipur and Maliya sub branch in first 30 kms. reach is completed. The work of structures on Saurashtra Branch canal upto 70 km. earthwork of Maliya and Vallabhipur branches in remaining reaches and work of structures across entire reach had been commenced since October, '97. Upto March-2001; total 487.64 LCM (95.25%) earthwork, 9.92 LCM (93.94%) concrete work of structures of SBC and sub-branches have been completed. It is planned to take up ....
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....t was submitted that the revenue's stand that only on completion of canal upto the desired destination there would be setting up/commencement of business is erroneous. The fact that the assessee completed construction of the canals from one point to another point itself is sufficient to hold that the business of the assessee has commenced. This submission was without prejudice to the contention that one of the object of the Assessee being to supply water through canals, was achieved during the previous year. In this regard, he also drew our attention to the Annual Report wherein the progress of construction has been duly highlighted. He also drew our attention to the fact that the revenue expenses pending capitalisation as per the books as on 31.03.2000 was Rs. 2390.71 crores, whereas the same as on 31.03.2001 was Rs.3281.35 crores. These items of expenses are revenue expenses which in the event of the Tribunal coming to the conclusion that the business of the assessee has commenced, have to be allowed as deduction while computing income from business. He pointed out that the expenses incurred during the previous year which were revenue in nature if held to be allowable as deductio....
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....ness is set up. It is because of the above provision, the revenue is taking a stand that the business of the Assessee has not been set up and therefore there can be no computation of income under the head "Income from Business". As we have already seen there are no receipts of business during the previous year. If the business is held to be set up during the previous year, then there has to be computation of income under the head "Income from Business". If such computation is done then all revenue expenses have to be allowed as deduction. Since there are no receipts of business the expenses so allowed will result in loss under the head "Income from Business". Such loss will be available for set off against income under any other head of income u/s. 71 of the Act. 47. Another aspect which is required to be kept in mind is that there is a clear distinction between a person commencing a business and a person setting up a business and for the purposes of the Indian Income-tax Act. In Western India Vegetable Products v. CIT 26 ITR 151 (Bom.), the Hon'ble Bombay High Court held that the setting up of the business and not the commencement of the business that is to be considered. The f....
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....rval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions under Section 10(2)." 48. The above decision came up for consideration before the Hon'ble Supreme Court in the case of CWT v. Ramaraju Surgical Cotton Mills Ltd. 63 ITR 478 (SC). The facts of the case were that the board of directors of the company, which was formed in 1939, for the purpose of carrying on the business of manufacturing absorbent cotton wool, resolved in March, 1955, to establish a new spinning unit, for which the industrial licence was obtained in August, 1955. The respondent-company placed orders for the necessary spinning machinery and plant in January and February, 1956. Construction of buildings was begun in March, 1956, and completed by December, 1957. Installation of the machinery and plant was completed by stages commencing from June, 1957. A licence from the Inspector of Factories for working the factory unit was obtained in June, 1958. Time to complete the project was extended by the Government up to March, ....
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....he Inspector of Factories issued a licence to the respondent for working the factory, which was in June, 1958. In the statement of the case, the facts recited show that the construction of the factory buildings was completed by December, 1957, and the erection of the spinning machinery and plant was completed in several stages commencing from June, 1957. On these facts, the High Court, and we consider rightly, proceeded on the basis that the unit was completed and became ready to go into business only after 1st April, 1957, when the Act had already come into force. Consequently, the condition laid down in the principal clause of section 5(1)(xxi) was satisfied, and the company became entitled to exemption in respect of the value of the assets used up in setting up this unit. 49. It can thus be seen that the decision in the case of Western India Vegetable Products (supra) was referred to by the Hon'ble Supreme Court in the case of Ramaraju Surgical Cotton Mills Ltd. (supra) but the conclusion of the Hon'ble Supreme Court rested on the interpretation of the provision of Sec. 5(1)(xxi) of the Wealth Tax Act, 1957 and the second proviso to the said provision. 50. In the case of C....
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....tting up of a business and not the commencement of a business. It is only when a business is established and is ready to commence business that it can be said of that business that it is set up. Before it is ready to commence business, it is not set up. This view taken by the Bombay High Court was approved by the Supreme Court in CWT v. Ramaraju Surgical Cotton Mills Ltd." The Hon'ble Gujarat High Court thereafter held that the observations of the Hon'ble Supreme Court lay down the test which must be applied for the purpose of determining when a business can be said to be set up. 51. In CIT v. Saurashtra Cement & Chemical Industries Ltd. 91 ITR 170 (Guj), the facts were that a company was formed in 1956 for the manufacture and sale of cement. As part of its business the assessee obtained a mining lease for quarrying limestone and started the mining operations in 1958. It claimed the expenditure incurred for the purpose of extracting limestone as also depreciation and development rebate for the machinery installed for that purpose for the assessment years 1960-61 and 1961-62: It was held by the Hon'ble Gujarat High Court that the activities which constituted the business of th....
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.... for the purpose of acquiring raw material to be utilised in manufacture of cement. The second category comprised the activity of manufacture of cement by user of the plant and machinery set up for the purpose; and the third category consisted of the activity of selling manufactured cement. These three activities combined together constituted the business of the assessee. Each one of these activities was as much essential for the purpose of carrying on the business of the assessee as the others. If the assessee ceased to carry on any one of these activities, the business would come to an end. Each one of these activities constituted an integral part of the business of the assessee. Why then can it not be said that the assessee commenced its business when it started the first of these activities? The activity of quarrying the leased area of land and extracting limestone from it was as much an activity in the course of carrying on the business as the other two activities of manufacture of cement and sale of manufactured cement. The business could not in fact be carried on without this activity. This activity came first in point of time and laid the foundation for the second activity ....
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.... which was incurred by it between October 1, 1964, and March 31, 1965, was a business expenditure for the assessment year 1965-66. That expenditure consisted mainly of salaries to gardeners, servants and others, aggregating to Rs. 7,504.49 and Rs. 24,326.16 for building repairs and Rs. 13,074.92 for electric rewiring. Legal and stationery charges, registration, printing, stationery and conveyance charges amounted to Rs. 1,489. The Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal all held that the company could not be said to have been ready to commence business prior to May 1, 1965, the day on which it gave on leave and licence part of the said building, and certainly not by October 1, 1964, and disallowed the deduction claimed. On a reference, the Hon'ble High Court held that that the business activities of the company could be said to fall into three broad categories. The first business activity was to acquire, either by purchase or by any other manner, immovable property, so that the property could be ultimately given out either on leave and licence basis or on lease to others together with the appurtenant services. The second category of the b....
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.... start functioning as a business or a manufacturing organization. It must be pointed out, as is clear from Sarabhai Sons Pvt. Ltd. (supra), that the main question before the Division Bench was whether on the finding of the Tribunal that the business of the assessee had been set up in the previous year was unreasonable or contrary to evidence or based on no evidence at all. Therefore, the main question which was considered by the Division Bench in that case was the question of appreciation of evidence on record and to find out whether there was evidence to support the conclusion that the business of the assessee had been set up in the previous year or whether the finding of the Tribunal that it had been set up in the previous year was unreasonable or contrary to evidence. The decision in Sarabhai Sons Pvt. Ltd.'s case (supra) has been explained by the same Division Bench in Commissioner of Income-tax v. Saurashtra Cement & Chemical Industries Ltd. [1973] 91 ITR 170, 178, 179 (Guj.) in these terms : "That decision raised the question as to when a certain business carried on by the assessee could be said to have been set up : whether it was set up prior to 31st March, 1966, or subs....
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.... The test to be applied is as to when a businessman would regard a business as being commenced and the approach must be from a commonsense point of view." 54. Thus it can be said that the principles laid down in the cases of Commissioner of Income-tax v. Saurashtra Cement and Chemical Industries [1973] 91 ITR 170 (Guj.), Sarabhai Management Corporation Ltd. v. Commissioner of Income-tax [1976] 102 ITR 25 (Guj.) and Prem Conductors Pvt. Ltd. 108 ITR 654 (Guj.), would hold the field and has to be regarded as the view of the jurisdictional High Court. We will now proceed to examine the facts of the Assessee's case for AY 00-01 keeping in mind those principles laid down by the Hon'ble High Court. 55. The Revenue authorities have proceeded on the basis of facts as contained in the Directors report to the shareholders of the Assessee in 13th Annual Report for the year 2000-01. The said report has been accepted as disclosing the real state of affairs both by the Assessee and the Revenue. We shall therefore proceed to decide the issue on the basis of the said report. 56. As we have already seen in the earlier part of this order, the Assessee was formed for the purpose of construct....
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....Since the business of the Assessee has not commenced, the assessment is being completed as per the decision of the Supreme Court in Tuticorin Alkalies Chemicals & Fertilizers Ltd. 227 ITR 171." The order of the CIT(A) also proceed on the same lines. He followed the order of his predecessors in the earlier year. He has also observed as follows in his order: "The claim of the appellant that mere flow of water through Narmada Canal amounted to commencement of business hardly has any merit. The reference made by the ld. counsel for the appellant to the observations of the Assessing Officer in earlier years in this regard is not of much relevance. This is evident from the elaborate findings on the issue in this regard in the appellate order for the assessment year 1990-91, which have been reproduced in para-3.2 above. Mentioning of flow of water from Narmada Canal cannot be viewed in isolated manner to conclude that business of the appellant had started. The whole activity of the appellant has to be seen in totality and the composite observations in the appellate order for assessment year 1990-91. It is an admitted position that the appellant did not release any water on commercia....
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.... 2001. The earthwork of Saurashtra Branch Canal (SBC) in reach 0 to 46 km. was completed as on the last date of the previous year. 59. With the above stage of completion of the main canal and branch canals, the Assessee could manage to supply water from Narmada river. The Directors report in this regard reads thus: "Gujarat has faced three consecutive scarcities in last three years. In wake of the acute water crisis that prevailed in many regions of the state during the last summer, an emergency water supply from Narmada river was executed. Sardar Sarovar Project, for this emergency supply, put to use its facilities created so far and started the deliverance of water through its partial completed Narmada Main canal. The water from the SSP reservoir was pumped out through installation of 90 water pumps and maintained continuous flow of on an average more than 1000 cusecs through the Narmada Canal upto ch. 149 km. Thereafter, the Gujarat Water Supply and Sewerage Board (GWSSB) arranged further delivery of water to remote interior areas - specifically Saurashtra. This supply arrangement started on 21st February, 2001 and lasted upto 8th June, 2001. In all 421 villages and 29 ....
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....early analyse the nature of the business activity of the assessee for the purpose of arriving at a conclusion as to when business of an Assessee can be set be set up. 62. The Objects clause of Memorandum of Association of the Assessee contain the following clauses: (a) Object Clause 3(A)(1): "To undertake execution of the Sardar Sarovar Project comprising a dam across the river Narmada in the Nadod Taluka of Bharuch district in the State of Gujarat, a canal system emanating from the reservoir called the Sardar Sarovar impounded by the construction of the said dam; power houses at the foot of the said dam and at the canal head and all other works incidental or ancillary to the said project in accordance with the direction of the Government of Gujarat." (b) Object Clause 3(A)(9): "To promote schemes to facilitate navigation in the Narmada river" (c) Object Clause 3(A)(10): "To promote Schemes for irrigation and water supply in the State for utilization of water from the Sardar Sarovar." (d) Object Clause 3(A)(21): "To alter, manage, develop, exchange, lease, mortgage, underlet, sell, give as gifts or otherwise dispose of, improve or ....
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....r that the last stage must start before it can be said that the business was set up. The test to be applied is as to when a businessman would regard a business as being commenced and the approach must be from a commonsense point of view 65. As we have already seen one of the main object of the Assessee as per Clause 3(A)(10) of the Memorandum of Association is to "To promote Schemes for irrigation and water supply in the State for utilization of water from the Sardar Sarovar". We are of the view that in the light of the facts prevailing in Assessee's case, it can be said that the Assessee by supplying water through its main canal had in fact achieved the purpose for which it was established. One of the purpose for which the Assessee was set up was to supply water through canals. The canal was complete in respect of part of the stretch and that enabled supply of water through such canal to certain destinations. The fact that the entire stretch of canal up to the desired destination was not completed would not be sufficient to hold that the Assessee's business was not set up. 66. The flow of revenue from supply of water is not relevant as has been laid down by the Hon'ble Supre....