TaxTMI 
TaxTMI 
2026 (10) TMI 515
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....the sustenance of the disallowance of expenditure of Rs. 10,70,08,883/- relating to the Bio-Pharma Division. 4. Brief facts of the case are that the assessee-company is engaged in three principal business activities, namely, Agriculture, Pharmaceuticals and Bio-Pharma. The assessment proceedings in the present case arose pursuant to proceedings u/s. 263 of the Income Tax Act, 1961 ("the Act"). Consequent to the revisionary proceedings, the Assessing Officer (AO) passed an order u/s. 143(3) read with section 263 of the Act and disallowed expenditure claimed by the assessee in relation to its Bio-Pharma Division amounting to Rs. 10,70,08,883/-, treating the expenditure as relating to a division which had not commenced commercial operations and, therefore, requiring capitalization. The Assessing Officer proceeded on the premise that the Bio-Pharma Division had not commenced commercial activity during the relevant period. According to the Assessing Officer, since the division had not commenced commercial production, expenditure incurred in relation thereto represented expenditure connected with setting up a new division/project and was consequently required to be capitalized rather ....
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.... information were available in the public domain. The ld. AR further submitted that the Ld. CIT(A) failed to properly appreciate that the alleged SARFAESI proceedings relied upon by the Revenue occurred subsequently. According to the assessee, the properties were taken over by Punjab National Bank only on 30.12.2015 and the Bio-Pharma Division was auctioned on 03.03.2017. Therefore, those subsequent events could not establish that the Bio-Pharma unit had not been set up or was incapable of carrying on business during the previous year relevant to Assessment Year 2013-14.The ld. AR further submitted that the assessee had furnished written submissions before the Ld. CIT(A) on 01.03.2021 and 20.01.2024, notwithstanding which the appellate order records that the hearing notices dated 17.02.2021 and 17.01.2024 had not been complied with. It was accordingly argued that the impugned order had been passed without proper consideration of the submissions and documentary evidence placed on record and, therefore, violated the principles of natural justice. 7.1 On merits, the ld. AR submitted that the very foundation of the disallowance was erroneous because the Bio-Pharma unit had been esta....
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.... and was furnished for the first time before the Tribunal. Accordingly, the Revenue submitted that there was no commercial activity in the Bio- Pharma Division during the relevant year and that the expenditure of Rs. 10,70,08,883/- was rightly treated as capital expenditure. 9. We have carefully considered the rival submissions and perused the material available on record. At the outset, we note that the assessee has withdrawn Ground No. 4 during the course of hearing. The same is, therefore, dismissed as withdrawn. The remaining controversy essentially centres around the allowability of expenditure of Rs. 10,70,08,883/- relating to the Bio-Pharma Division. The principal basis adopted by the Assessing Officer and thereafter by the Ld. CIT(A) is that the Bio-Pharma Division had not commenced commercial production during the relevant year.10. In our considered view, the approach adopted by the lower authorities does not properly appreciate the distinction between setting up of a business and commencement of business. The Hon'ble Bombay High Court in Western India Vegetable Products Ltd. v. CIT, 26 ITR 151 (Bom.), explained that "setting up" and "commencement" are distinct conc....
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....g setup under the name and style of BIOPIL was completed fully and the company has started its production..." The aforesaid statement is significant. It is not a subsequent self-serving explanation prepared for purposes of the present appeal. It forms part of the statutory corporate reporting for the relevant financial year itself. The Annual Report also records the proposed expansion of the second phase of the project involving additional capital expenditure. This contemporaneous disclosure supports the assessee's contention that the first phase of the Bio-Pharma project had reached the stage of production, whereas further expansion was being undertaken. The Revenue has not brought before us any cogent material demonstrating that the aforesaid statement contained in the Annual Report was false or had subsequently been withdrawn or corrected. 14. We also find merit in the assessee's contention concerning the timing of the SARFAESI proceedings. The Ld. CIT(A) relied upon the statement attributed to the assessee that the bank had seized the properties and that the company's operations were affected. However, the assessee has specifically submitted before us that the....
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....l borrowed for business purposes is specifically governed by section 36(1)(iii). In the case of interest relating to acquisition of an asset, the statutory proviso restricts deduction only for the period beginning with borrowing and ending with the date on which the asset is first put to use. Therefore, once the relevant assets have been put to use for business purposes, the statutory provisions cannot be displaced merely by characterising the entire expenditure of the division as "pre-operative". Likewise, expenditure on scientific research is specifically dealt with u/s. 35, subject to fulfilment of the conditions applicable to the particular claim. Section 35 itself recognises expenditure on scientific research related to the business as a distinct statutory category. 16. We make it clear that the present adjudication is confined to the disallowance made by the Assessing Officer on the broad premise that the entire expenditure relating to the Bio-Pharma Division was capital in nature merely because, according to the Revenue, commercial production had not commenced. 17. We also find another important aspect. The assessee has specifically stated that written submissions were....