TaxTMI 
TaxTMI 
1985 (10) TMI 111
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....AL EMPLOYED Rs. (A) Factory Building 10,39,285 (B) Plant and machinery 23,78,064 ----------- 34,17,349 Less : Loans from UPFC and PICUP 15,76,000 ....
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....ed by both moulding plants. 4. Store room. 5. Workshop and room tools. 6. Generating sets. 7. Factory office." The ITO, thus, held that this was a clear case of splitting of the old undertaking. According to him the common use by the two projects of the land, building, slitting machine, galvanised plant, threading machine, store room, workshop, generating set and factory office, as revealed from the inspection, falsified the assessee's contention that there was no splitting up of the old business. According to him, the decision of the Supreme Court in the case of Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 195 relied on, on behalf of the assessee was distinguishable from that of the assessee. 4. The ITO further observed that the claim was also not admissible in the year under appeal on account of the fact that the borrowed money and debts owed by the assessee 'and not merely by the new undertaking' far exceeded the value of the assets of the undertaking. It was submitted before him that only the loan taken from U.P. Financial Corporation utilised in the acquisition of the new assets was to be deducted as a borrowing. This was not accepted by the ITO in vie....
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....ery amounted to Rs. 10,39,285 and Rs. 23,78,000. He contended that these facts clearly went to support his above contentions. In this connection, he also referred to the following authorities : Textile Machinery Corpn. Ltd.'s case, CIT v. Indian Aluminium Co. Ltd. [1977] 108 ITR 367 (SC) and CIT v. Rohtas Industries Ltd. [1979] 120 ITR 110 (Cal.). The counsel further submitted that it was not correct to deduct the borrowings of the entire undertaking while computing the capital employed only in the new industrial undertaking. His further submission was that merely because a separate profit and loss account and a separate balance sheet had not been prepared for the new undertaking, it was no ground to deny the relief and that the profit of the undertaking could be worked out separately with reference to the data available on record or made available by the assessee. He, of course, kept silence, on the issue whether the capital employed on the last day of the accounting year or on the first day of the accounting year was to be considered for working out the relief. 7. The learned departmental representative, on the other hand, supported the findings of the lower authorities.....
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....g can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is preserved. This has not happened here in the case of the two undertakings which are separate and distinct. Section 15C partially exempts from tax a new industrial unit which is separate physically from the old one, the capital of which and the profits thereon are ascertainable. There is no difficulty to hold that section 15C is applicable to an absolutely new undertaking for the first time started by an assessee. The cases which give rise to controversy are those where the old business is being carried on by the assessee and a new activity is launched by him by establishing new plants and machinery by investing substantial funds. The new activity may produce the same commodities of the old business or it may produce some other distinct marketable products, even commodities which may feed the old business. These products may be consumed by the assessee in his old business or may be sold, in the open ....
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....72] 85 ITR 401 (Ker.) cannot be called an authority after the decision of the Supreme Court in the case of Textile Machinery Co. Ltd. This case was relied on by the learned departmental representative in support of the department's stand. 9. For the reasons given above, we hold that the assessee is entitled to reliefs under sections 80J and 80HH. We direct the ITO to compute the profits attributable to the new project. For this purpose, the assessee is directed to render assistance to the ITO by producing the relevant data and the books of account. 10. Before closing the above matter, we have to decide two other issues. We do not agree with the stand of the department that the entire borrowings and debts owed by the undertaking as a whole have to be deducted in computing the capital employed in the undertaking. The relief has to be allowed on 'capital employed in the industrial undertaking'. It does not show that the ITO is required to compute the capital employed in all the activities carried on by the assessee. What he has to do is only to find out the capital employed in that industrial undertaking whose profits are subject to relief under section 80J. The ITO is, therefor....
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....ppeals), the issue was covered against the assessee by a decision of this Bench of the Tribunal in the case of ITO v. Metal Decorators (P.) Ltd. [1983] 4 ITD 595. For both the above reasons, namely, that the issue has already been decided against the assessee in the above case and further that the matter was not pressed before the Commissioner (Appeals), we reject this contention. 13. The next contention in the above appeal relates to disallowance of Rs. 4,750. The assessee had incurred an expenditure of Rs. 4,750 on the registration fee for increase in its share capital. It was claimed as deduction in the computation of its income. The ITO held that it was in the nature of capital expenditure in view of the decisions of the Himachal Pradesh and the Calcutta High Courts in the cases of Mohan Meakin Breweries Ltd. v. CIT [1979] 117 ITR 505 and Hindustan Gas & Industries Ltd. v. CIT [1979] 117 ITR 549, and, therefore, it could not be allowed as deduction in computing the assessee's income. The Commissioner (Appeals) confirmed the finding of the ITO in view of a decision of the Allahabad High Court in the case of Upper Doab Sugar Mills Ltd. v. CIT [1979] 116 ITR 928. 14. The fin....
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....expenses while the balance, though of entertainment nature, related both to the employees and the customers. His contention, therefore, was that the assessee was entitled to the deduction of the entire amount of Rs. 10,617.98 and a part of the balance of the expenses. Keeping in view the principle laid down by the Allahabad High Court in the case of Brij Raman Dass & Sons v. CIT [1976] 104 ITR 541, the learned departmental representative supported the orders of the lower authorities. 17. In view of the above decision of the Allahabad High Court, it cannot be disputed that under the Act 'the entertainment expenditure' would include all expenditure incurred in connection with the business on the entertainment of customers and constituents. The entertainment may consist of providing refreshment or it may consist of providing some other form of entertainment. However, in another case, the Court has also held that the expenditure relating to the staff cannot be treated as entertainment expenditure. The ITO in the light of these principles should re-examine the expenses, the details of which, as stated above, are given at pages 100 to 104 of the paper book submitted before us. The ass....
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.... of the assessee was exempt from excise duty and, therefore, there was no prescribed register for showing the stock of raw material, goods in process, by-product and finished goods. Obviously, there was also no check by the Excise Department over the working of the assessee's factory or its final product. The assessee was found to have maintained only one single stock register, which was a common register and that too without page-numbering. The ITO also found that on different pages of this register, the stock of steel sheets and zinc (raw materials) and black steel tubes and galvanised steel tubes (finished tubes) had been entered in terms of weight. The stock register was not signed by any authorities. 23. The ITO required the assessee to explain the difference between the stock shown in the statements to the bank and the stock shown in its stock register and why the peak of the difference be not treated as unaccounted and its value be added as the income of the assessee. It was submitted before him that the assessee had submitted statements to the bank prepared on the basis of the estimate of stock, which might be more or less in view of the drawing power position. It was al....
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....ap in the form of dross, ash and blowing of zinc worked out to 50.50 per cent in the month of August 1980, whereas the percentage was only 29.97 per cent in the month of February 1981. The percentage of wastage in other months ranged between these two figures. There was no day-to-day record of that wastage, which was sold as zinc dross, ash and blowing. It was submitted before the ITO that the entire sale of dross, ash and blowing was effected to local parties and the delivery was claimed to be ex-factory, i.e., without involving any reference to the means of transport in the sale invoices. The ITO observed that the zinc was a costly item, which can be purchased only by big manufacturers from Hindustan Zinc Ltd. and MMTC and that petty manufacturers, which also used it had to depend upon these big manufacturers. The ITO finally observed that the vast valuation in the percentage of wastage in different months, absence of day-to-day quantitative record of production and sale of zinc scrap and the entire sale of zinc scrap ex-factory coupled with the excess quantity of zinc shown in each of the bank stock statements proved beyond doubt that the assessee had cleared a part of zinc in t....
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....verse inference against the assessee and held that the amount of Rs. 6,14,720 was the income of the assessee liable to be included in its assessment. He also took support from the following authorities : CIT v. Ashok Textiles (P.) Ltd. [1983] 141 ITR 785 (Ker.), Coimbatore Spg. & Wvg. Co. Ltd. v. CIT [1974] 95 ITR 375 (Mad.) and V. Rajan v. CIT [1974] 96 ITR 64 (Mad.). 26. The ITO found similar discrepancies in respect of stock of black and galvanised steel tubes. He found that the stocks shown in the statement to the banks were in excess of the stocks reflected in its own stock register. Here also the explanation was the same that the statement was prepared on estimate basis and that on some of the dates there was even excess stock in the stock register while the stock shown in the statement to the bank was at a lesser figure. The ITO rejected the assessee's explanation here also. His strong point was that the stock register was not certified by any authority while the statement to the bank was signed and authenticated by a director of the assessee and, therefore, the latter had to be believed. He also found another discrepancy. While the invoices showed the sale by measurem....
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....by the ISI officials and consumption and production of tubes had been reported every month to the Ministry of Steel and Mines and that the weight of the tubes could easily be tallied with metre, length and diameter from the conversion table kept by the assessee. It was submitted that no such verification was made by the ITO nor any discrepancy in the purchases and sales was detected. As regards wastage it was submitted that the normal wastage in the form of zinc dross, ash and blowing varied between 30 per cent to 50 per cent, which was proved by a technical publication produced before the ITO and, in any case, the wastage was reported regularly to the Indian Bureau of Mines, Nagpur under the Essential Commodities Act, which was well within the permissible limits. It was also submitted that if, in the opinion of the ITO, the stock register did not reflect the correct position then there was no justification on his part to use the same register as a basis for comparison with the figures shown in the statements submitted to the bank. It was also submitted that since the borrowing limits were on low side, there was no reason for the assessee to inflate its stock in the statements unle....
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.... the directors, who had signed the statements to show that they were on estimate and were filed in a casual manner. He contended that the assessee's books of account suffered from several defects as pointed out by the ITO and, therefore, the position of its stock as reflected in the statements to the bank, represented the correct position and they had rightly been relied upon by the ITO for making different additions. He also observed that the assessee had not summoned the bank officer to show that there was any collusion between the bank officials and its directors in filing wrong statements with the bank. In this connection, he strongly relied on the principle laid down by the Madras High Court in the case of Coimbatore Spg. & Wvg. Mills Co. Ltd. It was held in this case that the alleged practice said to be followed by business organisations of declaring larger stocks to the banks for the purpose of getting higher loans or overdraft facilities had neither been shown to exist nor recognised in commercial circles or by the Courts and even assuming that such a practice existed, the Tribunal was not expected to take judicial notice of such substandard morality on the part of the asse....
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....sed on the stock register showing no discrepancy. He also, in this connection, relied on the decision of Allahabad High Court in the case of Swadeshi Cotton Mill Co. Ltd. v. CIT [1980] 125 ITR 33. In this case, the ITO had found that the goods pledged with the bank were in excess of the goods as per stock and rejected the book result and by applying a gross profit rate, made an addition of Rs. 15 lakhs. The explanation given by the assessee was that its chief executive officer had inflated the value and quantity of the stocks with a view to obtain a larger overdraft from the bank. That explanation was accepted by the Tribunal for one of the years, but the Tribunal had observed that the assessee had failed to furnish any particulars to justify the action of the chief executive officer in regard to the entire discrepancy and, hence, on the basis of estimate, a part of the addition was maintained. In the second year, the Tribunal relying on the earlier finding upheld the addition. It was held that the finding recorded by the Tribunal that the proviso to section 13 of the Indian Income-tax Act, 1922 corresponding to section 145 of the 1961 Act was applicable, had been arrived at after ....
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....f the Allahabad High Court in Swadeshi Cotton Mill Co. Ltd.'s case by pointing out that that case was of a pledge while the case of the assessee was of hypothecation. In the case of hypothecation, the goods remained in the custody of the assessee while in the case of pledge the goods were kept under the lock and key of the bank. He contended that in the case of a hypothecation, nothing mattered if the statements showed excess stock as the bank did not exercise any check over the actual stocks held by the assessee through any verification as it did not have the lock and key of the godown in its possession. He also submitted that special leave petition had been admitted by the Supreme Court against the decision of the Allahabad High Court---. In passing he also submitted that goods had also been received on credit by the assessee which too had been certified as the assessee's own goods. 33. The learned counsel for the assessee, on his part, referred to another decision of the Madras High Court in CIT v. Ramakrishna Mills (Coimbatore) Ltd. [1974] 93 ITR 49. In this case also there was variation between the stock declarations given to the bank and entries in the stock book maintaine....
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....s, we are clearly of the opinion that the Commissioner (Appeals) has gone wrong in following the decision of the Tribunal without examining further facts as exhaustively pointed out by the ITO in his order and as summarised by us above as best as we can. We will, in this connection, again refer to the decision of the Allahabad High Court in the case of Swadeshi Cotton Mill Co. Ltd. The finding of the Tribunal that the proviso to section 13 was applicable, was upheld by the High Court on the ground that it had been arrived at after a consideration of all the facts of the case. It has, therefore, to be seen by the fact-finding authorities whether the provisions of section 145 of the Act are applicable to the present case. The finding of the ITO was that they were applicable. He tried to prove that the stock register of the assessee was not maintained in the desired manner, that it had not maintained any day-to-day record of its consumption and production, that it had submitted to keep any record of stock in process (sic). If these facts are taken into account and if additional fact that the assessee had been declaring excess stock to the bank is also considered, then the only conclus....