Principal Commissioner Of Income-Tax-7 v. M/S Graviss Foods Pvt. Ltd

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.295 OF 2017 Principal Commissioner of Income-Tax-7 .... Appellant versus M/s Graviss Foods Pvt. Ltd.... Respondent….... Mr.Suresh Kumar, Advocate for Appellant.Mr.Suresh Kumar, Advocate for Appellant. Mr.Jitendra Jain a/w Mr. Jas Sanghavi a/w Ms.Divyasha Mathur i/b. PDS Legal, Advocate for Respondent.Mr.Jitendra Jain a/w Mr. Jas Sanghavi a/w Ms.Divyasha Mathur i/b. PDS Legal, Advocate for Respondent. CORAM : AKIL KURESHI &SARANG V. KOTWAL, JJ.DATE: 05[th] APRIL, 2019. P.C. : 1. This Appeal is filed by the revenue to challenge the judgment of Income Tax Appellate Tribunal. Following questionis presented for our consideration; “Whether on the facts and circumstance of the case andin law the Hon'ble Tribunal is correct in deleting thedisallowance of Rs.1,87,16,047/- incurred by theassessee as preoperative expensive for “Mawa Project” a 2 / 9 14-ITXA-295-17.odtnew project unconnected with the existing businesswhich was capital in nature and not deductable u/s37(1) of the Act? 2. Brief facts are as under; The Respondent-Assessee is a private limited companyand is engaged in the business of manufacturing Ice-cream andother milk products. For the assessment year 2010-2011 theassessee had filed return of income which was taken in scrutinyby the Assessing Officer. He noticed that the assessee hadincurred expenditure of 1.80 crores (rounded of) in process ofsetting up a factory for production of Mawa, which project theassessee was forced to abandon. The Assessing Officer was ofthe opinion that the expenditure was incurred for setting up of anew industry. The expenditure was a preoperative expenditureand could not have been claimed as revenue expenditure. Thisissue eventually reached the tribunal. The tribunal by theimpugned judgment relied upon its earlier decision in case ofassessee for the earlier assessment year and confirmed the viewof CIT (Appeals) and dismissed the revenue's Appeal. Tribunal 3 / 9 14-ITXA-295-17.odtwas of the opinion that there was interlacing of the accounts,management and control. The new product to be manufacturedby the assessee, was in the same line of the business, in whichthe assessee was already engaged. The tribunal therefore heldthat the expenditure was incurred for expansion of the existingbusiness and therefore allowable as a revenue expenditure. 3. Learned Counsel for the Revenue submitted that theassessee was previously engaged in the business ofmanufacturing ice-cream. Assessee desired to set up a new plantat a distant place for production of Mawa. This was thereforeclear case of setting up of a new industry. The Tribunal hascommitted error in holding that the assessee had merelyattempted to expand the existing industry. 4. Learned Counsel for the assessee opposed the appealcontending that the tribunal has correctly applied the legalparameters. In the present case, there was commonality of 4 / 9 14-ITXA-295-17.odtaccounts, management and control. The assessee was engagedin manufacturing of the ice-cream. The company had object ofproduction of milk and milk products and ice-cream. Merelybecause the new unit was being set up at a place distant fromthe existing unit, would be of no consequence. Counsel relied oncertain decisions, reference to which, would be made later. 5. The facts on record as culled out by the tribunal arethat the assessee-company was set up with the objects toproduce or caused to be produced by process, grate, pack, storeand sell milk products and ice-cream. In furtherance of suchobjects, the assessee had already set up an ice-cream producingunit. Using same management, control and accounts, theassessee attempted to set up another unit for production ofMawa, which is also a milk product. Under such circumstances,tribunal correctly came to the conclusion that this is a case ofexpansion of existing business and not a case of setting up ofnew industry. 5. The facts on record as culled out by the tribunal arethat the assessee-company was set up with the objects toproduce or caused to be produced by process, grate, pack, storeand sell milk products and ice-cream. In furtherance of suchobjects, the assessee had already set up an ice-cream producingunit. Using same management, control and accounts, theassessee attempted to set up another unit for production ofMawa, which is also a milk product. Under such circumstances,tribunal correctly came to the conclusion that this is a case ofexpansion of existing business and not a case of setting up ofnew industry. 5 / 9 14-ITXA-295-17.odt 6. The Division Bench of this Court in case ofCommissioner of Income Tax Vs. Tata Chemicals Ltd.reported in (2002) 256 ITR 395, in somewhat similarbackground had held and observed as under; 9.As far as question (b) read with question (h) isconcerned, Mr. Desai took us through the orderpassed by the Assessing Officer as well as by theCommissioner of Income Tax (Appeals), Mumbai, andpointed out that both these authorities have come tothe conclusion that this fertilizer unit will have to betreated as a separate unit and, therefore, the benefitUnder section 36(l)(iii) cannot be extended to therespondent as far as any amount of interest paid inrespect of capital borrowed for the business of thefertilizer unit is concerned. Now, when one sees theorder of the Assessing Officer, he has given emphasison the solitary fact that the two plants, one atMithapur, and other at Babrala, are situated at twofar off places and that the operation of both theseplants is neither interdependent for technology nor forinputs. He has observed that the closure of plant atMithapur would not in any manner adversely affectthe operation of the fertilizer plant at Babrala. concerned, Mr. Desai took us through the orderpassed by the Assessing Officer as well as by theCommissioner of Income Tax (Appeals), Mumbai, andpointed out that both these authorities have come tothe conclusion that this fertilizer unit will have to betreated as a separate unit and, therefore, the benefitUnder section 36(l)(iii) cannot be extended to therespondent as far as any amount of interest paid inrespect of capital borrowed for the business of thefertilizer unit is concerned. Now, when one sees theorder of the Assessing Officer, he has given emphasison the solitary fact that the two plants, one atMithapur, and other at Babrala, are situated at twofar off places and that the operation of both theseplants is neither interdependent for technology nor forinputs. He has observed that the closure of plant atMithapur would not in any manner adversely affectthe operation of the fertilizer plant at Babrala. 6 / 9 14-ITXA-295-17.odt 10. This order of the Assessing Officer has beenmechanically confirmed by the Commissioner ofIncome Tax (Appeals), Mumbai. As against this, theAppellate Tribunal has culled out the propositions oflaw based on various judgments of the apex court aswell as of various High Courts in para. 28 of itsorder. It has summarised propositions anddetermined the tests on the question of unity ofbusiness. They are as follows :mechanically confirmed by the Commissioner ofIncome Tax (Appeals), Mumbai. As against this, theAppellate Tribunal has culled out the propositions oflaw based on various judgments of the apex court aswell as of various High Courts in para. 28 of itsorder. It has summarised propositions anddetermined the tests on the question of unity ofbusiness. They are as follows : (i) The nature of the two lines of business is not relevant. (i) The nature of the two lines of business is not relevant. (ii) The fact that one business can be convenientlyclosed down without affecting the other businessis a strong indication that both the businessesare distinct and separate. But no decisiveinference can be drawn from the fact.closed down without affecting the other businessis a strong indication that both the businessesare distinct and separate. But no decisiveinference can be drawn from the fact. (iii) The decisive test is the unity of control which isindicated by interlacing, interdependence andinterconnection between the businesses and thedovetailing of one into the other. Suchinterlacing, interdependence or inter- connectioncan be shown to exist by reason of a commonmanagement, common administration, commonfund and a common place of business.indicated by interlacing, interdependence andinterconnection between the businesses and thedovetailing of one into the other. Suchinterlacing, interdependence or inter- connectioncan be shown to exist by reason of a commonmanagement, common administration, commonfund and a common place of business. The above propositions are culled out from thefollowing judgments of the apex court: (1) Setabganj Sugar Mills Ltd. v. CIT[1961]41ITR272(SC);CIT[1961]41ITR272(SC);(2) CIT v. Prithvi Insurance Co. Ltd. [1967]63ITR632(SC);[1967]63ITR632(SC); (3) Produce Exchange Corporation Ltd. v. CIT [1970]77ITR739(SC);[1970]77ITR739(SC); (4) Standard Refinery and Distillery Ltd. v. CIT [1971]79ITR589(SC);[1971]79ITR589(SC); (5) Hooghly Trust (Pvt.) Ltd. v. CIT [1969] 73ITR685(SC); and73ITR685(SC); and (6) B. R. Ltd. v. V. P. Gupta, CIT [1978]113ITR647(SC). The learned counsel appearing for the parties took usthrough the text of the various judgments referred tohereinabove and we are in complete agreement with theTribunal that the above determined tests would be thecorrect approach to the questions with which we areconcerned. The Tribunal while reaching to the conclusionhas considered various factors such as administration ofvarious units, flow of funds, unity of management, unity ofthe accounting set up as well as control coupled with 8 / 9 14-ITXA-295-17.odt various such relevant factors. The Tribunal also found theadministration and management of funds of two units iscommon. The Tribunal has also recorded findings of factthat there was a functional integrity between the two units.It is in these circumstances that the deduction under theparticular section was held allowable. 8 / 9 14-ITXA-295-17.odt various such relevant factors. The Tribunal also found theadministration and management of funds of two units iscommon. The Tribunal has also recorded findings of factthat there was a functional integrity between the two units.It is in these circumstances that the deduction under theparticular section was held allowable. 11. The Tribunal has come to the conclusion that thedecisive test is the unity of control which is indicatedby interlacing, interdependence and interconnectionbetween the businesses and dovetailing of one intothe other. In the present case, it is quite clear that theamalgamation of the subsidiary was allowed by theHigh Court. Thereafter it is for the management ofthe company to manage its affairs and the benefitwhich would be available for the borrowings done fora unit would certainly be claimable by the companyas such. Section 36(1)(iii) which permits the amountof interest paid in respect of capital borrowed for thepurposes of the business will have to include theborrowing for a unit of the company which is whatthe fertilizer unit at Babrala is. Considering the factthat the finding is based on appreciation of evidencebrought on record, we do not find that this questioncan be said to be a question of law warrantingdecisive test is the unity of control which is indicatedby interlacing, interdependence and interconnectionbetween the businesses and dovetailing of one intothe other. In the present case, it is quite clear that theamalgamation of the subsidiary was allowed by theHigh Court. Thereafter it is for the management ofthe company to manage its affairs and the benefitwhich would be available for the borrowings done fora unit would certainly be claimable by the companyas such. Section 36(1)(iii) which permits the amountof interest paid in respect of capital borrowed for thepurposes of the business will have to include theborrowing for a unit of the company which is whatthe fertilizer unit at Babrala is. Considering the factthat the finding is based on appreciation of evidencebrought on record, we do not find that this questioncan be said to be a question of law warranting 9 / 9 14-ITXA-295-17.odtadjudication by this court. In view of what isobserved hereinabove, the questions of law raised inat (b) and (h) do not arise for our consideration.” 7. The Supreme Court in case of Alembic Chemical Works Co. Ltd. Vs. Commissioner of Income-Tax, Gujarat,reported in [1989] 177 ITR 377, was considering a case where the assessee was engaged in the business of manufacturingantibiotic including the Penicillin. The assessee acquired know-how to produce higher yield and sub-culture of high-yieldingstrain of penicillin. Observing that there was no evidence toindicate that this was not in the line of existing manufacture ofPenicillin, the Court held that the expenditure was revenue innature. 8. In view of the above discussion, no question of lawarises. Income Tax Appeal is dismissed. (SARANG V. KOTWAL, J.) (AKIL KURESHI, J.)