1. The assessee is a manufacturer of metallic yarn and polyester films.
For the accounting period it had incurred total expenditure of Rs. 29,200 in connection with a project for manufacturing metallic yarn and polyester films at Kandla. The break up of these expenses is as follows :a. Engineering service fee 24,400b. Travelling expenses 3,100c. Industrial licence fee 500d. Loan application fee 1,200 ------- 2. The ITO found that no entry had been passed in the profit and loss account and at the time of hearing from the discussion it appeared to him that there was nothing like revenue expenses which could be allowed. The ITO did not accept the assessee's contention that the project was an extension of the existing business and ultimately rejected the claim of the assessee.
3. The Commissioner (Appeals) held that all the expenses were for establishing a new project and not for the existing business of the assessee. He, therefore, confirmed the order of the ITO.4. Before us, the learned counsel for the assessee has drawn our attention to the objects clause of memorandum of association of the company and a letter dated 17-3-1978 from the Government of India. So far as the former is concerned, it is nobody's case that the company was doing anything outside the scope of its objects clause. The letter of 17-3-1978 is addressed to the assessee-company and there is no doubt that it was asses-see-company which was given permission for setting up the project at Kandla Free Trade Zone for the manufacture of 'metallic yarn and polyester films' for the purpose of manufacture of capacitors.
5. On behalf of the assessee, the learned counsel has contended that the new project was merely an extension of the existing business of the company and that, therefore, all the aforesaid expenditure was allowable as revenue expenditure. He has relied on the decision of the Gujarat High Court in CIT v. Alembic Glass Industries Ltd.  103 ITR 715. In that case, the assessee-company was manufacturing glass at Baroda and incurred an expenditure for establishing new glass manufacturing unit at Bangalore. This unit did not go into production during the assessment year in question and the ITO disallowed the payment of interest for the two years on the borrowings. Ultimately, the High Court found that the business organisations, administration and fund of both the units of the assessee, namely, the unit at Baroda and the unit at Bangalore, were common. According to the High Court, there was complete inter-connection, inter-lacing and inter-dependence of both the units, which is the test laid down for determining whether two lines of business constitute the 'same business'. The High Court held that the new factory at Bangalore did not constitute a new business but was only an establishment of a new unit of the existing business of the assessee at Baroda. The High Court also held that the interest paid on the amount borrowed was revenue expenditure. In the present case, the project was to be carried on by the assessee-company itself and the manufacture was also of the same type of material. We have been informed that the common books of account were kept. In the case of Assam Bengal Cement Co, Ltd. v. CIT  27 ITR 34 the Supreme Court approved the decision of the Full Bench of the Lahore High Court by stating that "outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business". It also stated "In cases where the expenditure is made . . . for extension of a business . . . there is no doubt that it is capital expenditure. .
. .". (p. 45) 6. Applying the decision of the Gujarat High Court in Alembic Glass case (supra), we are of the view that the new project was merely an extension of the existing business. Even then the question remains whether the expenditure in connection therewith is of a capital nature or of a revenue nature 7. As had been indicated above, the Gujarat High Court was concerned with the interest payment on borrowings and its decision is confined to that aspect covered by the special provisions of Section 10(2)(iii) of the Indian Income-tax Act, 1922 ('the 1922 Act'). In this case, however, we are concerned with the expenditure other than those for interest payment and, therefore, it is a different aspect. Applying the aforesaid decision of the Supreme Court which is binding in the circumstances, we are of the view that the expenditure in question is of a capital nature and, therefore, cannot be allowed.
8. In the result, the Commissioner (Appeals)'s order is confirmed and the appeal is rejected.
1. I am in respectful disagreement. In paragraph 6 of his order, my learned brother has come to be of the view that the new project was merely an extension of the existing business. On facts and in the circumstances of the case, that was obviously the correct view that could be taken and I am in respectful agreement with my learned brother in respect of the same. But then, therefore, the ratio of the decision of the Gujarat High Court, viz., Alembic Glass' case (supra), would determine the issue. Question No. 2 as referred to the Gujarat High Court in that case reads as under : Whether, on the facts and in the circumstances of the case, the interest, miscellaneous expenses, and travelling expenses incurred by the assessee referable to the Bangalore unit are wholly and exclusively for the purpose of the assessee's business (p. 719) Thus, the matter referred to the Gujarat High Court also covered the allowance of miscellaneous expenses and the travelling expenses incurred by the assessee besides the claim of interest. Of course, while returning the reference, the Gujarat High Court had observed that the amount of interest was allowable as a revenue deduction but while doing so, at the same time, the Gujarat High Court has not said that the miscellaneous expenses and the travelling expenses were not to be allowed as a deduction. These expenses had been allowed as a deduction by the Tribunal.a. Engineering service fee 24,400b. Travelling expenses 3,100c. Industrial licence fee 500d. Loan application fee 1,200 So far as the loan application fee is concerned, the allowance of the same has to be treated as covered by number of decisions of various courts. The courts have held that for the borrowing of money it was immaterial whether the borrowing had been made for acquiring a revenue asset or a capital asset. The courts had considered that the borrowing did not result in acquiring an asset of an enduring nature and that on the other hand it was in fact a liability to be discharged by the borrower. The only condition for the borrower had to be that there was already a running business and that a new business altogether was not being set up. In the case of the assessee, the business was already running and the case was of setting up of a new unit as extension of its business. As regards the industrial licence fees also, the allowance thereof has to be treated as covered by the said decision of the Gujarat High Court in the case of Alembic Glass (supra). It is common ground that the Under Secretary to the Government of India had written in March 1978 to the assessee that the Government had approved the proposal of the assessee-company for setting up of a small scale industrial unit in the Kandla Free Trade Zone for the manufacture of the following items .... The assessee-company was controlling the setting up of the new unit as an extension of its business and it was being controlled from its headquarters. All the expenses in connection with the said new unit were recorded in the books of the assessee-company. This was also a factor that was considered by the Gujarat High Court in the said case. The travelling expenses have to be allowed as connected with the business. The only difficulty can, however, be in respect of expenses of Rs. 24,400 included in the first item, viz., engineering service fees. The amount was incurred by the assessee-company in connection with its obtaining a feasibility report from the experts concerned in terms of the Government of India's letter referred to earlier. However, while arguing the matter before the Commissioner (Appeals), it was contended on behalf of the assessee that the travelling expenses amounting to Rs. 3,100 and the loan application fees and industrial licence fees paid should be allowed as revenue expenses even if the fees for engineering services amounting to Rs. 24,400 were treated as 'capital expenditure'. The learned counsel for the assessee had explained before us that that was merely an alternative plea and that the claim of the assessee in respect of the same had not been abandoned. The ratio of the decision of the Gujarat High Court is that, in the case of extension of business the expenditure connected with the setting up of new unit has to be treated as revenue expenditure even if production had not started in the new unit. The allowance of interest amount on borrowed capital was a more difficult proposition than the fees paid to the experts for obtaining the feasibility report for the extension of business so as to be able to properly compete with the competitors in the field. The decision of the Supreme Court referred to by my learned brother and relied upon by the department is an old one and the law had since progressed very greatly. In fact that is how the Gujarat High Court has looked at it. I am of the view that the entire expenditure of Rs. 29,200 calls for being allowed as a revenue deduction in view of the Gujarat High Court's said decision. It is ordered accordingly.
1. Although the question stated to the Gujarat High Court mentions miscellaneous expenses, the judgment itself deals with only interest on borrowings provided for specially under Section 10(2)(iii) of the Indian Income-tax Act, 1922 ; nowhere in the judgment, does the 'ratio' as stated at page 3 above appear.
2. The words in the Supreme Court judgment are clear and their meaning unmistakable. Can we go against it STATEMENT UNDER SECTION 255(4) - There being a difference of opinion amongst us, the matter is referred to the President under Section 255(4) of the Income-tax Act, 1961, in respect of the following : Whether, on the facts and in the circumstances of the case, the assessee-company was entitled to the deduction of the expenses of Rs. 29,200 incurred in connection with the setting up of a new unit as extension of its business 1. This appeal had come up for hearing before a Bench constituted by two members. As the members of the Bench differed in their opinion on a certain point, which is referred to hereinafter, the case was referred by the President for hearing on the same point by me. The learned members have stated the point on which they have differed as follows : Whether, on the facts and in the circumstances of the case, the assessee-company was entitled to the deduction of the expenses of Rs. 29,200 incurred in connection with the setting up of a new unit as extension of its business 2. I have considered the relevant facts and circumstances and the submissions made by both the sides and have also gone through the orders of my two learned brothers who had heard the appeal in the first instance.
3. I shall now refer to the facts which were obtained in the present case : The assessee, a limited company, is a manufacturer of metallic yarn and polyester films. For the accounting year, it had incurred a total expenditure of Rs. 29,200 in connection with a project for manufacturing of metallic yarn and polyester films at Kandla. The details of the said expenses are set out hereunder :a. Engineering service fee 24,400b. Travelling expense 3,100c. Industrial licence fee 500d. Loan application fee 1,200 ------- The assessee's contention before the ITO was that the impugned expenditure, which was related to expenses of the present business, should be allowed as a revenue expenditure. This contention of the assessee was rejected by the ITO, who disallowed the claim for deduction as made by the assessee.
4. Being aggrieved, the assessee carried the matter in appeal before the Commissioner (Appeals) who upheld the view of the ITO.5. When the matter came up in appeal before the Tribunal, the learned Judicial Member took the view firstly, that the new project undertaken by the assessee at Kandla for the manufacture of metallic yarn and polyester films was an extension of the existing business. In this connection reliance was placed on the decision of Gujarat High Court in case of Alembic Glass (supra). However, according to the learned Judicial Member the question was whether the impugned expenditure was of capital or of revenue nature. Relying on certain observations of the Supreme Court in the case of Assam Bengal Cement (supra), he held that the impugned expenditure was of capital in nature, and as such, rightly disallowed.
6. The learned Accountant Member, however, took the view, relying on the decision of Alembic Glass case (supra), that the expenditure was allowable as a revenue expenditure. It may be pointed out here that according to the learned Judicial Member the decision in Alembic Glass case (supra) dealt with the question of allowance of interest on borrowings under Section 10(2)(iii) of the 1922 Act and did not deal with the other items like miscellaneous expenses, travelling expenses, etc., specifically ; though these items were referred in the question.
7. In view of the difference of opinion between the two members, the matter was placed before me as stated above. The learned counsel for the assessee, Shri Patel, pointed out that there was extension of existing business and both the learned members have agreed in regard to this fact. According to him, the decision in Alembic Glass case (supra) would clearly govern the controversy. That apart, the decision of Gujarat High Court reported at Bansidhar (P.) Ltd. v. CIT  127 ITR 65 also supported his claim for allowance of the impugned expenditure as revenue expenditure. The learned departmental reoresentative on the other hand referred to the provisions of Section 35D of the Act and stated that the assessee's claim was covered by the specific provision and, therefore, there was no question of considering the claim of the assessee under Section 37 of the Act. Secondly, the expenditure were of capital nature as it was related to extension of business and was also related to profit-earning structure. He next pointed out that the decisions relied upon on behalf of the assessee had no application to the facts of the case. And lastly, in view of the Supreme Court decision relied upon by the learned Judicial Member, the assessee's claim was rightly disallowed by the authorities below.
8. It may be pointed out at the outset that the authorities below had based their conclusion to disallow the impugned expenditure on the ground that the Kandla project undertaken by the assessee was new business and not an extension of the present business. In other words, the consideration which governs the decision was that when a new project is to be established the expenditure incurred prior to establishment of a new project has to be treated as an expenditure on capital account. One can have no quarrel with this well settled proposition. However, in the instant case, both the learned brothers have agreed as a matter of fact that the Kandla project undertaken by the assessee was merely an extension of the existing business. The only point of dispute, as discussed earlier, was whether the expenditure incurred in this connection was a capital expenditure or a revenue expenditure. The Gujarat High Court in case of Alembic Glass (supra) have dealt with the controversy on a similar issue as follows : 1. The assessee-company was manufacturing glass at Baroda from 1947.
It incurred certain expenditure for establishing a new glass manufacturing unit at Bangalore. The said unit did not go into production during the two assessment years under question and the ITO disallowed payment of interest in the two years on the borrowings made by the company. It further held that the Bangalore unit was not a branch of the assessee's factory and was, therefore, a new business and since this new business had not started production, the payment of interest could not be taken as a revenue expenditure. For the same reasons, he also disallowed in respect of both the years miscellaneous expenditure and travelling expenditure referable to establishment of Bangalore unit. On these facts, it was held as follows : ... it could not be disputed that the business organisation, administration and fund of both the units of the assessee, namely, the unit at Baroda and the unit at Bangalore, were common. There was one company which controlled the administration of both the units, which supplied the staff to both the units and which managed the whole of the business organisation of both the units. The production of both the units was considered the production of the assessee-company itself. In the application for the proposed establishment of the new unit at Bangalore made by the assessee to the Government of India on December 8, 1959, and in the application for licence submitted by the assessee to the Government, it was stated that the new unit at Bangalore was nothing but an expansion of the existing business. Thus, there was complete inter-connection, inter-lacing and inter-dependence of both the units, which is the test laid down for determining whether two lines of business constitute the 'same business' within the meaning of Section 24(2), by the Supreme Court in the case of CIT v. Prithvi Insurance Co.
Ltd.  63 ITR 632 and again approved by the Supreme Court in Produce Exchange Corporation Ltd. v. CIT  77 ITR 739.
Even assuming that the test for considering whether a particular unit is a separate business from the business of the other unit or not, is to see whether the closure of one unit would affect the other unit or not, as contended by the revenue, the closure of any of the two units here would surely affect the working and the business of the remaining unit. For the simple reason that a larger liability of the whole business would obviously have to be borne by the other unit on the closure of one unit.
The Tribunal was, therefore, justified in law in holding that the new factory at Bangalore did not constitute a new business but was only an establishment of a new unit of the existing business at Baroda. (p. 716) Their Lordships also did not accept the contention raised on behalf of the revenue that the interest on borrowings utilised for the purpose of establishing a new unit should go towards the cost of the new unit. It was held further that the interest incurred by the assessee on the borrowings utilised for the purpose of establishing Bangalore unit is for the purpose of assessee's business and as such, allowable as revenue expenditure.
2. CIT v. Elecon Engg. Co. Ltd.  132 ITR 752 (Guj.). The facts were these : The assessee was carrying on business of manufacturing engineering equipments of various kinds. It sent one of its directors abroad for selection of some foreign engineers with a view to start manufacture of areal ropeways which were used for transporting of machines as well as human beings. The assessee did not manufacture areal ropeways earlier. The ITO found from the director's report that the company had decided to start designing and manufacture of areal ropeways for passenger traffic and handling materials on a turnkey basis to overcome the effects of competition and with a view to diversify its activities and held that it was entirely a new line of activity and disallowed the expenditure on foreign tours of the directors as an expenditure of a capital nature. While the AAC confirmed the order of the ITO, the Tribunal found that though the assessee wanted to embark on a different line altogether, yet after considering various aspects, particularly the utilisation of existing machinery and existing financial resources and management, it held that the assessee wanted to utilise existing resources in a more effective way and the manufacture of areal ropeways was an extension of the assessee's existing activities and allowed the expenditure on foreign tour as a revenue expenditure. It was held that there was no proposal to increase fixed capital of the company. All the existing designing techniques and processes-know-how in the possession of the assessee-company- were to be employed for the purpose of manufacturing areal ropeways and it was for the better utilisation and more essential utilisation of its existing profit-earning apparatus that the directors of the assessee-company wanted to diversify from their existing business of manufacturing of conveyor belts, etc., and go in for the production of areal ropeways. Since there was no proposal to add to the fixed capital of the assessee-company even at a later date and all that was done was to utilise existing machinery and knowledge of the company more efficiently and in a better manner, the expenditure on foreign tour was allowable as a revenue expenditure. In coming to the above decision their Lordships observed as follows : These are distinctions, which we have pointed out, where on the one sideline or the other the question is decided by determining whether the expenditure in question was incurred for a more efficient use or better utilisation of the existing processes and techniques employed by the company or whether the expenditure was incurred for the purpose of acquiring new machinery or new plant or addition, even though remotely or at a distant future, to the fixed capital of the company. If the expenditure fell in the first category, namely, in the category of better utilisation of the existing income-earning apparatus of the company, it has always been treated as in the three different cases pointed out above as revenue expenditure. If, on the other hand, it is incurred for the purpose of adding, immediately or in future, to the fixed capital of the company and buying new machinery or installing new machinery so that the fixed capital of the company would increase, then, it has always been treated as capital expenditure. (p. 763) 3. In CIT v. McGaw Ravindra Laboratories (India) Ltd.  132 ITR 401 (Guj.), a similar question arose about the claim for deduction of foreign tour expenses of a director and an employee. The assessee had claimed the expenditure on foreign tour as a revenue expenditure, while the ITO disallowed the claim by holding the same as capital expenditure, the AAC held that the tour undertaken by the director was for twin purposes, i.e., (a) to negotiate changes in the arrangement with the foreign company to enable the foreign company to market its product in new territories, and (b) to negotiate for setting up an altogether new business involving manufacture of new products. To the extent the tour of the director was undertaken for starting manufacture of new products the expenditure was capital in nature. But the expenditure to the extent it was incurred for extending business to the new territories, was not capital in nature. The expenditure on the employees' tour being for the purpose of new business was rightly disallowed as capital expenditure. On reference it was held that half of the expenditure in connection with the director's visit to USA was allowable as a revenue expenditure.
9. Applying the above test to the facts of the case, it is clear firstly that the impugned expenditure was incurred in connection with the existing business of the assessee. Secondly, the new project was merely an extension of the assessee's existing business. Lastly, the details of expenditure show that there was no increase in the fixed capital of the assessee-company. In my view, therefore, the impugned expenditure was allowable as a revenue expenditure. I, therefore, agree with the view taken by the learned Accountant Member.
10. The matter may now be placed before the Bench which originally heard the appeal for disposal in accordance with the majority view.