By Mehul K. Patel & Manish J. Shah
Advocates                                             

WHETHER THE RATIO OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD., 227-ITR-172 (SC) CLOSES ALL DOORS?

TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD. 227-ITR-172 (SC)

BRIEF FACTS OF THE CASE

The assessee was a company incorporated on December 3, 1971, for the purpose of, inter alia, manufacturing heavy chemicals such as ammonium chloride and soda ash. The trial production of the factories of the company commenced on June 30, 1982. For the purpose of setting up of the factories, the company had taken term loans from various banks and financial institutions. That part of the borrowed funds, which was not immediately required by the company was kept invested in short-term deposits with banks. Such investments were specifically permitted by the memorandum and articles of association of the company. The company had also deposited certain sums with the Tamil Nadu Electricity Board. It had also given interest-bearing loans to its employees to purchase vehicles. Up to the assessment year 1980-81, interest earned by the company from the various loans given by the company and also from the bank deposits was shown as income and was taxed accordingly. For the accounting year ending on June 30, 1981 (assessment year 1982-83), the assessee received a total amount of interest of Rs.2,92,440. In its return of income filed on June 22, 1982, the company disclosed the said sum of Rs.2,92,440 as "income from other sources". It also disclosed business loss of Rs.3,21,802. After setting off the interest income against the business loss, the company claimed the benefit of carry forward of net loss of Rs.29,360. The company later on realised its mistake and on December 26, 1984, it filed a revised return showing business loss of Rs.3,21,802. It claimed that according to the accepted accounting practice, interest and finance charges along with other pre-production expenses had to be capitalised, and that, therefore, the interest income of Rs.2,92,440 should go to reduce the pre-production expenses (including interest and finance charges), which would ultimately be capitalised. During the previous year relevant to the assessment year 1983-84, the assessee had received interest income of Rs.1,08,336. The assessee filed its return in which it claimed that the interest income of Rs.1,08,336 should go to reduce the pre-production expenses including the interest and finance charges which would ultimately be capitalised. The Income tax Officer rejected the assessee’s claim that the interest income was not exigible to tax. The view of the Income-tax Officer was upheld by the Commissioner of Income-tax (Appeals). The company’s further appeal to the Income-tax Appellate Tribunal was dismissed. In view of the conflict of decisions between the Madras and Andhra Pradesh High Courts, the Tribunal referred the question regarding taxability of income, directly to the Supreme Court :

Held, that the company had surplus funds in its hands. In order to earn income out of the surplus funds, it had invested the amount for the purpose of earning interest. The interest thus earned was clearly of revenue nature and would have to be taxed accordingly. The accountants might have taken some other view but accountancy practice was not necessarily good law. This was not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as it liked. The application of the income for payment of interest would not affect its taxability in any way. The company could not claim any relief under section 70 or section 71 since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting years. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business could not be allowed as deduction, nor could it be adjusted against any other income under any other head. Similarly any income from a non-business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee.

OUR ANALYSIS OF 227-ITR-172 (SC):
As can be seen from the analysis of the above-mentioned judgment, the fact that has played a very prominent role in bringing about this judgment is that "business of the company had not commenced". The argument and the factual stand taken by the assessee concern was also that the company had not commenced its business.

The important thing according to us which is required to be kept in mind, whenever any assessee is placed in an identical situation, is that it is required to be analysed as to whether the business of the assessee has commenced or not. If the assessee is in a position to prove that his business has already commenced then the ratio of Tuticorin Alkali Chemicals 'supra' will not be applicable to the assessee concerned.

Presently as well as in the recent past numerous matters have arisen wherein stand taken is that after the decision of Tuticorin Alkali Chemicals 'supra' a given situation would be totally covered by the above mentioned decision and hence, deductions claimed or set off claimed by the concerned assessee will not be allowable. We, in our humble opinion believe that Tuticorin Alkali Chemicals ‘supra’ is a decision, which is limited in scope to the facts of its own case and it does not have a universal application. The judgment was inspired by the fact that the business had not commenced and hence it would only apply in a situation where it is possible to prove that the business had not commenced.

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TESTS LAID DOWN BY DIFFERENT HIGH COURTS FOR THE PURPOSE OF PROVING "COMMENCEMENT OF BUSINESS"

(i) PREM CONDUCTORS PVT. LTD. vs. C.I.T. 108-ITR-654 (GUJ):

FACTS:

In this case, the company had commenced its business by securing orders first and going into production later on. "In view of this particular special feature in this case, namely, that the business activity of securing orders had practically started since the very date of the incorporation of the company, it was obvious that the business activity of this company started from the day of its incorporation and not from the day when the production of aluminium conductors commenced."

(ii) HOTEL ALANKAR vs. C.I.T. 133-ITR-866 (GUJ) :
Acquisition of a building and making it suitable for hotel business tantamounts to commencement of hotel business. All the integrated activities need not be fully carried out or wholly completed so that the business can be said to be established. The requirement is also complied with when assessee undertakes first of all series of integrated activities of which the business is overall comprised off.

(iii) C.I.T. vs. WESTERN INDIA SEAFOODS (P) LTD. 199-ITR-777 (GUJ) :
Test discussed – Business of processing marine products – Acquisition of godown for such processing in August, 1970 – Starting point of business – Actual business commenced from October, 1970, after monsoon season – Held, business set up in August’70 and expenses from August ’70 to October ’70 are revenue expenses and allowable.

(iv) C.I.T. vs. TRIVENI PLENTY ENGG. LTD. 209 ITR (St.) 91:
Commencement of business
Submission of tenders without installation of plant :
15-7-1994 : Their Lordships B.P. JEEVAN REDDY and S.C. SEN JJ. Dismissed a special leave petition by the Department to appeal against the order dated 11.11.1993 of the Delhi High Court in ITC No. 200 of 1992 rejecting a reference application on the question whether submission of tenders before the installation of plant and machinery by the assessee could be said to be commencement of business by the assessee and whether losses incurred by the assessee during this period, i.e., before the installation of plant and machinery could be said to be business loss : Commissioner of Income-tax v. Triveni Plenty Engineering Ltd. : S.L.P. (Civil) No. 15655 of 1994.

(v) C.I.T. vs. FRANCO TOSI INGEGNERIA 241-ITR-268 (MAD.):
Held, that the assessee had commenced its business in India from April 13, 1981, when it secured and accepted the letter of intent from Neyveli Lignite Corporation and not from October 1, 1981, when it opened its site office at N and, therefore, the assessee was entitled to the expenditure claimed by it from that date, viz. April 13, 1981.

CONCLUSION:
Keeping the above decisions and many other decisions relating to the concept of ‘commencement of business’ we, in our humble opinion, believe that whenever an assessee is faced with the situation where the ratio of Tuticorin Alkali Chemicals ‘supra’ is applied or proposed to be applied, the above illustrated tests should be kept in mind and applied to the facts of the case because of the glaring fact that business had not commenced in the facts concerning the Supreme Court in the matter of Tuticorin Alkali Chemicals ‘supra’. We believe that if in a given case, an assessee is in a position to prove that business had actually commenced, then the ratio of 227-ITR-172 (SC) will not apply in his case.

June  2002

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