INCOME TAX OFFICER v. TIRUMALAI HOTELS & BUILDERS (P.) LTD
[Citation -1985-LL-0712-5]

Citation 1985-LL-0712-5
Appellant Name INCOME TAX OFFICER
Respondent Name TIRUMALAI HOTELS & BUILDERS (P.) LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 12/07/1985
Assessment Year 1981-82
Judgment View Judgment
Keyword Tags capital expenditure • industrial company • ginning of cotton • share of profit • printing press • cotton ginning • business loss • share of loss • export house • take over • plant
Bot Summary: First is whether the assessee is an industrial company or not; and the second is whether the assessee is entitled to set off of a loss of Rs. 16,005 being share of loss from a firm in which the company was a partner. The Calcutta High Court's decision relied on by the assessee was a case where the assessee was getting his printing and blinding of books done by others. The assessee not owning a printing press itself was not found to be against a finding in favour of the assessee. In the case of the assessee, apart from buying of the cotton and sending it to the other factories for converting it into lint, the assessee has nothing else to do. The products manufactured in the other company were under the direct supervision of the assessee's own technically qualified staff and under the assessee's own quality control. The assessee, therein carried on business of publication, purchase and sale of books and claimed that they were industrial company. We now consider the question of the loss allocated to the assessee from the firm in which the assessee was a partner.


This is departmental appeal. Two issues are raised here. First is whether assessee is industrial company or not; and second is whether assessee is entitled to set off of loss of Rs. 16,005 being share of loss from firm in which company was partner. 2. assessee-company has been incorporated only on 5-2-1980. main object of firm was to carry on business as builders and contractors. There was also ancillary object of carrying on business in cotton and kapas. On 1-4-1980 company became partner in firm. share of profit was 60 per cent. This firm was dissolved on 11-11-1980 and company took over entire business. We may state here that it was specifically mentioned in partnership deed that company was incorporated with object of taking over business assets and liabilities of partnership. 3. assessee's share in respect of business of firm amounted to los of Rs. 16,005. In return filed assessee claimed that this loss should be set off against business income. assessee after take over of business had continued purchase of cotton and converting same into lint. It is admitted position that assessee by itself did not have machineries for conversion of cotton into lint. This was being sent to others who own factories for this purpose. 4. assessee-company claimed that since income is from conversion of cotton into lint, they should be treated as industrial company. It also claimed business loss being share from firm. ITO did not admit either of claims. As far as claim for industrial company is concerned, he held that this would not amount to any procession done by assessee. As far as share of loss is concerned, according to ITO, it was capital expenditure since joining in firm was expressly with intention o f acquiring business of firm. Hence, loss was connected with acquisition of business which is capital asset. 5. On appeal, Commissioner (Appeals) held that ginning of cotton amounted to processing of goods and, therefore, assessee is entitled to be treated as industrial company. As far as loss is concerned, he held that it was business loss and should be set off against profits of business in kapas. 6. department is in appeal. Mr. Santhanam for department pointed out that main premises of formation of company was to do business as contractors. He submitted that funds of company are mostly deployed i n business of contracts. investments in respect of cotton ginning is only ancillary. Therefore, it could not be considered as industrial company. Although we agree main deployment of funds are not on processing o f lint, nevertheless we have to consider claim of assessee under Explanation to section 2(8) (c) of Finance Act. As per this Explanation, if more than half of income is from activity of processing, then, assessee would be considered as industrial company. In case before us, income from such processing accounts for more than Rs. 4 lakhs and, therefore, assessee will come under Explanation aforesaid. Thereupon, Shri Santhanam submitted that assessee is merely getting cotton processed into lint in factory of others. As per decision of Madras High Court in case of Addl. CIT v. Chilies Export House Ltd. [1978] 115 ITR 73 assessee who does not itself engage in processing of goods could not be considered as industrial company. Shri Rajagopala Rao, on other hand, submitted that there are number of decisions which have held that even if processing is done in other factories, it would be sufficient for purpose of determining whether company is industrial company or not. He particularly referred to decision of Gujarat High Court in case of CIT v. Lakhtar Cotton Press Co. (P.) Ltd. [1983] 142 ITR 503 and decision of Andhra Pradesh High Court in case of Nava Bharat Enterprises (P.) Ltd. v. CIT [1983] 143 ITR 804. He also referred to decision of Calcutta High Court in case of Addl. CIT v. A. Mukherjee & Co. (P.) Ltd. [1978] 113 ITR 718. 7. We have considered submissions. decision relied on by Shri Santhanam is not relevant for issue before us. In that case, issue before High Court was whether clipping and stemming and fumigation of chillies would itself amount to processing. High Court held it will not. As far as conversion of cotton into lint is concerned, there is definitely processing and that conversion of cotton into lint is concerned, there is definitely processing and that has been held so by Gujarat High Court's decision relied on by assessee's counsel. What we have to see is whether fact that assessee gets it done through others would disentitle them from making claim. Calcutta High Court's decision relied on by assessee was case where assessee was getting his printing and blinding of books done by others. In that case, assessee was publisher of books. assessee's job was to get manuscript for publication, hit upon suitable fromat for book, get it printed as per its requirements under its supervision, get book bound after suitable changes and then put out publication for sale. In all these activities, assessee had to play active role of coordinating activities in business- like-manner. Calcutta High Court found all these activities dovetailed into one another and stage from acquisition of manuscript right to publication was one integrated activity which amounted to manufacturing or processing. So, assessee not owning printing press itself was not found to be against finding in favour of assessee. It will be noticed that decision rested on facts that right from getting manuscript to binding and publication of book was one integrated activity and only part of it was done by outsiders. Under these circumstances, only it could be considered as industrial company. In case of assessee, apart from buying of cotton and sending it to other factories for converting it into lint, assessee has nothing else to do. We had asked Shri Rajagopala Rao whether there was any evidence to show whether conversion of cotton into lint was under assessee's control and supervision. No evidence was available with him to prove same since, according to him, none of authorities had asked for such evidence. Under these circumstances, Calcutta High Court decision can be distinguished. 8. Bombay High Court had occasion to consider similar issue in case of CIT v. Neo Pharma (P.) Ltd. [1982] 137 ITR 879. In that case, assessee-company had licence for manufacturing pharmaceuticals. They, however, did not own any machineries which would enable them to do manufacturing. They entered into agreement with another company to make available to assessee plant, machinery and services of staff to carry on manufacturing. products manufactured in other company were under direct supervision of assessee's own technically qualified staff and under assessee's own quality control. Raw materials and packing was also done by assessee. It was under these circumstances that Bombay High Court held that assessee would be considered as industrial company although they themselves did not won machineries. It will be seen that in this case again emphasis is laid on supervision and control of manufacturing process by assessee themselves although actual others. Delhi High Court had also considered similar issue in case of Orient Longman Ltd. v. CIT [1981] 130 ITR 477. assessee, therein carried on business of publication, purchase and sale of books and claimed that they were industrial company. Delhi High Court found that facts of this case were identical with facts of Calcutta case - A. Mukherjee & Co. (P.) Ltd. (supra). Thus, they pointed out that although printing was done by some one else, it was under control by assessee. 9. From analysis of authorities above, we find that it is essential that assessee must be continuously associated with processing of goods even though such processing might be done in factory of others. No evidence had been led on this point before ITO or Commissioner (Appeals). Therefore, we find it difficult to hold that assessee is industrial company. Since no enquiry had been made to find out whether conversion into lint undertaken in factory of others was under control and supervision of assessee and their staff, we think it is necessary that this matter should be further investigated. For purpose, we will set aside findings of Commissioner on this point. ITO is directed to make enquiries on lines suggested above and decide point according to law. 10. We now consider question of loss allocated to assessee from firm in which assessee was partner. ITO's case is that since t h e assessee became partner with sole intention of taking over business of firm, any expenditure incurred in connection therewith will be only capital expenditure. It is true that partnership deed itself mentions intention of company in becoming partner. But that would not be sufficient for holding that share of loss allocated to assessee would amount to capital expenditure. In taxation laws, there is distinction between motive and capital expenditure. In taxation laws, there is distinction between motive and purpose. Bombay High Court has laid down as early as 1956 in case of B i Bhuriben Lallubhai v. CIT [1956] 29 ITR 543 that there is difference between motive for incurring expenditure and purpose of expenditure. motive with which assessee may have incurred expenditure would be irrelevant and what was relevant is only purpose. We may mention that this distinction has been approved by Supreme Court in case of Madhav Prasad Jatia v. CIT [1979] 118 ITR 200. Now, motive of company in becoming partner is certainly to take over running business of firm. But that motive is not very relevant. purpose of becomming partner is immediate objective as against remote objective is to become partner and earn profit or loss in conducting business for year. For accounting year concerned, assessee's share was loss. This loss has to be clearly allowable since it is loss incurred by assessee as partner in firm doing business. We will, therefore, uphold order of Commissioner (Appeals) on this point. 11. In result, appeal will be treated as party allowed. *** INCOME TAX OFFICER v. TIRUMALAI HOTELS & BUILDERS (P.) LTD.
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