Gujarat H.C : The assessee’s business had set up w.e.f. 21/02/2001 just by flow of drinking water as construction work of canal project was still under progress

High Court Of Gujarat

CIT, Gandhinagar vs. Sardar Sarovar Narmada Nigam Ltd.

Assessment Year : 2001-02

Section : 28(i), 37(1), 255

Akil Kureshi And Ms. Sonia Gokani, JJ.

Tax Appeal No. 199 Of 2013

April 16, 2013

ORDER

Ms. Sonia Gokani, J. – This Tax Appeal under section 260A of the Income-tax Act, 1961 (for short, hereinafter after referred as “the Act”)is preferred against the order dated 07.09.2012 of the Income Tax Appellate Tribunal, Special Bench, Ahmedabad raising following substantial questions of law for our consideration:

“(A) Whether the Hon’ble ITAT special bench is right in holding that the assessee’s business had set up w.e.f. 21/02/2001 just by flow of drinking water as construction work of canal project was still under progress?

(B) Whether Hon’ble President of ITAT is correct in referring full appeal to special bench though decision on same issue was available in assessee’s own case from division bench and assessee’s appeal is pending before Hon’ble High Court on same issue?”

2. Brief facts of the case are as follow.

2.1 The assessee is a company established and wholly owned by the Government of Gujarat under the provisions of the Companies Act, 1956 for execution of Sardar Sarovar Project-an inter-state multi-purpose project of four States viz. Madhya Pradesh, Maharashtra, Gujarat and Rajasthan with a terminal major dam on the river-Narmada in Gujarat.

2.2 A Nigam was formed by the Government of Gujarat which executed a part of project. The assessee-respondent was granted certificate of commencement of business. The project being under construction, the assessee-respondent did not file returns of income for the Assessment Years 1989-1990 & 2000-2001. A notice under section 148 was issued and the assessee filed returns, claiming expenditure incurred by it as business expenses.

2.3 The Tribunal for the Assessment Years 1989-1990 & 2000-2001 held that the business of the assessee could not be said to have commenced as main object for the formation of a company was to construct dams and canals.

2.4 In the instant case, for the Assessment Year 2001-2002, the assessee-respondent took the stand that the business of the assessee has already commenced and that the Assessment Year 2001-2002 is different from the earlier year as activity to supply water to people of the State from Narmada Dam has already commenced.

2.5 The Gujarat faced scarcities in earlier years and Sardar Sarovar Nigam, for this emergency supply, put to use its facilities created so far and started the deliverance of water through its partially completed Narmada Main Canal. The Assessing Officer, however, did not accept the say of the assessee and while disallowing deduction, computed income of the assessee as income from other sources.

2.6 Challenge before the CIT(Appeals), it rejected the assessee’s appeal following its earlier order for the Assessment Year 1990-1991 holding that the business of the assessee would commence only when the water starts flowing from the canals and/or when power houses start generating electricity.

2.7 The Special Bench of Income Tax Appellate Tribunal was formed which allowed the appeal of the assessee by giving detailed reasonings.

2.8 Such order of the Tribunal is impugned in the present Tax Appeal raising aforementioned questions of law for our consideration.

3. We have heard learned counsel Mr. Sudhir Mehta for the revenue who fervently submitted that for the earlier Assessment Years, the very issue of commencement of business in case of this very assessee is pending before this High Court in Tax Appeal Nos. 449/2004 and 1183/2007 and therefore, the Tribunal committed an error in holding in favour of the assessee-respondent. He further urged that in the statement recorded of Executive Engineer, Sardar Sarovar Narmada Nigam Limited, he has stated that on commercial basis for irrigation, no water has been released, however, drinking water was supplied, for which, no income was received and therefore, when there is no commencement of business and construction work is also in progress, the flow of water from Narmada Canal must not be viewed in isolation.

4. Learned senior counsel Mr. Saurabh Soparkar appearing for the assessee-respondent has forcefully submitted that the issues which are at large before this Court in pending appeals are unconnected with the issues raised in the present Tax Appeal. He has emphasized on the detailed findings of the Tribunal by urging that the expenses claimed are revenue in nature which will have to be allowed as deduction while computing income from business.

Learned counsel also urged that revenue’s stand that only on completion of canal as per the desired destination would only amount to commencement of business, is wholly misconceived. He further urged that there being no flow in the reasonings given by the Tribunal, based on voluminous material available on record, this Tax Appeal merits no consideration.

5. Upon thus hearing both the sides, for the reasons to follow hereinafter, this Tax Appeal deserves no consideration for having raised no substantial question of law.

6. At the outset, Question no.2 is required to be addressed. As far as Question No.2 is concerned, the same challenges the constitution of Special Bench Tribunal. Therefore, before dealing with the first question, this question requires to be examined. This issue when was raised before the Tribunal, it dealt with the same by holding that the main issue raised is as to whether the business of the assessee can be said to have been set up during the previous year relevant to the assessment year. The Tribunal was of the opinion that such question is a mixed question of law and facts & therefore, its answer would depend on the facts that prevailed during the previous year relevant to the Assessment Year 2001-2002.

Upon hearing both the sides and on examination of decision of the Tribunal, we are in agreement with the findings of the Tribunal that this essentially is a mixed question of law and fact. Even if the Tribunal earlier in case of this very assessee for the Assessment Years 1989-1990 and 2000-2001 had examined this very issue and those findings are at large before this Court, that could not have prevented the Tribunal to examine the facts which were laid before it as every year, the fact and circumstances would materially change. No error is committed either in law or in fact in constitution of Special Bench. Therefore, no question of law arises as far as this issue is concerned.

7. With regard to Question no. 1, it is needed to be mentioned that this Court in Tax Appeal Nos.449/2004 and 1183/2007 has admitted the question in case of the very same assessee as to when the business of the assessee can be said to have commenced. This question was in relation to the construction of dam and also the bank interest earned on the fixed deposits by the assessee- respondent.

The question herein is in regard to setting up of a business which is held by the Tribunal in affirmation from the day on which the water flew in the canal. This, of course, has a reference of work on canal project which is also under progress. The Tribunal was addressing the question as to whether the business of the assessee has already set up so as to avail benefits under the law to the assessee as the profit and gain of the new business can be computed only when the business is set up. We are concerned with the Assessment Year 2001-2002.

Section 3 of the Act defines previous year which is the financial year immediately preceding the Assessment Year. Till the business is held to be set up, all expenses are held to be capital in nature and therefore, under the heading “Income from business”, the assessee may not be entitled to any computation.

8. It is since a stand of the revenue that the business has not been set up of the assessee- respondent in as much as the work of construction of canal has not been completed, there would be no computation of income under the heading “Income from business”. What amounts to setting up of a business & whether commencement is sufficient for the purpose needs closer examination.

The Tribunal made a distinction between commencing a business and setting up of a business for the purpose of Income-tax Act, relying on the decision of the Bombay High Court in case of Western India Vegetables Products Ltd. v. CIT [1954] 26 ITR 151. The Bombay High Court, in the said decision held that what is to be looked into is the setting up of a business for the purpose of income-tax and not the commencement of the business. Between a business which is set up and business which is commenced, assessee can avail benefits. In other words, all expenses incurred after the setting up of the business, but, before its commencement would be permissible as deduction under section 10(2) of the Act.

9. Yet another decision of the Apex Court sought to be relied upon by the Tribunal is rendered in case of CWT v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478. While referring to the decision of Western India Vegetable Products Ltd’s case (supra), the Apex Court concluded while interpreting the provisions of Section 5(1)(xxi) of the Wealth-tax Act, 1957 that the company becomes entitled to exemption in respect of value of the assets used in setting up of such business.

10. In case of CIT v. Sarabhai Sons (P.) Ltd. [1973] 90 ITR 318 (Guj.), this Court was dealing with the case where the assessee had started a new business for manufacturing of scientific instruments and communication equipments. The assessee had claimed deduction for the amount spent in connection with the new business. The Court referred to the judgment of the Supreme Court given in case of Ramaraju Surgical Cotton Mills Ltd. (supra), while answering the question that as to when a business can be said to be set up is no longer a matter of doubt or debate. The Court held as under:

“Bombay High Court in Western India Vegetables Products case. The Bombay High Court pointed out in this case that there is a clear distinction between a person commencing a business and a person setting up a business and for the purpose of Section 2(11) which was the section of the Indian IT Act, 1922, corresponding to Section 3(1)(d) of the IT Act, 1961, what is required to be considered is the setting up of a business and not the commencement of a business. It is only when a business is established and is ready to commence business that it can be said of that business that it is set up. Before it is ready to commence business, it is not set up. This view taken by the Bombay High Court was approved by the Supreme Court in CWT vs. Surgical Cotton Mills Ltd.”

11. This Court, in case of CIT v. Saurashtra Cement & Chemical Industries Ltd. [1973] 91 ITR 170 (Guj.), had dealt with an identical question as to when the business can be said to have been set up. The Court was of the opinion that to determine this question, it is necessary to know as to what constitutes the business of the assessee & for determining that what are the activities which constitute such business need to be ascertained without being misguided by loose expression of vague and indefinite import. Before this Court, in such case, the business of the assessee was of manufacturing and sale of cement which was held to be divisible into three categories, 1) activity of extraction of limestone by quarrying the leased area of land , 2) activity of manufacture of cement by use of the plant and machinery set up for the purpose and 3) activity of selling manufactured cement. It was held therefore that each of these activities was equally essential for the purpose of the business of the assessee. Any one of the activities if is ceased, the business would come to a grinding halt. Again, it was held that “The business consisted of a continuous process of these three activities and when the first activity was started with a view to embarking upon the second and the third activities, it clearly amounted to commencement of the business. It may be that the whole business was not set up when the activity of quarrying the leased area of land and extracting limestone was started. That would be set up only when the plant and machinery was installed, the manufacture of cement started and an organization for sale of manufactured cement was established. But, as pointed out above, business is nothing more than a continuous course of activities and all the activities which go to make up the business need not be started simultaneously in order that the business may commence. The business would commence when the activity which is first in point of time and which must necessarily precede the other activities.”

12. Yet another decision rendered in case of Sarabhai Management Corpn. Ltd. v. CIT [1976] 102 ITR 25 (Guj.), refers to this very issue where the assessee was a private limited company whose main object was to acquire immovable property and to give it out either on leave and licence basis or on lease as residential or, in the alternative for business accommodation. This Court, there also, held that the business can be divided into three categories; 1) To acquire immovable property 2) To put up the building accommodation, set up the land and garden, and 3) Actually to give out accommodation on lease or on leave and licence basis. The Court followed the decision given in case of Saurashtra Cement & Chemical Industries Ltd. (supra), & explained the decision rendered in case of Sarabhai Management Corpn. Ltd. (supra).

13. Yet another decision rendered in case of Prem Conductors (P.) Ltd. v. CIT [1977] 108 ITR 654 (Guj.), this Court was answering the question whether business can be said to have commenced when there was actual production or at the time when earlier steps like securing orders were taken. Referring to the earlier decisions rendered in cases of Saurashtra Cements and Chemicals Ltd. (supra) and Sarabhai Management Corporation Ltd. (supra), it held that for the Court to consider whether company has set up its business or not, it needs to examine the same in light of the above mentioned decisions, whether the business of the assessee consists of different categories and whether the activity which was started earlier than the actual commencement of the production could be said to be essential part of the business activity of the assessee. In the words of the Bench:

“The company can be said to have set up its business from the date when one of the categories of its business is started and it is not necessary that all the categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set up. The test to be applied is as to when a businessman would regard a business as being commenced and the approach must be from a common sense point of view.”

14. The Tribunal, in the case on hands, on a detailed examination of the Director’s report printed in the annual report of the assessee for the year 2000-2001 and on referring to the decisions as well as on considering object clause of Memorandum of Association of the assessee-company, concluded that the business of the assessee was set up on 21.02.2001 when water was supplied through the main canal and all revenue expenditures after such date shall have to be allowed as deduction.

15. It is thus apparent from the elaborate reasonings given by the Tribunal that it has extensively considered the factual matrix presented before it and on applying all the above referred decisions of this Court to the facts on hands, it could arrive at such conclusion. Neither in appreciating the fact nor in applying the law to the case of the assessee, any error is committed by the Tribunal so as to give rise to any question of perversity.

16. The very object for which the company has been set up is to construct a dam across the river-Narmada and to create canal system emanating from reservoir called the Sardar Sarovar and to set up power house at the foot of the dam and at the canal head. To promote and facilitate navigation in the Narmada river and also for irrigation and water supply in the State and for utilization of water from Sardar Sarovar as well as for managing, developing, exchanging etc. the land, property and resources of the company are some objects set out in the object clause of the Memorandum of Association of the assessee-respondent.

What is to be regarded is as to whether the business of the assessee has been set up or not, to enable the assessee to avail the benefits under the Income-tax Act. This being essentially a mixed question of law & facts needs to be decided primarily on the basis of facts and circumstances of each case, based on different decisions rendered in this regard. In a given case, for the Court to consider whether the business has been set up or not, the nature of business of assessee, whether the same comprises of integrated activities and whether all these activities collectively would go to make the business, shall need to be examined in light of the object clause of the Memorandum of Association and other material available on the subject.

The annual report of the assessee respondent in the instant case for the year 2000-2001 highlighted progress of the project as the activity could be divided into three categories 1)Dam and Appurtenant Works, 2) Hydro power and 3) Narmada Main Canal. As far as the first activity is concerned, excavation and concrete works should be considered major components of the Main Dam works. The major portion was excavated and concrete work was done up to March, 2001. Open excavation and underground excavation for River Bed Power House and Canal Head Power House with its auxiliaries and ancillaries is said to have been completed. The power house is also connected with Gujarat Electricity Board grid at 220 KV Voltage level. As far as Narmada Main Canal Phase-1 is concerned, it is almost completed and main canal work from 144 kms. to 264 kms i.e. from Mahi River crossing to Saurashtra Branch Canal off-take is in progress. There are other details provided in respect of structure across the main reservoir crossing Narmada Main Canal which are not required to be elaborated. As far as Branch Canal and Distribution System is concerned, Phase-I is said to have been completed up to March, 2001. The second phase is also completed up to March, 2001. The Directors’ report is indicative of drinking water having been supplied during scarcity period through partially completed Narmada Main Canal.

As can be noted during the course of discussion as also from the record that the use is made by the Tribunal of Director’s report which mentions that the State of Gujarat faced scarcity consecutively for 3 years and execution of urgent water supply from Narmada River and Sardar Sarovar Project was a must. Such supply was made from partially completed Narmada Main Canal & material was also produced before the Tribunal that water from Sardar Sarovar was pumped out through installation of 90 water pumps and maintained continuous flow of an average more than 1000 cusecs through the Narmada Canal up to 149 km.

17. We are of the firm opinion that the activities mentioned in the object clause of Memorandum of Association do not contemplate a single activity. Under the fiscal legislation when it is vital to determine what is the business of the assessee and what are the activities which constitute such business, it can be noted that execution of the Sardar Sarovar Project comprises of a dam across the river Narmada, canal system as also the power house at the foot of the dam and at the canal head and all other works. It can not be said that such objects could be achieved without contemplating different stages of completion. It would be wholly wrong to uphold the contention of the revenue that only on completion of work of entire canal, the assessee’ business can be said to have set up. In a project like Sardar Sarovar, there are bound to be different stages where different activities take place and those activities being integral parts of the business and when they are set up phase vice, assessee cannot be deprived of benefits of fiscal legislation in disregard to well settled principles on the issue by adopting over technical approach.

For determining as to when the business can be said to have been set up, the flow of the water from Narmada Canal in the given circumstances needed to be viewed as an integral and inseparable activity of the business of the assessee. The Tribunal has rightly approached the issue by holding that test in such events will have to be applied which must appeal to the common sense. It is apparent from the record that the assessee supplied water through its main canal, one of the purposes of setting up the company is to supply the water through the canal & even if the entire stretch of canal is yet to come into existence, in a project of this big a size, it will surely be not right to hold that the business of the assessee-respondent has not been set up. The construction of dam and canal are essential and inseparable parts of the activity which would necessarily precede other activities. As well laid down by this Court in the decisions in case of Saurashtra Cements and Chemicals Ltd. (supra) and other judgments, when each one of the activities essential & vital, combined together, constitutes business of the assessee and this being a continuous process, all the activities which go to make a business need not be started simultaneously in order to hold that the business has commenced. Those of the activities which form integral part of entire term business when preceded other activities, no fault can be found in the approach of the Tribunal when it held the business to have been set up without the same being commenced. The Tribunal, by elaboration sound and logical reasonings, has dealt with the entire issue.

No question of law much less any substantial question of law arises.

Resultantly, Tax Appeal is dismissed.

[Citation : 364 ITR 477]