THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA REFERRED CASE No.186 of 1996 05.12.2011 Between: Commissioner of Income-tax, A.P.II, Hyderabad … Petitioner AND M/s.Coromandel Fertilisers Ltd., Secunderabad … Respondent THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA REFERRED CASE No.186 of 1996 ORDER: (Per Hon’ble Sri Justice V.V.S.Rao) The Commissioner of Income Tax, A.P.II, Hyderabad got the following two questions referred to the opinion of this Court by the Income Tax Appellate Tribunal, Bench-B, under Section 256(1) of the Income Tax Act, 1961 (the Act). 1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the Cement Unit was set up and commenced commercial production and hence the assessee was entitled to depreciation and Investment allowance for the assessment year 1984-85? 2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the disallowance under Rule 6D has to be worked out taking all the trips of the employees together? The brief fact of the matter which gives rise to the questions referred is as follows. The respondent (assessee) undertook a cement factory. Even before it went into production, during the assessment year 1984- 85, they ﬁled return of income on 31.8.1984. Among others there is a claim for depreciation under Section 32(1) of the Act and the allowance of expenditure under Section 37(3) of the Act read with Rule 6D of the Income Tax Rules, 1962 (the Rules). The assessing oﬃcer disallowed the depreciation on the ground that the cement manufacturing unit was not set up and did not go into production during the ﬁnancial year 1983- 84 relevant to the assessment year 1984-85. Insofar as the disallowance under Rule 6D of the Rules is concerned, the assessing oﬃcer considered the travelling expenses of each employee separately, in respect of each trip. The Commissioner of Income Tax (Appeals), however, directed to work out the disallowance under Rule 6D taking all the trips of all the employees put together, which was conﬁrmed by the Tribunal. Being aggrieved, the Revenue sought the reference to this Court. This matter was initially heard on 28.11.2011. During the course of the preliminary submissions, the Junior Standing Counsel for Income Tax brought to our notice the decision of this Court in CIT v Coromandel Fertilisers Ltd[1] (Coromandel-II) and CIT v Coromandel Fertilisers Ltd[2] (Coromandel-I). According to the Counsel, Coromandel-II covers the ﬁrst question and Coromandel-I covers the second question in favour of the Revenue. The Counsel for assessee, however, sought to distinguish Coromandel-II. Be that as it is, today the Senior Counsel for Income Tax relies on the two decisions and submits that both the questions are to be decided in favour of the Revenue. The Counsel for the assessee, however, submits that the trial production was undertaken during January to March, 1984 and the commercial production commenced on 02.4.1984. Therefore, according to him, having regard to the proximity of trial run and the commencement of cement business the assessee is entitled for depreciation under Section 32 of the Act for the assessment year 1984-85. In support of his submission, he relies on certain passages from the judgment in Coromandel-II. This is however strongly opposed by the Counsel for the Revenue. We have thoroughly gone through the order of the assessing authority, ﬁrst appellate authority and the Tribunal. As rightly pointed out by the Revenue, there is no clear ﬁnding by the Tribunal that during the ﬁnancial year 1983-84 the assessee has completed setting up of the machinery and commenced trial production. Nor there is a ﬁnding that there was commencement of production. Even if it is taken that the assessee was involved in producing limestone, which is an essential raw material in the manufacture of cement, it is a question of fact and in the absence of any ﬁnding dealing with the matter under Section 256(1) of the Act, this Court cannot give any importance to such a submission made by the Counsel for the assessee. In Coromandel-II this Court made the following observations. In the instant case, quarrying limestone – may be an essential raw material for the manufacature of cement – is too remote to be in proximity to the business of manufacture of cement to form the ﬁrst stage of commencement of that business of manufacture of cement. However, learned counsel for the assessee laid emphasis on the observation made by this court, which is to the following effect: “Perhaps the same cannot be said to be of the suggested second stage of mining operations of iron ore … and the same amounts to commencement of the business since the same is in proximity to the business of manufacture of cement.” The observation made cannot be blown out of context. It is not as if the court expressed any ﬁrm opinion that mining of iron ore is in proximity to the business of production of sponge iron. The very expression “perhaps” indicates that the court has not expressed any ﬁrm opinion on the same. The judgment, in our considered opinion, does not support the case set up by the assessee but, on the other hand, supports the submissions made by learned senior counsel appearing on behalf of the Revenue. It is not the case of the assessee that the plant and machinery has been erected within a short span of time after commencement of the quarrying of limestone. There is no material available on record as to when the plant and machinery for the manufacture of cement has been erected. As observed by this court, what activities constitute commencement of business is a mixed question of fact and law and it has to be decided on the facts of each case. On the facts of this case it is not possible to hold that the assessee had set up the business and commenced the manufacture of cement as such. The above observations on which considerable reliance is placed indeed go against the assessee and it cannot be said that the assessee commenced cement production during the ﬁnancial year 1983-84 relevant to the assessment year 1984-85. Further as held by the Division Bench in Coromandel-II, “the sole step so taken by the assessee (quarrying limestone) would not amount to setting up the business”. Thus in our considered view commencement of business is sine qua non, for claiming the depreciation under Section 32(1) of the Act. Insofar as the second question is concerned, the Division Bench in Coromandel-I considered the similar question and held as follows. A careful reading of the said provision shows that while computing the expenditure under sub-section (3) of section 37 of the Act, subject of course to the limitations imposed therein, the amount has to be calculated with reference to each individual employee. It may be that the total expenditure incurred by the assessee throughout the year will have to be arrived at in view of the phrase “whole of such amount” as mentioned in sub-clause (i) of clause (b) of rule 6D(2). … … The actual expenditure on each trip has to be ascertained with reference to the provisions of rule 6D. The unit of expenditure for purposes of rule 6D is the trip but not the individual employee. Therefore, it necessarily follows that the expenditure incurred by the assessee will have to be taken into consideration with reference to each trip of an individual employee but not with reference to the totality of the trips made by an individual employee. In our view, the Tribunal is not correct in coming to the conclusion that the Income-tax Oﬃcer has to compute the disallowance under rule 6D with reference to the expenditure incurred by each employee for the whole year as claimed by the assessee. In this view of the matter, the third question is answered in the negative i.e., in favour of the Revenue and against the assessee. In view of the above, both the questions are answered in the negative in favour of the Revenue and against the assessee. The Referred Case shall stand disposed of accordingly. _______________ (V.V.S.RAO, J) ____________________ (B.N.RAO NALLA, J) December 05, 2011. YS [1] (2003) 261 ITR 408 (AP) [2] (1996) 220 ITR 298 (AP)