IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN WEDNESDAY, THE 25TH JUNE 2008 / 4TH ASHADHA 1930 ITR.No. 4 of 2001() ------------------- (ARISING OUT OF ITA NOS.1073/COCH/86 - ASSESSMENT YEARS 1984-85 & 1985-86) APPLICANT: ----------- THE COMMISSIONER OF INCOME TAX, TRIVANDRUM. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL,GOI(TAXES) RESPONDENTS: ------------- M/S.MALABAR INDUSTRIAL CO. LTD., SHERTHALAI. BY ADV. SRI.P.BALAKRISHNAN (E) FOR R SHRI.JOHN RAMESH THIS TAX REFERENCE HAVING BEEN FINALLY HEARD ON 25/06/2008, ALONG WITH ITR NO. 5 OF 2001 THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR & V.K.MOHANAN, JJ. ------------------------- I.T.R. Nos.4 & 5 of 2001 --------------------------------- Dated, this the 25th day of June, 2008 J U D G M E N T Ramachandran Nair, J. Heard learned standing counsel for the Income Tax Department and learned counsel appearing for the respondent. 2. The question raised is whether assessee is entitled to deduction of preliminary expenditures incurred in the assessment years 1984-85 and 1985-86. The claim for the year 1984-85 is Rs.3,27,148/- and for the next year it is Rs.4,55,000/-. The Assessing Officer declined deduction because he was of the view that the preliminary expenditures can be amortised in the hands of the company, which has set up the industry as provided under Section 35B of the Income Tax Act. However, the Commissioner of Income Tax (Appeals) reversed the findings and allowed the appeal, which is upheld by the Tribunal. It is against this order, references are made to this Court at the instance of the Revenue. 3. We find that the Tribunal decided the issue without even caring to verify what are the break up details of the preliminary expenditures claimed by the assessee. Admittedly, the assessee ITR Nos.4 & 5/2001 -2- was not engaged in the business. It was carrying on as a plantation industry. However, learned counsel for the assessee refereed to amendment of the memorandum, which authorised the company to take up business for setting up of other industries. If assessee is engaged in the business of assisting setting up of industry for another party, then certainly the expenditure incurred for the business activities are allowable as revenue expenditure. However, it is seen from the Commissioner of Income Tax(Appeal)'s order that the assessee's effort led to setting up of industry, in which the assessee has an equity participation. It is not known whether assessee has received any consultancy fees or service charges for the services rendered. This should have been the first question to be considered in the enquiry as to whether business expenditure incurred is allowable or not. Strangely, the authorities have not considered the relevant aspects. Even though assessee's counsel relied on the details mentioned in the first appellate order, we feel it is only peripheral consideration of the general issue. There is nothing that stopped the assessee from furnishing details of work undertaken or nature of the work assigned to it by other companies or parties in regard to project work for setting up of industries. The ITR Nos.4 & 5/2001 -3- issue should have been considered with reference to the detail facts on receipts and expenditures in the new line of business undertaken by the assessee based on the amended memorandum and objects of the company. We, therefore, decline to answer the question and set aside the orders of the Tribunal and CIT (Appeals) and also the order of the Assessing Officer on this issue and remand the matter to the Assessing Officer for the assessee to produce details based on which the Assessing Officer will decide the matter afresh in the light of the observations as above, after hearing the assessee. (C.N.RAMACHANDRAN NAIR, JUDGE) (V.K.MOHANAN, JUDGE) jg