Chander Singh, A.M. - (1.) THESE two appeals by the assessee for the asst. yrs. 1991-92 and 1992-93 are combined for the sake of convenience.
(2.) The assessee is a public limited company and is engaged in the production of steel. The assessee-company had undertaken a new project called "seamless pipes" at Baramati, which did not become functional till 31st March, 1991. The new unit of seamless pipes was considered by the assessee as part of the existing business for which the pre-operative interest of Rs. 1,04,09,776 and pre-operative expenses of Rs. 61,22,670 were claimed for the asst. yr. 1991-92. Similarly, for the asst. yr. 1992-93, the assessee had claimed the pre-operative interest of Rs. 4,56,87,651 and pre-operative expenses of Rs. 1,68,65,178. In addition, for the asst. yr. 1991-92, the assessee had also claimed the expenditure on service line for tube division amounting to Rs. 13,45,000. The AO disallowed the said expenditure by observing for the asst. yr. 1991-92 as under : "The assessee has claimed pre-operative expenses of Rs. 1,65,32,446 as deductible business expenses in respect of its seamless tube project at Baramati. The assessee's factory is at Mundhwa and its new project is at Baramati. The assessee claims that though it is at distance of over 100 miles, the new unit is only a part and parcel of the old unit at Mundhwa, as the management is the same, the funds are inter-winded and as the products of old unit become the raw material for the new unit. These claims are not acceptable. The new project at Baramati is entirely a new unit, with an entirely new product to be manufactured. The pre-operative expenses including those on interest, etc., cannot be allowed as revenue expenditure and I hold that these are properly capitalised by the assessee. The deduction of Rs. 1,65,32,446 claimed is rejected taking into account the Expln. 8 to s. 43(1) of the IT Act, 1961." On similar grounds, the AO also rejected the claim of the assessee for the payment of Rs. 13,45,000 being cost of M.S.E.B. for service connection/service line for its seamless tube project at Baramati.
(3.) AGGRIEVED, the assessee went in appeal before the CIT(A). It was urged before the CIT(A) that during the relevant previous year the assessee embarked on an expansion of its activity by going in for manufacture of seamless steel tubes which was a forward integration. For this purpose, the assessee obtained the requisite letter of intent and also acquired land at Baramati. During the year the assessee started construction of the factory and also started acquiring necessary plant and machinery for the purpose of seamless tube project. The assessee claimed the deduction as revenue expenditure on pre-operative interest as well as pre-operative expenses in respect of the seamless tube project. The assessee also asserted before the CIT(A) that although the new unit was at Baramati, it was only part and parcel of the existing business of the assessee as the management is same, funds are common, and steel produced by the factory at Mundhwa constitute raw material for seamless tubes. In this regard, the assessee made elaborate submissions before her vide 12th June, 1996, 17th June, 1996, and 26th June, 1996. All these letters have been placed by the assessee on its paper-book filed before us. In its letter dt. 28th September, 1994, the assessee justified the claim by citing various High Courts decisions and also pointed out that the test for constituting the same business is existence of common funds, existence of common management and common place of business. The assessee, therefore, tried to impress upon the CIT(A) that the tube division was part and parcel of the existing business of the assessee and, therefore, the assessee was entitled to the deduction of pre-operative interest and pre-operative expenses as well as expenses on the service line.;