R.R. Rastogi, J. - (1.) THE Income-tax Appellate Tribunal, Delhi Bench " A ", has referred the following questions for the opinion of this court. By the assesses : " Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the sum of Rs. 7,016 estimated to be the expenditure incurred by the company on the entertainment of customers and clients at its various offices was in the nature of entertainment expenditure within the meaning of Section 37(2) of the, Act ? " By the Commissioner : " (1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Abohar Ginning Unit had not been formed by the reconstruction of an already existing business but was entitled to exemption under Section 84 of the I.T. Act, 1961 ? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the one-half of the profits of the previous years should be added to the capital computation for purposes of calculating the relief under Section 84 ? (3) Whether, on the facts and in the circumstances of the case, the ITO was justified in estimating the annual letting value of the premises in question at Rs. 96,000 notwithstanding the fact that the quarters had already been let out to the Modi Industries Ltd., for a rent of Rs. 27,462?"
(2.) M/s. Modi Spinning and Weaving Mills Co. Ltd., Modinagar, hereinafter referred to as the assessee, is a public limited company carrying on business at Modinagar. The assessment year involved is 1965-66, the corresponding accounting period ended on April 30, 1964. The ITO made several additions and disallowed certain expenses claimed by the assessee, one of which was entertainment expenditure and the question referred at the instance of the assessee relates to the same. The assessee had debited a sum of Rs. 1,14,448 to the mess account in the accounts of its head office and of different units. Out of that amount a sum of Rs. 32,016 had been paid to the local restaurants and hotel for tea, etc., and it was claimed that that expenditure had been incurred by the assessee on the members of the staff. It was, however, admitted that that amount also included expenses incurred in entertaining the customers, merchants, and agents who came to the assessee's mill at Modinagar. In the absence of proper details, the ITO disallowed half of the said expenses being expenses incurred for the entertainment of the customers. The disallowance was upheld by the AAC on appeal. On further appeal before the Appellate Tribunal, it was urged that similar expenditure claimed by the assessee in the preceding year had been allowed by the Appellate Tribunal. In that year, the expenses claimed by the assessee had only been in respect of tea provided to the members of the staff while in the year under consideration this amount included expenditure incurred in entertaining the customers, merchants and agents as well. Hence, in the absence of fuller details and on a comparison with the figures of the earlier year, the Appellate Tribunal estimated Rs. 25,000 as expenditure incurred on the members of the staff and the balance of Rs. 7,016 as expenditure incurred on guests and occasional visitors. The disallowance was, thus, sustained at Rs. 7,016. So far as this disallowance is concerned, the matter is covered by a decision of this court rendered in Brij Roman Dass andamp; Sons v. CIT [1976] 104 ITR 541. Entertainment expenditure incurred on customers was held to be governed by Section 37(2A) of the I.T. Act, 1961. The corresponding provision is now contained in Section 37(2) and respectfully following that decision we agree with the view taken by the Appellate Tribunal in regard to the amount of Rs. 7,016. Now, coming to the questions, referred at the instance of the Commissioner, in regard to question No. 1 the facts briefly stated are that during the relevant previous year the assessee had set up a ginning press mill at Aboharand it started working from February, 1964. The assessee claimed that it had a profit of Rs. 90,330 from this mill and in respect of the same claimed rebate under Section 84 of the Act. The ITO did not accept that claim, the reasons being that if the purchase tax of Rs. 2,25.935 payable by this unit on the total purchases made by it was debited to the profit and loss account of the unit, there would be no profit available ; secondly, this unit had been set up from borrowed funds and if the liabilities payable in that behalf be excluded, the capital employed in this business would come to nil and, lastly, the computation of profit at Rs. 90,330 was not correct.
(3.) WHEN the matter came up in appeal before the AAC two additional grounds were urged in respect of this claim on behalf of the ITO and they were that, firstly, the sales of the pressed cotton had been made to the other units of the assessee at rates higher than the market value and this could not be done ; and, secondly, it was a case of expansion and could be said to have been formed as a result of the reconstruction of a business already in existence and as such was not entitled to exemption. The AAC accepted this last ground and upheld the disallowance of the claim. In second appeal, it was urged before the Appellate Tribunal on behalf of the assessee that the Abohar Ginning Press was an independent and economically viable unit and a substantial amount had been invested in it. This unit was bigger than the ginning unit which the assessee already had at Patiala. The production of this unit amounted to a crore of rupees out of the total turnover of Rs. 9 crores made by the company. There were some special features in the form of a delinting plant and it was the only one of its kind in Punjab. The Appellate Tribunal accepted this submission and came to the conclusion that this unit was a separate industrial undertaking entitled to relief under Section 84 of the Act. We find that on the facts found by the Appellate Tribunal the view taken is absolutely correct and finds support from the decision of the Supreme Court in Textile Machinery Corporation Ltd. v. CIT [1977] 107 ITR 195 (SC). That was a case under Section 15C of the Act of 1922 and it was laid down (p. 203) I " Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business. No particular decision in one case can lay down an inexorable test to determine whether a given case comes under Section 15C or not. In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is preserved. " Some of the factors which go to make an undertaking a new industrial undertaking within the meaning of Section 15C were stated to be that the new industrial undertaking must produce result, that it should have certain number of workers engaged in manufacturing process carried on by it, and it must not be substantially the same old existing business. There should be substantial investment of fresh capital in order to enable the earning of profits attributable to that new capital.;