2003 (2) TMI 54 - HC - Income Tax

Court rules quarrying limestone /= setting up cement business. Deductions allowed when biz ready to function.

The court determined that quarrying limestone alone did not constitute setting up a cement manufacturing business. As there was no evidence of the plant ... 'Whether, on the facts and in the circumstances of the case, the assessee could be said to have set up business of manufacturing cement during the accounting year relevant to the assessment year 1983-84 ?' - 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. - we will answer that in the negative. The reference is accordingly answered in favour of the Revenue and against the assessee. Issues Involved:1. Whether the cement unit could be said to have commenced business during the accounting year relevant to the assessment year 1983-84.Issue-wise Detailed Analysis:1. Commencement of Business:The core issue for consideration is whether the assessee's cement unit commenced business in the accounting year relevant to the assessment year 1983-84.Facts and Contentions:- The assessee, a public limited company, claimed that it commenced limestone mining activity for cement production in 1982, seeking deductions for related expenditures, depreciation, and investment rebate.- The Inspecting Assistant Commissioner disallowed these claims, asserting that the business had not commenced.- The Commissioner of Income-tax (Appeals) allowed the claims, citing that quarrying limestone is the first step in cement production.- The Income-tax Appellate Tribunal upheld the Commissioner's decision, rejecting the Revenue's appeal.Revenue's Argument:- The Revenue argued that merely quarrying limestone does not equate to starting cement manufacturing. The plant and machinery must be set up and ready for production.Assessee's Argument:- The assessee contended that quarrying limestone, an essential raw material, is the first step in cement production and thus constitutes commencement of business.Court's Analysis:- The court distinguished between 'setting up' and 'commencement' of business, stating that for claiming deductions, it suffices if the business is set up.- Citing precedents, the court explained that a business is set up when it is ready to start functioning as a manufacturing organization.- The court observed that there was no finding by the Tribunal on when the machinery and plant for cement manufacturing were set up.Precedents Considered:- CIT v. Sarabhai Sons Pvt. Ltd. [1973] 90 ITR 318: Highlighted the distinction between setting up and commencement of business.- CIT v. Saurashtra Cement and Chemical Industries Ltd. [1973] 91 ITR 170: Discussed the stages of business activities but was distinguished by the court.- Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151: Emphasized that setting up a business is different from commencing it.- CWT v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478 (SC): Defined 'set up' as being ready to discharge the intended function.- CIT v. Sponge Iron India Ltd. [1993] 201 ITR 770 (AP): Clarified that the commencement of business is a mixed question of fact and law.- Sarabhai Management Corporation Ltd. v. CIT [1976] 102 ITR 25 (Guj): Approved by the Supreme Court, discussed the stages of business activities.Conclusion:- The court found no evidence that the plant and machinery for cement manufacturing were set up or commissioned.- Quarrying limestone alone does not amount to setting up the business.- The Tribunal misdirected itself by concluding that the assessee commenced its business of cement manufacturing merely by starting limestone quarrying.Final Judgment:- The court redrafted the question to focus on whether the business was set up and answered it in the negative.- The reference was answered in favor of the Revenue and against the assessee.