1992 (8) TMI 68 - HC - Income Tax

Business Expenses Deductible Before Operations Start: Court Affirms Deduction Under Section 37 of Income-tax Act

The HC concluded that the assessee's business was set up on August 15, 1970, and expenses incurred between that date and October 6, 1970, were deductible ... Business, Business Expenditure Issues Involved:1. Whether the assessee is entitled to the deduction of Rs. 28,965 (corrected to Rs. 47,190) for expenses incurred between August 15, 1970, and October 6, 1970, before the actual commencement of the business.Summary:1. Entitlement to Deduction of Expenses:The primary issue was whether the assessee could claim a deduction for expenses incurred between August 15, 1970, and October 6, 1970, under section 37 of the Income-tax Act, 1961. The Tribunal referred the question to the High Court for an opinion. The respondent-assessee, a private limited company involved in processing marine products, claimed these expenses as deductions in the assessment year 1972-73. The Income-tax Officer initially disallowed the claim, but the Appellate Assistant Commissioner allowed it, concluding that the business was set up on August 15, 1970. The Tribunal upheld this decision, leading to the Revenue's appeal to the High Court.2. Setting Up of Business:The High Court examined the facts and determined that the business infrastructure was in place by August 15, 1970, when the assessee acquired a government godown. The court noted that the actual commencement of business activities, such as procuring fish, began on October 6, 1970. The Tribunal's finding that the business was set up on August 15, 1970, was based on relevant evidence and aligned with legal precedents.3. Legal Precedents:The court referred to several decisions, including Prem Conductors Pvt. Ltd. v. CIT [1977] 108 ITR 654, CIT v. Saurashtra Cement and Chemical Industries Ltd. [1973] 91 ITR 170, and Sarabhai Management Corporation Ltd. v. CIT [1976] 102 ITR 25, to establish the criteria for determining when a business is set up. The court emphasized that the business is considered set up when it is ready to commence, even if actual operations start later.4. Conclusion:The High Court concluded that the assessee's business was set up on August 15, 1970, and the expenses incurred between that date and October 6, 1970, were deductible under section 37 of the Act. The question referred was answered in the affirmative, in favor of the assessee and against the Revenue. No order as to costs.