Pre-commencement business and integrated commission liability are not deductible by apportionment against exempt profits.

Expenditure incurred before a new business has commenced is treated as preliminary expense and is not deductible in computing business income. Managing agency commission charged as a single liability on the net annual profits of an integrated business, and paid in Bombay, cannot be split and allocated to Karachi profits merely because part of those profits is exempt under the Indo-Pakistan relief arrangement. The deduction was therefore confined to the liability as incurred, without apportionment against exempt profits.

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Issues: (i) Whether prosecution expenses incurred in connection with an intended but unstarted business were deductible in computing business income. (ii) Whether managing agency commission payable on the profits of the Bombay and Karachi businesses could be apportioned so as to allow deduction of the portion attributable to Karachi profits for the purpose of tax relief under the Indo-Pakistan agreement.

Issue (i): Whether prosecution expenses incurred in connection with an intended but unstarted business were deductible in computing business income.

Analysis: The expenditure was incurred before the jeep business had actually commenced and was connected only with the preliminary steps of entering that line of business. Amounts spent before a business is started stand on the same footing as preliminary expenses and are not allowable as deductions in computing profits of the existing business.

Conclusion: The expense was not a permissible deduction.

Issue (ii): Whether managing agency commission payable on the profits of the Bombay and Karachi businesses could be apportioned so as to allow deduction of the portion attributable to Karachi profits for the purpose of tax relief under the Indo-Pakistan agreement.

Analysis: The managing agency commission was payable as a single charge on the net annual profits of the company as an integrated business, accrued and was paid in Bombay, and was not contractually referable to separate apportionment between Bombay and Karachi. The agreement under Section 49AA of the Income-tax Act, 1922, could not be used to convert that unified liability into an apportioned deduction. Following the principle applied in the analogous decision on section 14(2)(c), the relevant deduction was the whole commission as incurred in Bombay, not a split allocation against Karachi profits.

Conclusion: The commission was not apportionable against Karachi profits, and the assessee was not entitled to the further deduction claimed.

Final Conclusion: Both questions were answered in a manner that upheld the revenue's position, and the Tribunal's view was sustained.

Ratio Decidendi: Expenditure incurred before a new business has commenced is not deductible as business expenditure, and a commission liability arising on the basis of the profits of an integrated business is not apportionable merely because part of the profits is exempt from tax under a reciprocal relief arrangement.

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