Business not deemed set up before June 1966, expenses disallowed

The High Court ruled against the assessee, determining that the business was not set up by June 1966 as claimed. Consequently, expenses incurred post-June 1966 were not classified as revenue expenses. The Court emphasized that a business is considered set up only when it is ready to discharge its intended function, highlighting ongoing trial production and the need for additional machinery as factors indicating unreadiness for commercial production by June 1966. The assessee was directed to bear the costs of the reference to the Commissioner.

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Issues Involved:
1. Determination of the point at which the assessee-company set up its business.
2. Classification of expenses incurred post-June 1966 as revenue expenses.

Summary:

Issue 1: Determination of the point at which the assessee-company set up its business

The central question referred to the High Court was whether the assessee-company had set up its business by the end of June 1966, despite only trial production occurring thereafter and regular commercial production commencing later. The Tribunal had concluded that the business was set up by June 1966, as the company was equipped with all necessary plant, machinery, and raw materials to produce paper. However, the revenue contended that this conclusion was erroneous due to the ongoing installation of the wet press and the trial production phase extending into September 1966. The High Court, referencing Supreme Court decisions in *CWT v. Ramaraju Surgical Cotton Mills Ltd.* and *Travancore-Cochin Chemicals (P.) Ltd. v. CWT*, held that a business is considered set up only when it is ready to discharge its intended function. The Court found that the Tribunal erred in concluding that the company was ready for production by June 1966, given the ongoing trial production and the need for additional machinery to achieve satisfactory production levels.

Issue 2: Classification of expenses incurred post-June 1966 as revenue expenses

The assessee-company claimed that expenses incurred after June 1966 should be treated as revenue expenses. The Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) rejected this claim, stating that the business had not been set up until September 1966, as evidenced by the order from the Collector of Central Excise. The Tribunal, however, allowed the appeal, directing that these expenses be deducted as revenue expenses. The High Court, disagreeing with the Tribunal, held that the company was not ready for commercial production by June 1966 and thus, expenses incurred during the trial production phase could not be classified as revenue expenses.

Conclusion:

The High Court reframed the question to focus on whether the Tribunal was correct in law to hold that the business was set up by June 1966. The Court answered this reframed question in the negative, ruling in favor of the revenue and against the assessee. Consequently, the expenses incurred post-June 1966 were not to be treated as revenue expenses. The assessee was ordered to pay the costs of the reference to the Commissioner.

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