High Court allows business losses, finding assessee commenced activities pre-1965. Commissioner to cover reference costs.

The High Court ruled in favor of the assessee, overturning the Tribunal's decision. It held that the assessee had indeed commenced its business activities before June 26, 1965, by undertaking essential business components such as securing orders and acquiring raw materials. Therefore, the expenditures and losses claimed by the assessee were allowed as business losses. The Commissioner was instructed to cover the costs of the reference to the assessee.

---

---

Issues Involved:
1. Whether the Tribunal was correct in holding that the assessee did not commence its business prior to June 26, 1965, and consequently not entitled to expenditure incurred amounting to Rs. 58,600 from January 1, 1965, to June 26, 1965.
2. Whether the Tribunal was justified in disallowing the claim of loss of Rs. 46,970 for the assessment year 1965-66.

Detailed Analysis:

Issue 1: Commencement of Business Prior to June 26, 1965
The Tribunal concluded that the assessee did not commence its business prior to June 26, 1965, and therefore, the expenditure incurred from January 1, 1965, to June 26, 1965, amounting to Rs. 58,600 was not allowable. The Tribunal's decision was based on the fact that the actual production of conductors began on June 27, 1965. The Tribunal held that the business activities prior to this date were preparatory and did not constitute the commencement of business.

However, the High Court analyzed the distinction between "setting up" and "commencing" a business as elaborated in various precedents. According to the judgment in Western India Vegetable Products Ltd. v. Commissioner of Income-tax [1954] 26 ITR 151 (Bom), the term "setting up" means establishing the business to the point where it is ready to commence operations. The High Court also referred to Commissioner of Wealth-tax v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478 (SC), which emphasized that operations for setting up a business precede the actual commencement of business.

In Commissioner of Income-tax v. Sarabhai Sons Pvt. Ltd. [1973] 90 ITR 318 (Guj), the court held that obtaining land, placing orders for machinery, and acquiring raw materials were preparatory activities and did not constitute the setting up of the business. The business was considered set up only when the machinery was installed and ready for production.

The High Court concluded that the assessee had indeed commenced its business activities by securing orders, acquiring raw materials, and obtaining necessary licenses and know-how before June 26, 1965. These activities were essential components of the business. Therefore, the Tribunal erred in holding that the business had not commenced before June 26, 1965.

Issue 2: Disallowance of Loss for Assessment Year 1965-66
The Tribunal disallowed the assessee's claim of a loss amounting to Rs. 46,970 for the assessment year 1965-66, on the grounds that the business had not commenced. The High Court, however, found that the assessee had undertaken significant business activities such as acquiring contracts, purchasing raw materials, and securing loans, which are integral parts of the business.

The High Court referred to Commissioner of Income-tax v. Saurashtra Cement & Chemical Industries [1973] 91 ITR 170 (Guj), where it was held that business activities need not start simultaneously. The business would be considered commenced when the first essential activity begins.

In the present case, the High Court determined that the assessee had commenced its business activities from the date of incorporation by securing contracts and preparing for production. Therefore, the loss incurred during the period from January 1, 1965, to June 26, 1965, amounting to Rs. 58,600, and the loss of Rs. 46,970 for the assessment year 1965-66, should be treated as business losses.

Conclusion:
The High Court answered both questions in the negative, in favor of the assessee and against the revenue. The Tribunal's decision to disallow the expenditures and losses was overturned. The Commissioner was directed to pay the costs of the reference to the assessee.

---