Commencement of Business for property letting and conversion: expenses incurred pre-opening held allowable as business expenditure.

A company carrying on a multi-faceted letting business converted a residential property and undertook alterations, installations and staffing to render accommodation serviceable; the activity of preparing and making premises available constituted carrying on the second category of its business from October 1, 1964, and therefore preparatory expenditure incurred between October 1, 1964, and March 31, 1965, amounting to Rs. 48,004, is attributable to business operations and is allowable as business expenditure with the effect that those costs must be treated as deductible business expenses.

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Issues Involved:

1. Whether the expenditure of Rs. 48,004 incurred between October 1, 1964, and March 31, 1965, could be allowed as business expenditure.

Summary:

Issue 1: Allowability of Expenditure as Business Expenditure

The assessee, a private limited company incorporated on March 24, 1964, aimed to acquire immovable property and lease it out with amenities. The company purchased a bungalow on March 28, 1964, and claimed that it was ready to offer services from October 1, 1964. The expenditure of Rs. 48,004 incurred between October 1, 1964, and March 31, 1965, was claimed as business expenditure. The Income-tax Officer rejected this claim, stating that the business commenced only on May 1, 1965, when part of the building was given on leave and licence. The Appellate Assistant Commissioner and the Tribunal upheld this decision, concluding that the company was not ready to carry on its business by October 1, 1964.

The High Court analyzed the objects of the company, which included providing residential and office accommodation with amenities. The court noted that the business activities of the company could be divided into three categories: acquiring property, preparing it for lease, and actually leasing it out. The court emphasized that business activities include preparatory actions such as engaging staff and purchasing equipment.

Referring to the principles laid down in Commissioner of Income-tax v. Saurashtra Cement & Chemical Industries Ltd., the court stated that business commences when the first essential activity is started. The court concluded that from October 1, 1964, the company was engaged in business activities by preparing the property for lease, thus incurring business expenditure.

The court held that the Tribunal had not applied the correct tests and arrived at an erroneous conclusion. Therefore, the expenditure of Rs. 48,004 incurred between October 1, 1964, and March 31, 1965, should be allowed as business expenditure. The question was answered in the affirmative and in favor of the assessee, with costs to be paid by the Commissioner.

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