1994 (11) TMI 178 - AT - Income Tax

Tribunal affirms deductions for business expenses, emphasizing readiness to commence operations.

HERO HONDA MOTORS LTD. Versus DEPUTY COMMISSIONER OF INCOME TAX.

The Tribunal upheld the CIT(A)'s decision to allow deductions for revenue expenditure incurred by the assessee during the period in question. It was ... - Issues:1. Whether the Assessing Officer erred in disallowing the assessee's claim of expenses incurred for a specific period.2. Whether the assessee had set up its business during the relevant accounting year.3. Whether the Revenue's appeal against the order of the CIT(A) directing identification and allowance of revenue expenditure is valid.4. Whether trial production qualifies as setting up a business for claiming deductions.5. Interpretation of relevant provisions including s. 35D and s. 28 in the context of the case.Detailed Analysis:1. The Revenue appealed against the CIT(A)'s order directing the Assessing Officer to identify and allow deductions for revenue expenditure incurred by the assessee from 16th March, 1985, to 30th April, 1985. The Revenue contended that the assessee had not started functioning as a business or manufacturing organization during the relevant accounting year, thus disallowing the claim of expenses incurred. The CIT(A) found that the assessee had indeed set up its business during the said period, leading to the direction for allowance of the expenditure.2. The Departmental Representative argued that trial production without any commercial production or saleable commodity does not constitute setting up a business for claiming deductions. Citing relevant case laws, including judgments from the Allahabad High Court and the Supreme Court, the Representative contended that a unit must be ready to discharge its intended function to be considered set up. Referring to provisions such as s. 35D and s. 28, it was asserted that the assessee's claim should be judged accordingly.3. The assessee's representative emphasized that the business was set up during the relevant period, as evidenced by trial production activities and necessary preparations for commercial production. Referring to conflicting judgments and supporting case laws, the representative argued that the assessee was geared for production and, therefore, entitled to claim deductions for the expenses incurred. The representative highlighted the readiness of the business to commence operations as a crucial factor in determining whether the business was set up.4. The Tribunal reviewed the orders of the AO and the CIT(A) and found the latter's order detailed and well-reasoned. Relying on the distinction made by the apex court between setting up a unit and its operational function as a business, the Tribunal endorsed the CIT(A)'s findings. It was concluded that the authorities cited by the Revenue were not applicable to the case, and the assessee had indeed set up its business during the relevant accounting year, justifying the allowance of the claimed deductions.5. The Tribunal dismissed the Revenue's appeal, affirming the decision of the CIT(A) regarding the identification and allowance of revenue expenditure incurred by the assessee. Additionally, the assessee withdrew its appeal during the hearing, leading to its dismissal.