1978 (4) TMI 118 - AT - Income Tax

Tribunal disallows pre-business expenses but allows post-commencement costs due to raw material unavailability.

The Tribunal rejected the expenses claimed by the assessee before December 14, 1973, as they did not constitute the commencement of business. However, ... Distinction between setting up of business and commencement of business - allowability of pre-commencement business expenses - business commencement linked to regulatory licence - remand for verification of expenditureDistinction between setting up of business and commencement of business - allowability of pre-commencement business expenses - business commencement linked to regulatory licence - Whether the assessee is entitled to deduction of business expenses incurred in the period claimed where actual manufacture did not occur but licence to manufacture was obtained on 14th December, 1973. - HELD THAT: - The Tribunal accepted that there is a legal distinction between setting up a business and commencement of business. Actions taken before the date when the regulatory licence was issued cannot be treated as commencement of business. Once the licence to manufacture was obtained on 14th December, 1973 the assessee was in a position to commence production and, but for unavailability of raw material, could have started manufacturing. Therefore expenses incurred after the date of grant of the licence are attributable to the commenced business and are allowable; expenses incurred prior to that date are not allowable as business deductions for the year under appeal.Expenses incurred up to 14th December, 1973 disallowed; expenses incurred after 14th December, 1973 allowed.Remand for verification of expenditure - Verification of the quantum and date-wise allocation of the claimed expenditure of Rs. 6,399 between amounts incurred before and after 14th December, 1973. - HELD THAT: - The Tribunal directed factual verification by the ITO because the assessee's representative stated that expenditures prior to 14th December, 1973 amounted to Rs. 2,942 but no supporting details were placed before the Tribunal. The limited remand is for the ITO to examine the assessee's records, determine the correct split of expenses on the basis of documents and allow only those expenses that fall after the licence date.Matter remanded to the ITO to verify and quantify expenses incurred up to 14th December, 1973, which alone are to be disallowed; the balance to be allowed.Final Conclusion: The appeal is partly allowed: expenditures incurred after 14th December, 1973 (date of grant of licence) are allowable as business expenses; expenditures prior to that date are disallowed, subject to verification and quantification by the ITO. Issues:- Disallowance of expenses claimed by the assessee for the assessment year 1974-75.Analysis:The assessee contended that the disallowance of Rs. 6,399.00 made by the Income Tax Officer (ITO) and confirmed by the Appellate Assistant Commissioner (AAC) was incorrect. The assessee, an individual, had started a business under the name Pharma Chem but did not produce anything during the relevant year. The ITO disallowed the claimed loss as no business activity was conducted during the year. The AAC upheld this decision.The assessee's representative argued that the business under the name M/s. Pharma Chem was established in September 1973, and expenses of Rs. 6,399.00 were incurred between September 1973 and March 1974. These expenses were claimed as business expenditure. The representative emphasized the difference between commencing business and setting it up, stating that for income tax purposes, setting up the business was crucial. The business premises were acquired, machinery installed, and a drug license obtained by December 14, 1973. However, due to the unavailability of raw materials, actual production did not commence. The assessee contended that the expenses incurred before December 14, 1973, should be allowed.The Departmental Representative argued that until goods were manufactured, the expenses could not be claimed. They contended that actions such as obtaining a building, installing machinery, or applying for a drug license did not constitute manufacturing. The Departmental Representative maintained that the assessee could not claim the expenses until the date the license was obtained, i.e., December 14, 1973.The Tribunal acknowledged the distinction between setting up a factory and commencing business. They noted that actions taken before December 14, 1973, when the license was issued, did not strictly constitute the commencement of business. However, they recognized that the business could not start due to the unavailability of raw materials. The Tribunal decided to reject the expenses incurred before December 14, 1973, but allowed the expenses thereafter. The ITO was directed to verify the expenses incurred before December 14, 1973, and disallow only those expenses. Consequently, the appeal was partly allowed.