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Issues: (i) Whether the manufacture of butyl alcohol had commenced during the relevant previous years so as to entitle the assessee to claim deduction of expenditure and depreciation under section 10(2)(xv) of the Income-tax Act, 1922. (ii) Whether the circumstance and property tax paid to the District Board was deductible as business expenditure under section 10(2)(xv) of the Income-tax Act, 1922.
Issue (i): Whether the manufacture of butyl alcohol had commenced during the relevant previous years so as to entitle the assessee to claim deduction of expenditure and depreciation under section 10(2)(xv) of the Income-tax Act, 1922.
Analysis: Mere completion of the plant and the consumption of small quantities of raw material, without production of any finished product, was held insufficient to establish commencement of the manufacturing business. For the later periods, however, substantial raw materials were consumed, finished goods were produced, and the goods were offered for sale or actually sold. Those facts showed that the plant was being run for the purpose of manufacturing marketable product, even if the business was running at a loss or the output was small.
Conclusion: The manufacture had not commenced in the assessment years corresponding to the period ending 30 September 1945 and the year when the distillery did not work at all, but it had commenced in the intervening two assessment years. The issue was decided partly in favour of the assessee and partly against the assessee.
Issue (ii): Whether the circumstance and property tax paid to the District Board was deductible as business expenditure under section 10(2)(xv) of the Income-tax Act, 1922.
Analysis: The tax was treated as an outgoing incurred for carrying on the sugar business and not as a tax on income. The decision followed the earlier view that such a levy, when imposed on the business premises and operations of the sugar mill, was an expenditure laid out wholly and exclusively for the purpose of business.
Conclusion: The tax was deductible as business expenditure and the issue was decided in favour of the assessee.
Final Conclusion: The references were disposed of by upholding deduction only for the periods in which manufacturing business had commenced and by allowing the district board tax as a deductible business expense, with costs left to be borne by the parties themselves.
Ratio Decidendi: Manufacturing business commences only when the process of production of the finished commercial product actually begins; preparatory or experimental steps, even after a plant is completed, do not amount to commencement. A levy imposed on the business operations of a sugar mill may be deductible if it is incurred wholly and exclusively for carrying on the business.
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