Revenue deduction dispute on when a new manufacturing business is set up deemed to commence only after machinery installation.

Revenue deduction concern addresses when a new manufacturing business is treated as 'set up' for tax purposes. The legal basis is that commercial commencement requires the enterprise to be ready to perform its manufacturing function, which in this case depended on installation of necessary machinery; preparatory acts (leasing land, hiring management, ordering materials or equipment) are insufficient. Consequently the business was not set up before the machinery installation in July 1966, and the earlier Tribunal finding to the contrary was unsupported by evidence, with costs directed against the assessee.

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Issues:
Assessment of income tax for the year 1966-67, Deduction of revenue expenditure for a new business, Interpretation of when a business is considered set up.

Analysis:
The judgment pertains to the assessment of income tax for the year 1966-67 of a private limited company acting as a managing agent of another company, which decided to start a new business for manufacturing scientific instruments and communication equipment. The company appointed a General Manager for the new business in November 1965 and started preparations by placing orders for machinery and equipment in January 1966. The company also rented premises and initiated manufacturing activities in July 1966. The company claimed a deduction of Rs. 13,770 as revenue expenditure incurred before March 31, 1966. The Income-tax Officer initially rejected the claim, but the Appellate Assistant Commissioner and Tribunal allowed it based on the Bombay High Court's decision that the business was set up in January 1966.

The main issue revolved around determining when a business is considered set up, as it impacts the eligibility for claiming revenue expenditure as a deduction. The Income-tax Act specifies that the previous year for a newly set up business begins with the date of setting up and ends with the financial year. The Supreme Court precedent established that a business is set up when it is ready to commence operations. In this case, the business of manufacturing scientific instruments and communication equipment was not considered set up until July 1966 when the machinery was installed and the factory was ready to commence operations. Merely appointing a General Manager or ordering machinery and equipment did not constitute setting up the business. The Tribunal's decision that the business was set up before March 31, 1966, was deemed unreasonable and not supported by evidence.

In conclusion, the Tribunal's finding that the business was set up before March 31, 1966, was contrary to evidence and unreasonable. The business was only considered set up when it was ready to commence operations, which occurred in July 1966. Therefore, the company was not eligible to claim the revenue expenditure incurred before the business was fully established. The judgment highlights the importance of understanding when a business can be deemed set up for tax deduction purposes.

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