1972 (7) TMI 7 - HC - Income Tax

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 ... Revenue deduction - Whether the finding of the Tribunal that the business of the assessee had been set up in the previous year was unreasonable or contrary to evidence or based on no evidence at all ? - HELD THAT:- The new business which was sought to be established by the assessee was a business of manufacturing scientific instruments and communication equipment and it could not be said to be ready to discharge the function for which it was being established, namely, manufacture of scientific instruments and communication equipment, until the machinery necessary for the purpose of manufacture was installed. It is only when the machinery was installed that the business could be said to be put into such a shape that it could start functioning as a manufacturing organisation. It was not sufficient that the assessee obtained the land on lease from the Gujarat Industrial Development Corporation or appointed Dr. Ramanathan as a General Manager or placed orders for purchase of raw materials and stores or ordered out the necessary machinery and equipment. These were merely operations for the setting up of the business. The business could be set up only as a culmination of these operations when all that was necessary for the setting up of the business was done. The new business in the present case could not, therefore, be said to be set up by the assessee until July, 1966, when the machinery was installed and the factory was ready to commence business. We, therefore, answer the question as reframed by saying that the finding of the Tribunal that the business of the assessee was set up in the previous year that is, prior to 31st March, 1966, was contrary to evidence or based on no evidence at all. It was impossible for the Tribunal to have come to that decision on the facts found by it. The question must, therefore, be answered in the affirmative. The assessee will pay the costs of the reference to the Commissioner. 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.