Depreciation and development rebate on machinery in limestone extraction held deductible as business commenced upon extraction

Whether quarrying and extracting limestone amounted to commencement of business for tax deductibility of expenses and allowances was considered; the extraction activity itself was held to constitute commencement of business, a factual finding not set aside for legal error, and therefore expenditure on extraction together with depreciation and development rebate for machinery used in extraction were deductible in computing trading profits for the relevant assessment years. A secondary question was rendered unnecessary by this conclusion.

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Issues: (i) Whether the expenditure, depreciation and development rebate in respect of extraction of limestone from mines could be allowed as business expenditure?

Analysis: The issue required identification of the activities that constituted the assessee's business and whether extraction of limestone formed an essential and integral activity of that business in the relevant accounting years. The business was analysed as comprising three interdependent stages: procurement of raw material (extraction of limestone), manufacture of cement, and sale of cement. For a deduction to qualify as revenue expenditure it must be incurred for the purpose of a business carried on in the relevant accounting year. It was held that commencement of business does not require that all constituent activities be simultaneously in operation; the start of an essential antecedent activity which is part of a continuous process can mark commencement. Extraction of limestone, begun in April 1958, was an essential antecedent activity undertaken with a view to carrying on the manufacture and sale of cement and therefore formed part of the business carried on in the relevant years. Prior decisions addressing when an industrial unit is 'set up' or 'established' were distinguished as addressing a different legal question (setting up a unit versus commencement of business).

Conclusion: The expenditure, depreciation and development rebate relating to extraction of limestone are allowable as business expenditure in computing trading profits; the question is answered in the affirmative in favour of the assessee.

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