1992 (3) TMI 49 - HC - Income Tax

Summary

Issues:
- Whether expenses incurred after the purchase of raw materials but before the start of production are allowable as revenue expenditure.

Analysis:
The case involved a reference made by the Tribunal under section 256 of the Income-tax Act, 1961, at the instance of the Revenue. The main issue was whether expenses of Rs. 20,131 incurred by the assessee-company after purchasing raw materials but before the commencement of production were allowable as revenue expenditure. The assessee, engaged in manufacturing plastic containers, purchased raw materials on June 9, 1973, and started production on November 23, 1973. The Income-tax Officer disallowed the claimed deduction of Rs. 30,962 as revenue expenditure, as it was incurred before the production date. However, the Appellate Assistant Commissioner allowed the deduction, leading the Revenue to appeal to the Income-tax Appellate Tribunal.

The Tribunal held that the assessee had commenced business when it purchased raw materials on June 9, 1973, and expenses incurred after that date but before production were deductible as revenue expenditure. The Revenue contended that actual production started on November 23, 1973, and thus, the business did not commence on the purchase date. The Revenue relied on various precedents to support its argument. However, the Court emphasized that the question of whether the assessee commenced business is a factual determination. It was found that the raw materials were genuinely purchased for production, indicating a genuine intent to start the business.

The Court adopted a common-sense approach, stating that the assessee would not have purchased raw materials unless genuinely intending to commence production. The Tribunal's finding that the business commenced on June 9, 1973, based on the purchase of raw materials, was upheld. Therefore, the expenses incurred by the assessee were deemed as revenue expenditure and deductible. The Court answered the referred question in favor of the assessee and against the Revenue. The judgment highlighted the factual nature of determining business commencement and the significance of genuine intent demonstrated through actions like purchasing raw materials.