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Interpretation of provisions of the Income Tax Act, 1961 regarding the treatment of opening stock in the manufacturing and trading account for the assessment year 1965-66. Detailed Analysis: The case involved an assessee, M/s. Incheck Tyres Ltd., engaged in the manufacture of tyres, with the relevant previous year ending on June 30, 1964, corresponding to the assessment year 1965-66. The Income Tax Officer (ITO) added an amount of Rs. 3,03,000 to the manufacturing account, contending that a portion of raw materials and stores consumed during the pre-production period inflated the cost of manufacturing. The assessee appealed to the Appellate Assistant Commissioner (AAC), who upheld the ITO's view, stating that the opening stock of materials was related to the pre-production period. The matter was further taken to the Tribunal by the assessee, arguing that the expenses incurred were for the business purpose and should be allowable as they related to the cost of raw materials for manufacturing and trading accounts. The Tribunal analyzed the provisions of the Income Tax Act, specifically sections 3, 28(1), and 3(1)(d), to determine the eligibility of the expenses claimed by the assessee. It held that the Revenue's reliance on section 28(1) without considering the definition of "previous year" under section 3 was misplaced. The Tribunal referred to the decision in Western India Vegetable Products Ltd. v. CIT and CWT v. Ramaraju Surgical Cotton Mills Ltd., emphasizing that expenses incurred before the commencement of commercial production were allowable as they were related to the business set up. The Tribunal concluded that the expenses for arriving at the manufacturing and trading account should be considered along with the opening stock and purchase price of raw materials. The High Court, upon reviewing the Tribunal's decision, noted the distinction between setting up a business and commencing manufacturing operations. It observed that the Revenue's argument regarding the timing of the expenditure was not raised before the Tribunal and therefore could not be considered at this stage. The Court held that the Tribunal had sufficient material to reach its conclusion and answered the question in favor of the assessee. The judgment was agreed upon by both judges, and each party was directed to bear their own costs. In conclusion, the judgment clarified the treatment of expenses related to the manufacturing and trading account, emphasizing the importance of considering the business set up and commencement of operations when determining the allowability of expenses under the Income Tax Act.
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