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Issues Involved:
1. Whether the assessee-company had set up business in February, 1961. Summary: Issue 1: Whether the assessee-company had set up business in February, 1961 The High Court of Bombay was tasked with determining whether the assessee-company had set up its business in February, 1961, for the assessment year 1962-63. The company, incorporated on 1st August, 1959, had completed the construction of its building and installation of machinery by December, 1960, or January, 1961. The business involved manufacturing industrial solvents, particularly ether, requiring denatured spirit as raw material. The plant was initially charged with 200 gallons of raw material on 5th February, 1961, and continued operations throughout the year, although the finished product was not marketable. The Income Tax Officer (ITO) concluded that the plant was completed by mid-March 1961, and trials continued until September 1961, deeming these as experimental and not indicative of business commencement. Consequently, the ITO disallowed the expenses claimed by the company, viewing them as preparatory rather than operational. The Appellate Assistant Commissioner (AAC), however, accepted the company's contention, referencing the Bombay High Court decision in Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151, which stated that a business is set up when it is ready to commence production. The AAC found that the business was set up in February 1961, when trial runs began, and directed the ITO to determine the admissible business loss and depreciation. The Income-tax Appellate Tribunal upheld the AAC's decision, agreeing that the business was set up in February 1961, despite the finished product being unmarketable. However, the Tribunal did not specify the exact date or month when the finished product was obtained, leading to a supplementary statement of case. The Tribunal later found that some quantity of the finished product was obtained between 19th August, 1961, and 11th September, 1961, although it was sub-standard. The revenue argued that the business could not be considered set up in February 1961, as the company failed to obtain a reasonable quantity of the finished product within the accounting year. They suggested 19th August, 1961, as the earliest possible date for setting up the business. The assessee contended that the business was set up in February 1961, when the plant commenced trial operations. The court referred to various precedents, including Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151 and CWT v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478, emphasizing that a business is set up when it is ready to commence operations, not necessarily when it starts production. The court concluded that mere installation of machinery was insufficient; the business must be ready to produce the end product. Based on the Tribunal's findings, the court determined that the business was set up by 19th August, 1961, when the plant began producing ether, albeit sub-standard. Consequently, the expenses incurred after this date were deemed business expenses. The Tribunal's order sustaining the AAC's decision was not upheld, and the ITO was directed to calculate the admissible business loss, depreciation, and development rebate from 19th August, 1961. Conclusion: The assessee-company was regarded as having set up its business by 19th August, 1961, and not in February, 1961. Both sides were directed to bear their own costs of the reference.
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