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Issues involved: Determination of the date when a business can be considered as set up for claiming deductions under section 28 of the Income-tax Act, 1961.
Summary: The High Court of Bombay considered a case where an assessee-company claimed expenditure incurred for business purposes during the assessment year 1965-66. The Income Tax Officer (ITO) disallowed the expenditure, stating that the business was not set up until the company obtained power connection and a completion certificate for the factory. The Appellate Authority Commission (AAC) upheld the ITO's decision. The assessee appealed to the Income-tax Appellate Tribunal, which determined that the business was set up from August 27, 1963, when machinery installation was completed. The Tribunal allowed the expenditure incurred from that date as deductions. The revenue challenged this decision, arguing that installation of machinery alone was not sufficient to establish the business setup. The court referred to previous judgments and tests to determine when a business is considered set up. The court found errors in the Tribunal's approach but ultimately concluded that the business was ready to commence production from June 10, 1964, when the power connection was secured, and allowed the expenditure incurred from that date as deductions. The court answered the question referred by stating that the expenditure from June 10, 1964, should be allowed as a deduction in determining the company's business profits under section 28 of the Income-tax Act, 1961. The assessee was directed to pay the costs of the reference. This judgment clarifies the criteria for determining the establishment of a business for tax purposes and emphasizes the readiness to commence production as a key factor in setting up a business.
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