1979 (1) TMI 63 - HC - Income Tax

Summary

Issues involved: Determination of deductibility of a sum in computing the income of a company for the assessment year 1962-63.

Summary:
The High Court of Bombay considered the issue of deductibility of a sum of Rs. 92,400 in computing the income of a company for the assessment year 1962-63. The company, engaged in manufacturing tools, had paid this amount to the Gujarat Electricity Supply Board for laying a new circuit line. The Income Tax Officer (ITO) disallowed the deduction, considering it as capital expenditure. The matter was appealed to the Appellate Assistant Commissioner (AAC) and then to the Tribunal, which upheld the decision. The court analyzed various precedents, including the distinction between setting up a business and commencing business as established in previous cases. It was concluded that the company could not be deemed to have set up its business of producing tools when it incurred the expenditure, therefore, the deduction was disallowed. The decision of the Tribunal was upheld, and the question was answered in the negative in favor of the Commissioner.

In analyzing the case, the court referred to previous decisions such as CIT v. Sarabhai Sons Pvt. Ltd. and Prem Conductors Pvt. Ltd. by the Gujarat High Court, as well as CIT v. Industrial Solvents and Chemicals Private Ltd. by the Bombay High Court. These cases provided guidance on when a business can be considered as set up, emphasizing the need for a commonsense approach from a businessman's perspective. The court applied the tests from these cases to determine that the company had not set up its business of producing tools when the expenditure was incurred, thus disallowing the deduction claimed by the assessee.

The court highlighted the importance of distinguishing between the operations for establishing a business and the actual setting up of the business itself. It was emphasized that expenses incurred before the business is ready to commence operations cannot be considered as permissible deductions. By applying the principles established in previous judgments, the court concluded that the company had not set up its business of producing tools at the time of incurring the expenditure, leading to the disallowance of the deduction claimed. The decision of the Tribunal was upheld, and the question was answered in the negative, requiring the assessee to pay the costs of the reference to the Commissioner.