1985 (4) TMI 106 - AT - Income Tax

Summary

Issues:
- Allowability of expenses incurred by the assessee after the commencement of business.
- Interpretation of the date when a business is considered to be set up for the purpose of allowing expenses.

Analysis:

Issue 1: Allowability of Expenses
The assessee contended that expenses incurred after the commencement of business should have been allowed by the lower authorities. The expenses in question were related to the establishment of two businesses by the private limited company, one involving fruits handling and fruit canning business at Simla, and the other being the manufacture of abrasive powder in Kanpur. The assessee argued that expenses from 1st June, 1979 onwards should be allowed, as significant steps had been taken to set up and commence business operations.

Issue 2: Interpretation of Setting Up Business
The Tribunal considered the distinction between setting up a business and commencing a business. It was noted that the date of incorporation of the company does not necessarily signify the commencement of business. The Tribunal accepted the assessee's contention that expenses incurred from 1st June, 1979 onwards should be allowed, as by that date, the company had set up its business operations. The Tribunal referred to legal precedents such as the case of Western India Vegetable Products Ltd. vs. CIT, which emphasized the importance of distinguishing between setting up and commencement of business for the purpose of allowing expenses.

Precedents and Legal Interpretations
The Tribunal relied on various legal precedents to support its decision, including cases like Prem Conductors (P) Ltd. vs. CIT and CIT vs. Ralliwoff Ltd., which highlighted the significance of defining when a business is considered to be set up. The Tribunal also referenced the Supreme Court decision in the case of Ramaraju Surgical Cotton Mills Ltd., which emphasized that a business unit must be ready to function before it can be deemed as set up. These legal interpretations guided the Tribunal's decision to allow expenses from the date when the business was set up, rather than from the date of incorporation.

Conclusion
The Tribunal partially allowed the assessee's appeal, directing the Income Tax Officer to allow expenses incurred from 1st June, 1979 onwards, except for the cost of a specific item considered as capital expenditure. The Tribunal dismissed other grounds raised by the assessee regarding interest charges and surcharge.