1966 (3) TMI 2 - HC - Income Tax

Erection of plant - business in the manufacture of butynol and acetone - there was no commencement of the business of manufacture - so, amount claimed as business expenditure cannot be allowed under s. 10(2)(xv)

Issues Involved:
1. Whether the assessee was carrying on the business of manufacturing butyl alcohol and acetone in the assessment years 1946-47, 1947-48, 1948-49, and 1949-50, and if so, whether the expenses incurred were deductible under section 10(2) of the Income-tax Act.
2. Whether the sums of Rs. 4,000 and Rs. 2,000 paid to the District Board were deductible under section 10(2) of the Income-tax Act for the assessment years 1948-49 and 1949-50.

Issue-wise Detailed Analysis:

1. Business of Manufacturing Butyl Alcohol and Acetone

Assessment Years 1946-47 and 1947-48:
The key consideration was whether the assessee's business of manufacturing butyl alcohol had commenced. The plant was completed on March 4, 1945, and the assessee claimed that production began on March 5, 1945. However, during the period from March 5, 1945, to September 30, 1945, there was no production of butyl alcohol, and only a small amount of raw materials was consumed. The court held that the business had not commenced since there was no actual production, and the expenses incurred were capital in nature, not revenue expenditure.

Assessment Years 1947-48 and 1948-49:
For these years, substantial raw materials were consumed, and there was actual production of butyl alcohol (140 gallons in the first period and 353 gallons in the second period). The finished products were offered for sale, and some were sold. The court concluded that the business of manufacturing had commenced and was being carried on during these periods. Thus, the expenses incurred were revenue expenditures and deductible under section 10(2)(xv) of the Income-tax Act.

Assessment Year 1949-50:
During this year, the distillery did not operate, and no production occurred. The court found that the business of manufacturing butyl alcohol was not carried on. The assessee's argument that the business was dormant was not raised before the Tribunal, and there was no evidence to support this claim. Therefore, the expenses were not deductible.

Conclusion:
The court answered the first question in the affirmative for the assessment years 1947-48 and 1948-49, and in the negative for the assessment years 1946-47 and 1949-50.

2. Deductibility of Sums Paid to the District Board

The assessee claimed deductions for sums paid to the District Board as circumstances and property tax. The income-tax authorities disallowed these claims, arguing that the tax was based on the assessee's income and not deductible under section 10(2) of the Income-tax Act. However, relying on a previous decision by the court in Simbholi Sugar Mills Ltd. v. Commissioner of Income-tax and a Privy Council decision, the court held that such taxes are deductible as they are expenses wholly and exclusively incurred for carrying on the business.

Conclusion:
The second question was answered in the affirmative, in favor of the assessee.

Final Judgment:
The first question was answered partially in favor of the assessee for the assessment years 1947-48 and 1948-49, and against the assessee for the years 1946-47 and 1949-50. The second question was answered in favor of the assessee. The court directed the parties to bear their own costs of the reference and assessed the counsel's fee at Rs. 500 as a consolidated amount for all three references.

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