1972 (7) TMI 7 - HC - Income Tax

Assessee s business of manufacture of scientific instruments and communication equipment - it cannot be said to have started until the necessary machinery were installed - obtaining of land and ordering for machinery, etc. were merely operations for setting up of the business - finding of the Tribunal that the business of the assessee was set up in the previous year that is, prior to 31st March, 1966, was contrary to evidence or based on no evidence at all. It was impossible for the Tribunal to have come to that decision on the facts found by it - revenue expenditure incurred prior to that date would not be permissible deduction

Summary

Issues:
Assessment of income tax for the year 1966-67, Deduction of revenue expenditure for a new business, Interpretation of when a business is considered set up.

Analysis:
The judgment pertains to the assessment of income tax for the year 1966-67 of a private limited company acting as a managing agent of another company, which decided to start a new business for manufacturing scientific instruments and communication equipment. The company appointed a General Manager for the new business in November 1965 and started preparations by placing orders for machinery and equipment in January 1966. The company also rented premises and initiated manufacturing activities in July 1966. The company claimed a deduction of Rs. 13,770 as revenue expenditure incurred before March 31, 1966. The Income-tax Officer initially rejected the claim, but the Appellate Assistant Commissioner and Tribunal allowed it based on the Bombay High Court's decision that the business was set up in January 1966.

The main issue revolved around determining when a business is considered set up, as it impacts the eligibility for claiming revenue expenditure as a deduction. The Income-tax Act specifies that the previous year for a newly set up business begins with the date of setting up and ends with the financial year. The Supreme Court precedent established that a business is set up when it is ready to commence operations. In this case, the business of manufacturing scientific instruments and communication equipment was not considered set up until July 1966 when the machinery was installed and the factory was ready to commence operations. Merely appointing a General Manager or ordering machinery and equipment did not constitute setting up the business. The Tribunal's decision that the business was set up before March 31, 1966, was deemed unreasonable and not supported by evidence.

In conclusion, the Tribunal's finding that the business was set up before March 31, 1966, was contrary to evidence and unreasonable. The business was only considered set up when it was ready to commence operations, which occurred in July 1966. Therefore, the company was not eligible to claim the revenue expenditure incurred before the business was fully established. The judgment highlights the importance of understanding when a business can be deemed set up for tax deduction purposes.