1972 (8) TMI 19 - HC - Income Tax

Whether the expenditure depreciation and development rebate in respect of extraction of limestone from mines could be allowed as business expenditure bold that the assessee commenced its business when it started the activity of extraction of limestone by quarrying the leased area of land. Since extraction of limestone commenced from April 1958 it must be held that the assessee was carrying on business during the relevant years of account and the Tribunal was right in taking the view that the expenditure incurred by the assessee in carrying on the activity of extraction of limestone as also depreciation allowance and development rebate in respect of the machinery employed in extracting limestone were deductible in computing the trading profits of the assessee

Summary

Issues Involved:
1. Whether the expenditure, depreciation, and development rebate in respect of extraction of limestone from mines could be allowed as business expenditure.
2. Whether the enhancement of assessment by the Appellate Assistant Commissioner was within his competence and justified in law.

Detailed Analysis:

1. Allowability of Expenditure, Depreciation, and Development Rebate:
The primary issue was whether the expenses incurred by the assessee for extracting limestone, including depreciation and development rebate on machinery, could be considered as business expenditure. The assessee, a limited company incorporated in 1956, began extracting limestone in April 1958 to manufacture cement. The Income-tax Officer allowed the expenditure related to limestone extraction as revenue expenditure but disallowed the expenditure related to the installation of plant and machinery as capital expenditure. The Appellate Assistant Commissioner, however, disallowed the expenses related to limestone extraction, asserting that the business had not commenced until the plant and machinery installation was completed in June 1960 and cement manufacture began in October 1960.

The Tribunal disagreed with the Appellate Assistant Commissioner, stating that the business of the assessee consisted of three stages: procurement of raw materials, manufacture of cement, and sale of cement. The Tribunal held that the business commenced when the first stage, extraction of limestone, started in April 1958. The Tribunal concluded that the expenses incurred for extracting limestone were allowable as business expenditure since the business had commenced.

The High Court upheld the Tribunal's view, emphasizing that business activities need not start simultaneously for the business to be considered commenced. The court noted that the extraction of limestone was an essential activity for the business and marked its commencement. The court rejected the revenue's argument that the business could only be considered commenced when the manufacture of cement started, stating that such a view would be illogical and irrational. The court also distinguished the case from other cited decisions, noting that the facts and context differed.

The High Court concluded that the assessee commenced its business with the extraction of limestone, making the related expenses, depreciation, and development rebate deductible as business expenditure. The first question was answered in the affirmative.

2. Competence of the Appellate Assistant Commissioner to Enhance Assessment:
The second issue regarding the competence of the Appellate Assistant Commissioner to enhance the assessment was to be considered only if the first question was decided against the assessee. Since the first question was answered in favor of the assessee, the court found it unnecessary to address the second question.

Conclusion:
The High Court affirmed that the business of the assessee commenced with the extraction of limestone, making the related expenses, depreciation, and development rebate deductible as business expenditure. Consequently, the second question about the enhancement of the assessment by the Appellate Assistant Commissioner was not addressed. The Commissioner was ordered to pay the costs of the reference to the assessee.