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TMI Blog1983 (10) TMI 108X X X X Extracts X X X X X X X X Extracts X X X X ..... uring this month. He purported to rely on the decision of the Supreme Court in CWT v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478 and the decision in CIT v. Sarabhai Sons (P.) Ltd. [1973] 90 ITR 318 (Guj.). He confirmed the order of the ITO and the assessee is in second appeal. 4. The learned representative for the assessee drew our attention to a number of facts which were furnished before the ITO but did not find a place in the orders of authorities below. The assessee-company was incorporated on 4-3-1972. The assessee had completed the construction of the building and erection of entire machinery even by January, 1975 well before the end of the preceding accounting year, March, 1975. The raw materials were already both imported (value Rs. 1,35,301) and locally purchased (Rs. 28,243) and these amounts were already in opening stock during the year as is evident from the statement of the accounts already on record. The director's report on record for the year reads as under : "Your directors are glad to inform you that the company commenced production from 1-4-75 but had to encounter problems in the process which were overcome and regular production started on 15-10-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ou (list attached) has been completed. This would facilitate in fully utilising services of our scientists when they are deputed to your works." The list of further things that were expected to be done on an earlier visit during October-November 1974 was enclosed to the above letter. The reply of the managing director on 3-4-1975 shows that all the expected things were completed by this date. Power and water were already available. Chemist was appointed. After saying that scientists' arrival was expected, the managing director stated in the said letter dated 3-4-1975 as under : "We are practically ready with all things including raw materials and we are eagerly waiting for your arrival to go into production." In fact, even prior to the detailed reply in the nature of a report confirming completion of all the requirements of the institute, the assessee had also given a general reply on 7-3-1975 and 20-3-1975. The executive director's letter dated 7-3-1975 reads as under : "We have completed all the formalities to run our plant. And at present we are in need of Mr. K. R. Narasimhan to run our plant. Therefore, we request you to kindly depute him for a period of one month. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned representative, on the above facts, claimed that the business had already commenced at the beginning of the year itself. He relied upon the decisions in CIT v. Saurashtra Cement Chemical Industries Ltd. [1973] 91 ITR 170 (Guj.), Prem Conductors (P.) Ltd. v. CIT [1977] 108 ITR 654 (Guj.), Sarabhai Management Corpn. Ltd. v. CIT [1976] 102 ITR 25 (Guj.) and CIT v. Industrial Solvents Chemicals (P.) Ltd. [1979] 119 ITR 608 (Bom.). 5. The learned departmental representative claimed that the facts clearly showed that the assessee was not able to run the machinery for technical reasons. Only from 15-10-1975 the production could be started and that regular production started from that date. Neither, acquisition of raw materials nor even installations of machinery could justify the inference that the business had been set up unless it was in a position to manufacture some quantities even if small. He claimed that the facts in the cases cited on behalf of the assessee were different and that the rationale of those decisions could only support the ITO's inference. He also relied upon the decision of the Gujarat High Court in Sarabhai Sons (P.) Ltd.'s case where obtaining of lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the current feeding system required change of foil and this took sometime. Whether this delay could be taken as a ground for holding that the business had not been set up is a question which now arises for consideration. As for the decision of the Gujarat High Court in Sarabhai Sons (P.) Ltd.'s case the facts are not comparable because the assessee relied upon the fact of having placed orders for raw materials and machinery as sufficient ground for claiming that the business had been set up. The High Court observed that merely obtaining land on lease and placing orders for machinery and raw materials did not amount to setting up of business but that they were merely operations for the setting up of the business. The assessee's facts, in our opinion, are much stronger. The raw materials were already available with the assessee. The machinery had been installed and were ready for production. In Saurashtra Cement Chemical Industries Ltd.'s case, the activity for extracting lime stone by quarrying was considered to be an independent activity and that such activity would be enough for holding that the assessee was in business, though the assessee was established for the manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w, we find it possible to accept the assessee's case. In the view we have taken, it is not necessary to consider the alternative ground urged on behalf of the assessee that in the event of any expenditure being disallowed as relating to the period before setting up of the business, such disallowable amount should be allowed to be capitalised and depreciation allowed thereon. 7 and 8. These paras are not reproduced here as they involve minor issues. 9. The last contention is that the assessee is a small scale industry and that it is entitled to investment allowance inasmuch as it satisfies the other conditions for eligibility of investment allowance. The first appellate authority found that there is a definition of small scale industry in Explanation to section 32(1)(vi) of the Income-tax Act, 1961 ('the Act') which requires that the aggregate value of the machinery and plant installed should not exceed Rs. 7.5 lakhs. Admittedly, the assessee's assets exceed this limit. But it is the assessee's case that the assessee is a small scale industry for the purposes of the Industries (Development and Regulation) Act, 1951. Since the Act has its own definition of a small scale industry, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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