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TMI Blog1993 (4) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... ion with the business being either in the nature of preliminary expenses or expenses to be capitalised and, therefore, the claim is not allowable. During the course of assessment proceedings, it was informed on July 12, 1976, that travelling expenses do not include any expenditure incurred for the Palghat project as they have been separately indicated in schedule 5 of the annual accounts. The Inspecting Assistant Commissioner of Income-tax, after taking into consideration the objections and the evidence produced, came to the conclusion that the amount of Rs. 1,85,460 cannot be allowed as a revenue expenditure and, accordingly, the assessment order was finalised. In the appeal preferred to the Commissioner of Income-tax (Appeals), Rajasthan, it was held that it is an admitted fact that the Palghat unit was still under the process of construction and the machinery was still under installation and the building was under construction. In these circumstances, the Palghat unit could not be said to have been set up during the relevant previous year. All expenses pertaining to a business before it is set up have to be treated as expenditure of capital nature. Accordingly, the disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g business), and the subsequent activities certainly constitute activities in the course of the carrying on of the assessee's business. Reliance was also placed on the decision of Prem Conductors Pvt. Ltd. v. CIT [1977] 108 ITR 654 (Guj), where it was held that the test to be applied is as to when a businessman would regard a business as being commenced and the approach must be from a common sense point of view and the activity of securing orders before commencement of actual production was held to be that the business had commenced though the actual production had not started. The expenses were allowed as business loss. Reliance was also placed on the judgment, Hotel Alankar v. CIT [1982] 133 ITR 866 (Guj), in which it was held that the list of repairs which had been provided before the Tribunal clearly indicated that there were no major structural changes except installation of lifts, making the building more ventilated, etc., and hence the expenses were of a revenue nature. It was further observed that the business of boarding and lodging house would necessarily comprise variegated activities commencing from the stage of acquisition of a proper and suitable building, making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n for procurement of plant and machinery from Japan as well as from indigenous sources, contracts for construction of main plant building, training of Indian engineers with Messrs. Yamatake Honeywell, in Japan, etc., have been initiated. The plant is expected to go into commercial production by the end of 1975." The balance-sheet of the year 1974-75 is as under: --------------------------------------------------------------------------------------------------------------------------------------------------- Liabilities Schedule Figures as at Figures as at 31st March, 1974 31st March, 1973 --------------------------------------------------------------------------------------------------------------------------------------------------- Rs. Rs. Share capital 1 4,32,53,000 3,97,53,000 Reserve surplus 1 2,21,13,004 2,31,58,416 Unsecured loans 2 1,97,64,043 2,24,80,277 Deferred credits 2 5,35,09,458 4,07,25,922 Current liabilities and provisions 3 4,37,83,366 4,36,40,237 Contingent liabilities and notes 8 ------------------------- ------------------------ 18,24,22,870 16,97,57,802 ------------------------- ------------------------ -------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the unit cannot be said to have been set up during the relevant previous year. The Tribunal has allowed the deduction considering it to be an expenditure of revenue nature as a prudent businessman would explore the market before the production commences and booking orders for the goods intended to be produced by the assessee in the near future was very essential. If this activity was started by the assessee after the goods had actually been produced, huge quantities of production would lie piled up for want of a market. It was in view of commercial expediency that the assessee has to book orders in advance. It may be noted here that the production of the unit started in December, 1975. In Bombay Steam Navigation Co. (1953) Pvt. Ltd. v. CIT [1965] 56 ITR 52, it was held by the apex court that "in considering whether an expenditure is revenue in nature, the court has to consider the nature and the ordinary course of business and the objects for which the expenditure is incurred. A question whether a particular expenditure is revenue expenditure incurred for the purpose of the business must be viewed in the larger context of business necessity or expediency. If the outgoing or expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed its business and the business was set up when it started securing orders against further production. One business activity may precede the other. What is required to be seen is, whether one of the essential activities for the carrying on of the business of the assesseecompany as a whole was or was not commenced. In the present case, it is no doubt true that we have to see the setting up of the business and not the commencement of the business. Any expenditure prior to the setting up of the business is not an allowable deduction. There may be an interval between setting up of a business and commencement of business. The term "business" has been defined in section 2(13) of the Act to include any trade, commerce or manufacture or any adventure or concern in the matter of trade, commerce or manufacture. A continuous exercise of activity constitutes the business. A bundle of activities are required to be carried on for carrying on the business. Procuring of orders is one of them and in a trading concern procuring orders for the commodities in which the assessee intends to deal will be vital point for deciding the issue that he has in fact commenced the business. The criteria in a m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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