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Commissioner of Income-tax, Bombay City-iii Vs. Forging and Stamping Pvt. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 85 of 1970
Judge
Reported in(1979)13CTR(Bom)127; [1979]119ITR616(Bom)
ActsIncome Tax Act, 1961 - Sections 28
AppellantCommissioner of Income-tax, Bombay City-iii
RespondentForging and Stamping Pvt. Ltd.
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateY.P. Trivedi, Adv.
Excerpt:
.....is indicative of date of power connection and business set up - held, expenditure incurred by assessee-company should be allowed as deduction under section 28. - - 1. the assessee-company in this case was incorporated on august 13, 1962, for the purpose of manufacturing, fabricating, producing and selling all types of dies and moulds for drop forgings, drop stampings and various other tools like spanners, pliers, screw drivers, etc. 's [1979]119itr608(bom) that the company should be ready to commence production must be taken to be satisfied on that day, because, according to the learned counsel, it could have been possible for the assessee to work its machinery with the aid of alternative source of power, namely, a generator, and it had actually done so from january 25, 1964,..........the year ending june 30, 1963, which was the first previous year after the incorporation of the assessee-company, it had purchased plant and machinery of the value of rs. 3,43,668 and had incurred an expenditure of rs. 3,981 on buildings which were under construction. the next accounting year of the assessee-company ended on june 30, 1964. admittedly, the installation of the machinery was completed on august 27, 1963, and the assessee had applied for power connection to the bombay surburban electric supply company ltd. the construction of the factory building was, however, not completed before june 30, 1964. the power connection was secured in the second week of june, 1964. for about four days in january, 1964, the assessee-company hired a generator set from one barbai pvt. ltd. for a.....
Judgment:

Chandurkar, J.

1. The assessee-company in this case was incorporated on August 13, 1962, for the purpose of manufacturing, fabricating, producing and selling all types of dies and moulds for drop forgings, drop stampings and various other tools like spanners, pliers, screw drivers, etc. During the year ending June 30, 1963, which was the first previous year after the incorporation of the assessee-company, it had purchased plant and machinery of the value of Rs. 3,43,668 and had incurred an expenditure of Rs. 3,981 on buildings which were under construction. The next accounting year of the assessee-company ended on June 30, 1964. Admittedly, the installation of the machinery was completed on August 27, 1963, and the assessee had applied for power connection to the Bombay Surburban Electric Supply Company Ltd. The construction of the factory building was, however, not completed before June 30, 1964. The power connection was secured in the second week of June, 1964. For about four days in January, 1964, the assessee-company hired a generator set from one Barbai Pvt. Ltd. for a trial running of the machinery. On June 10, 1964, the assessee-company had purchased certain broken die blocks worth Rs. 2,161, out of which raw material worth Rs. 277 had been consumed in the experimental running of the machinery. The company had incurred expenditure of Rs. 53,303 during the year ending June 30, 1964, and this amount was claimed as expenditure incurred for the purpose of business carried on during the previous year relevant to the assessment year 1965-66. This amount consisted of interest payment of Rs. 36,743, salaries and wages payment of Rs. 11,799 which included Rs. 8,000 paid to the technical director and some other miscellaneous items of expenses.

2. The ITO held that the business of the assessee could not be said to have been set up till the company got power connection from the electricity company and a completion certificate of the factory from the municipality. He, therefore, disallowed the expenditure claimed by the company.

3. The AAC confirmed the order of the ITO who took the view that the unit was not put into such a shape that it could start functioning as a business or manufacturing organisation and, therefore, the business of the assessee-company could not be held to have been set up during the previous year. He also found that the experimental running was done at the time when the company itself had not obtained power from the Bombay Suburban Electric Supply Company Ltd. and no other purchase had been made by the company.

4. The assessee filed an appeal before the Income-tax Appellate Tribunal. The Tribunal, however, took the view that the business of the assessee must be taken to be set up with effect from August 27, 1963, when the erection of machinery was completed. It also took the view that the delay in securing no objection certificate, nor the delay in establishment of a power connection, could postpone the date of setting up of a business. The Tribunal found that there was alternative source of power and the assessee had utilised an alternative source for a few days in January, 1964. Thus the Tribunal directed that the expenditure incurred by the company from August 27, 1963, should be allowed as deductions in determining the company's business profits. On this order of the Tribunal, the following question has been referred to us under s. 256(1) of the I. T. Act, 1961, at the instance of the revenue :

'Whether, on the facts and in the circumstances of the case, the expenditure incurred by the company from August 27, 1963, could be allowed as a deduction in determining its business profits under section 28 of the Income-tax Act, 196 ?'

5. Appearing on behalf of the revenue Mr., Joshi has contended that the Tribunal was in error in holding that the business of the assessee should be held to have been set up from August 27, 1963, on which day what was done was only the installation of the machinery. According to the learned counsel, mere installation of machinery was not sufficient in order to decide whether the business of an assessee was set up during the relevant assessment year and the learned counsel has relied on a decision of this court in CIT v. Industrial Solvents and Chemicals Private Ltd. (Income-tax Reference No. 72 of 1967), decided on 20th June, 1978, by a Division Bench to which one of us (Desai J.) was a party (since reported in : [1979]119ITR608(Bom) . According to Mr. Joshi, the test adopted by the Tribunal ran counter to the test laid down by this court in the above decision.

6. Mr. Trivedi appearing on behalf of the assessee has vehemently contended that since the machinery was installed in January, 1964, the machinery was geared for production and even the test laid down in Industrial Solvents and Chemicals Private Ltd.'s : [1979]119ITR608(Bom) that the company should be ready to commence production must be taken to be satisfied on that day, because, according to the learned counsel, it could have been possible for the assessee to work its machinery with the aid of alternative source of power, namely, a generator, and it had actually done so from January 25, 1964, to January 28, 1964. It is contended that the machinery was used for experimental production and, according to the learned counsel, no error could be found in the order of the Tribunal when it held that the assessee was entitled to the allowance incurred after August 27, 1963.

7. The test which has been laid down by this court earlier in Western India Vegetable Products Ltd. v. CIT : [1954]26ITR151(Bom) , to ascertain as to when a business can be said to have been set up has been considered by this court in Industrial Solvents and Chemicals Ltd.'s case : [1979]119ITR608(Bom) . It may be recalled that the test laid down in Western India Vegetable Products Ltd.'s case : [1954]26ITR151(Bom) was that when a business is established and is ready to commence business, then it can be said of that business that it is set up. In Industrial Solvents and Chemicals Ltd's case : [1979]119ITR608(Bom) this court has expressly taken the view that some installation and erection of machinery was not sufficient by itself and has further held that till some end product which is the business of the company is or can be obtained, it cannot be said that the company is ready to commence production and that it was such readiness to commence production which had been indicated in Western India Vegetable Products Ltd.'s case : [1954]26ITR151(Bom) as equivalent to the setting up of the business. It is this test which has to be applied and it cannot be disputed that if a question arises as to whether a particular business can be said to have been set up in the relevant assessment year, that question will have to be determined on the facts and circumstances appearing in each case. In view of the test which is laid down in Industrial Solvents and Chemicals Pvt. Ltd.'s case : [1979]119ITR608(Bom) , it is obvious that there is a clear error in the approach of the Tribunal when it proceeded to decide that the assessee's business could be said to have been set up in the previous year ending June 30, 1964, because the machinery was installed on August 27, 1963. Even though this finding of the Tribunal is found to be erroneous, that would not enable us to completely and effectively answer the question referred to us.

8. Mr. Trivedi appearing on behalf of the assessee, while not disputing the test laid down by this court in Industrial Solvents and Chemicals Pvt. Ltd.'s case : [1979]119ITR608(Bom) has, however, contended that the assessee-company could be said to be ready to commence production with effect from August 27, 1963, and, according to the learned counsel, even the test laid down by this court is satisfied in the case of the assessee-company. Unfortunately for the assessee there is hardly any material on record on the basis of which it could be said that the company was fully geared for production on August 27, 1963. It is not possible to accept the argument made at this stage that the use of the generator between January 26, 1964, and January 28, 1964, was for the purpose of a trial production. The statement of the case clearly states that the company had hired a generator set for a trial running of the machinery. A trial running of the machinery would not be the same thing as testing the machinery for the purposes of production. The statement of case and the orders of the income-tax authorities show that, for the first time, broken die blocks were purchased by the assessee on June 10, 1974, and a small part of this was used as raw material. There is no evidence to show as to what were the results of the trial running of the machinery taken between January 26, 1964, and January 28, 1964. There is also no material to show as to what were the products yielded as a result of the consumption of the raw material. That is why Mr. Joshi on behalf of the revenue has contended that it cannot be said that even on June 10, 1964, the business of the assessee can be said to be set up in the sense that it was ready to commence production.

9. Now, it is true that the results of the use of the machinery on June 10, 1964, after the purchase of the raw material are not on record. But this fact positively, in our view, shows that the machinery was ready to commence production at least on June 10, 1964. It appears to us that power connection was secured by the assessee in the second week of June, 1964, and it is obvious that it was only after securing the power connection that the assessee purchased raw material. This would indicate that the assessee was at that time ready to commence production. It was sought to be contended by Mr. Trivedi on behalf of the assessee that the power connection was secured on 9th of June. The material before us is, however, silent as to the exact date on which the power connection was secured. But, as already said, the statement of case clearly states that the power connection was secured in the second week of June, 1964. It would, therefore, be a reasonable inference drawn on the facts and circumstances appearing in this case that though the machinery was installed on August 27, 1963, and it was tested some time in January, 1964, the factory of the assessee was ready to commence production at least with effect from June 10, 1964. It is on that day that the business of the assessee must be said to have been set up. The assessee would, therefore, be entitled to the allowance of expenditure incurred by it from June 10, 1964.

10. Accordingly, the question referred to us is answered as follows : The expenditure incurred by the assessee-company from June 10, 1964, should be allowed as a deduction in determining its business profits under s. 28 of the I. T. Act, 1961.

11. The assessee has substantially failed in this reference and it shall pay the costs of this reference.


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