1998-VIL-355-MAD-DT

Equivalent Citation: [2000] 241 ITR 166, 164 CTR 330, 118 TAXMANN 190

MADRAS HIGH COURT

Date: 17.02.1998

COMMISSIONER OF INCOME-TAX

Vs

ELECTRON INDIA

BENCH

Judge(s)  : R. JAYASIMHA BABU., N. V. BALASUBRAMANIAN

JUDGMENT

R. JAYASIMHA BABU, J. :---

At the instance of the Revenue, the following question has been referred :

"Whether, on the Tribunal's view that the assessee had commenced its business during the previous year relevant to the asst. yr. 1973-74 and that it is entitled to the loss to be computed, is sustainable in law?"

The assessment year is 1973-74. The business in which the assessee is engaged is the manufacture of cadmium sulphide photo cells based on a process developed by Central Electro Chemical Research Institute, Karaikudi. It acquired plant and machinery and installed the same in the previous year relevant to the assessment year. It had also commenced production and prepared the cadmium sulphide salt, but the cadmium sulphide salt produced not being of the required purity, there was no sale of the final product in that year. Nevertheless, the assessee had incurred expenditure in that activity of manufacturing though what was manufactured could not be sold. The assessee had, therefore, claimed loss for that year. The assessee's claim was rejected by the ITO on the ground that the assessee had not done any business whatsoever in the year of account. The AO was apparently of the view that it is only when the product is marketed that business can be regarded as having commenced.

2. That view of the ITO not having found favour with the AAC, the matter was sent back by him to the ITO, after holding that the firm had commenced production in that year 1973-74. The Department carried the matter to the Tribunal. Its contention was that the assessee on the facts found could not be said to have commenced. business and was, therefore, dissentitled to claim any amount as loss in that assessment year. The Tribunal rejected the contention of the Department, and in our opinion rightly.

3. The Supreme Court in the case of CWT vs. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478 (SC) considered the question as to when a business can be said to have set up and when it can be regarded as ready to commence business. It was held by the Court that the business unit cannot be said to have been 'set up unless it is ready to discharge the function for which it is being' set up. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing organisation that it can be said that the unit has been 'set up'. The commercial sale of the product is not the criterion for deciding as to when a business is set up. The setting up of plant and machinery and commencement of production are the material factors for deciding as to whether as business has commenced.

4. In this case on the facts found, the assessee had set up the unit after installing the requisite plant and machinery, and had commenced the production but before the end of the relevant accounting year, it had been unable to sell the product manufactured as that product did not meet the specification fully. The fact that the product was not marketable by reason of the deficiency in quality, does not dissentitle the assessee from claiming that the business had commenced, though no profit was earned and only a loss was incurred in that year.

5. The view of the Tribunal that the assessee had commenced the business during the relevant year previous to the asst. yr. 1973-74, and that it is entitled to have its loss computed is, therefore, affirmed. The reference is answered in favour of the assessee, in the affirmative and against the Revenue.

 

 

 

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