TMI Blog1966 (3) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... t years 1946-47 and 1947-48. The chargeable accounting period relating to the assessment year 1946-47 is from 1st October, 1944, to 30th September, 1945, and coincides with the previous year for the assessment year 1946-47 in the Income-tax Reference No. 14 of 1961. The chargeable accounting period relevant to the assessment year 1947-48 is from 1st October, 1945, to 31st March, 1946, and, consequently, forms part of and coincides with the part of the previous year relevant to the assessment year 1947-48 with which we are concerned in Income-tax Reference No. 14 of 1961. Due to this coincidence of chargeable accounting period of the excess profits tax with the corresponding previous years in the income-tax references, the findings given by us in the income-tax reference would be automatically applicable mutatis mutandis to the excess profits tax references. The two income-tax references relate to the claim made by the assessee in respect of losses incurred in a business of manufacture of butyl alcohol and acetone which was taken up by the assessee as a subsidiary business with the principal business of running the sugar mills under one of the clauses of the objects of the public ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of experiments being made in the course of setting up of the factory and there was in fact no manufacture at all for the purpose of sale of the finished commodity. It was thus held that, the plant never having gone into production, all the expenses incurred must still be treated as expenses towards capital for the purpose of getting up the plant and not revenue expenditure incurred in running the plant as a manufacturing business. That view was affirmed by the Appellate Assistant Commissioner as well as the Income-tax Appellate Tribunal. In these circumstances, the following question, which is common to all the relevant four assessment years, has been referred to us for our opinion : " Whether, on the facts and circumstances of the case, the assessee was carrying on business in the manufacture of butynol and acetone in the assessment years 1946-47 and 1947-48 and as such was entitled under section 10(2) of the Income-tax Act to the reduction of Rs. 24,075 and Rs. 40,831 and the depreciation on factory, building, plant and machinery put up for purposes of manufacture of butynol and acetone in the assessment years 1946-47 and 1947-48 ? " In the reference made in respect of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture resulting in loss in business, whereas if it is found that the business was actually commenced, expenditure incurred thereafter would be in the nature of revenue expenditure claimable under section 10(2)(xv) of the Income-tax Act on the ground that it was wholly and exclusively laid out for the purpose of carrying on that business of manufacture. There is no dispute at all with regard to the expenditure that was incurred up to March 4, 1945. The assessee itself capitalised all the expenditure up to that date and did not claim it to be revenue expenditure incurred for the purpose of making taxable income. The dispute arises with regard to the expenditure incurred with effect from March 5, 1945. The first period that is to be considered is the period from March 5, 1945, up to 30th September, 1945, which forms part of the previous year relating to the assessment year 1947-48 in the income-tax reference and part of chargeable accounting period for the assessment year 1946-47 in the excess profits tax reference. From the findings of fact recorded by the Tribunal in the appellate order read with the facts given in the statement of the case as well as the facts given in the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and to turn out their products which started on 6th October, 1913. In the present case before us, it is true that the erection of the plant was completed on March 4, 1945, but, even thereafter, though a small quantity of raw materials was taken, there was actually no turning out of the finished products during the period with which we are at present dealing, viz., the period up to 30th September, 1945. During this period, admittedly no finished products were turned out and, consequently, it cannot be said that the business of manufacture of butyl alcohol had already commenced during this period. Even if some raw materials were consumed, the only inference would be that those materials were used up in carrying on some experiments which did not result in the actual production of the finished products so that there was no commencement of the business of manufacture. In respect of the first period, therefore, we consider that the view taken by the Income-tax Appellate Tribunal is perfectly correct. Then we proceed to consider together the two subsequent periods from 1st October, 1945, to 31st September, 1946, and from 1st October, 1946, to 30th September, 1947, which periods corres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... products of butyl alcohol was very small, being 145 gallons in the first period and 353 gallons in the second period, when the plant had a capacity of producing 100 gallons a day. We consider that for taking this view, the Tribunal had no jurisdiction. The mere fact that the finished product which was considered marketable was small in quantity cannot necessarily lead to the inference that the plant had not started the process of manufacturing the finished products. The Tribunal seems to have ignored completely the fact that raw materials obtained at very substantial cost were consumed during both these periods. The fact that raw materials of those values were consumed can lead to no other inference except that the plant must have been run for substantial periods for the purpose of producing butyl alcohol. It seems that, though a large quantity of raw materials was actually consumed, the finished product happened to be small in quantity and that was probably the reason that the business ran at a loss. The mere fact that the business ran at a loss does not mean that the process of manufacturing was not going on with the object of producing the finished product and putting it on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alcohol during this year, the facts found show that 145 gallons of butyl alcohol already in stock were sold and expenses were incurred in advertising and doing other work relating to sale so that it should not have been held that the business during this year was not carried on and had stopped. There are two reasons why we have to hold that, the assessee cannot claim any benefit on such a plea. The first reason is that the assessee, in putting forward its case before the income-tax authorities, had set up the plea that the business which was being carried on by the assessee was that of manufacture of butyl alcohol and there was no mention that the business was, or that even a part of the business consisted of, sale of butyl alcohol. It appears that the work of sale of butyl alcohol was treated as a minor and ancillary part of, the main business of manufacture of butyl alcohol. Even in the objects of the company, there was only a mention of the manufacture of other articles being taken up as a subsidiary business, and before all the authorities which had occasion to deal with the case, the assessee all the time contended that the business of manufacture of butyl alcohol was going on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Appellate Tribunal and, consequently, they had no occasion to record any finding thereon. Learned counsel drew our attention to the fact that on December 10, 1948, the directors in their report for the accounts for the year ending 30th September, 1948, stated that they were sorry to inform the shareholders that during the year the distillery could not be worked at all, but they expected that in the coming year they would be able to work it after the arrival of the trained chemist and scientific instruments ordered from America. Learned counsel urged before us that, from this report of the directors, an inference should have been drawn that the business was only dormant. We think that at this stage it is not competent for us to go into this aspect. It was for the assessee to invite a decision from the Income-tax Appellate Tribunal on the question whether the business of manufacture of butyl alcohol was only dormant during the year ending 30th September, 1948, or had been closed down. That the business was not carried on during this year was the basis of the order of the Appellate Assistant Commissioner for disallowing losses claimed and, in case the assessee wanted to cl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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