TMI Blog1978 (10) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... 0, 1966. It appears that the assessee filed its original return on June 21, 1967, declaring a loss of Rs. 1,17,620. By a subsequent revised return of July 25, 1971, it declared a loss of Rs. 1,21,884. The revised return was required to be filed for the purpose of claiming depreciation of machinery and plant which was not claimed in the original return. In the course of the assessment, it was claimed on behalf of the assessee-company that the business had been set up somewhere in June, 1966, and the expenses incurred thereafter were in the nature of revenue expenses which should be allowed for purposes of computing the profits and income of the business. The ITO examined the assessee's claim in detail and rejected the contention on the ground that up to the end of the accounting year, that is, September 30, 1966, the tests and trials were going on and the success was achieved at the end of the accounting year and, therefore, it could not be said that the company had set up the business. He, therefore, rejected the claim of the assessee-company for treating the expenses subsequent to June, 1966, as revenue expenses. The assessee-company, therefore, went in appeal before the AAC, who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Act, 1913, in the year 1939, and was carrying on the business of manufacture of absorbent cotton wool. In March, 1955, the board of directors resolved to establish a new spinning unit under the name of Sudarsanan Spinning Mills for which a licence was obtained from the Govt. of India under the Industries. (Development and Regulation) Act, 1951, in August, 1955. The orders for purchase of necessary spinning machinery and plant were placed in the months of January and February, 1956. The construction of factory buildings was taken in hand in March, 1956, and was completed by December, 1957. The erection of the spinning machinery and the plant in the buildings was completed in several stages commencing from June, 1957. A licence from the inspector of factories for working the factory was obtained in June, 1958. The company was assessed to wealth-tax for the assessment year 1957-58 and it claimed that in computing the wealth on the valuation date, which was 30th September, 1956, an amount of Rs. 1,43,727 should be deducted as being the amount laid out in setting up this new unit. The claim was not accepted up to the stage of the Appellate Tribunal and, therefore, the question was req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This order was confirmed by the AAC. The assesseecompany, however, succeeded before the Income-tax Appellate Tribunal. The question was referred to the High Court of Kerala (See[1964] 54 ITR 50) at the instance of the Commissioner. The Supreme Court referred to its earlier decision in Ramaraju Surgical Cotton Mills' case [1967] 63 ITR 478 in order to find out what is the meaning of the word established ". The Supreme Court referred to the decision of Thomas Davidson v. W. Lanier [1867] 4 Wall 447 and quoted with approval the following passage (p. 655 of 65 ITR): " 'What is meant by putting in operation or establishing a banking company ? We think that this language has a much wider import than mere commencement of business. To establish a company for any business means complete and permanent provision for carrying on that business and putting a company in operation may well include its continued as well as its first or original operation.' " We are of the opinion, having regard to this settled legal position that the contention of the revenue must prevail obviously for the following reasons: The Tribunal has found on a reappraisal that the following facts have been established: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy to go into production by about the end of June, 1966, is clearly erroneous. In any case, the Tribunal ought to have appreciated that the assessee-company was holding trial production and having test of their plant and machinery and was trying to ascertain whether the quantity and quality of the production was satisfactory. A Division Bench of this court has in Income-tax Reference No. 26 of 1973 decided on August 25, 1975 [CIT v. Saurashtra Cement Chemical Industries Ltd. [1981] 127 ITR 47 (Guj)] (per Divan C.J.), following the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, held that it is commonsense and matter of common knowledge that the test and trial of the plant has to be taken before the plant goes into actual production so that any defects in the plant and machinery can be detected at an early stage and can be rectified and without test and trial no plant can ever go into actual regular production. In the facts of the case before the Division Bench, therefore, the amount of Rs. 11,900 claimed by the assessee-company to have been incurred for test and trial was held to be capital expenditure qualifying for depreciation and developme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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