Income‑tax‑‑‑

‑‑‑‑Business‑‑‑Business loss ‑‑‑Assessee acquiring plant and machinery and commencing production‑‑No sale of final product in first year of production as product was not of required purtiy‑‑‑Nevertheless assessee entitled to have its loss computed.

The assessee acquired plant and machinery and installed the same in the previous year relevant to the assessment year 1973‑74. It had also commenced production and prepared the cadmium sulfide salt, but the cadmium sulphide salt produced not being of the required purity, there was no sale of the final product in the 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 Income‑tax Officer on the ground that the assessee had not done any business in the year of account. The matter was sent back by the Appellate Assistant Commissioner to the Income‑tax Officer after holding that the firm had commenced production in that year. The Tribunal upheld the order of the Appellate Assistant Commissioner. On a reference:

Held, that the view of the Tribunal that the assessee had commenced the business during the previous year relevant to the assessment year 1973‑74, and that it was entitled to have its loss computed, was correct.

CWT v. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478 (SC) fol.

C.V. Rajan for the Commissioner. R. Gangadharan for the Assessee.

JUDGMENT

R. JAYASIMHA BABU, J.‑‑‑ At the instance of the Revenue, the following question has been referred:

"Whether on the Appellate Tribunal's view that the assessee had commenced its business during the previous year relevant to the assessment year 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 the 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 Income‑tax Officer on the ground that the assessee had not done, any business whatsoever in the year of account. The Assessing Officer was apparently of the view that it is only when the product is marketed, that business can be regarded as having commenced.

That view of the Income‑tax Officer not having found favour with the Appellate Assistant Commissioner, the matter was sent back by him to the Income‑tax Officer, after holding that the firm had commenced production in that year 1973‑74. The Department carried the matter to the Tribunal in appeal. Its contention was that the assessee on the facts found could not be said to have commenced business and was, therefore, disentitled to claim any amount as loss in that assessment year. The Tribunal rejected the contention of the Department and in our opinion rightly.

The Supreme Court in the case of CWT v. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478 considered the question as to, when a business can be said to have been 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 (page 481) "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 a business has commenced.

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 specifications fully. The fact that the product was not marketable by reason of the deficiency in quality, does not disentitle the assessee from claiming that the business had commenced, though no profit was earned and only a loss was incurred in that year.

The view of the Tribunal that the assessee had commenced the business during the relevant year previous to the assessment, year .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.

M.B.A./563/FC

Order accordingly.