COMMISSIONER OF INCOME TAX Vs. FOOD SPECIALITIES LIMITED

JUDGEMENT

(1.) THE question referred to us in the case of the assessee is as follows :

(2.) THE facts of the case are that Food Specialities Ltd., the assessee in this case, was engaged in the business of condensed milk sold under the trade mark 'Milkmaid'. A new plant was set up for this purpose. After the factory had been erected, but before it was ready for commercial production, certain trial runs were made regarding the working of the installed machinery. For this purpose, milk worth Rs. 41,411 was purchased. The waste product was Rs. 18,342 and the difference was capitalised -it amounted to Rs. 23,069. This amount was disallowed by the ITO and the AAC, but the Tribunal allowed the same. The reasoning of the Tribunal was that the machinery cannot be said to be installed unless its working condition is ensured beyond doubt. For the purpose of ensuring this, the installed machinery had to be worked and experimentation had to be made. If the machinery was defective or not giving expected results, it could be repaired or replaced before the actual commercial production was started. Some examples are given by the Tribunal in its order.

(3.) KEEPING in view the fact that the setting up of the factory would be incomplete unless some sort of trial or test runs were made, it seems that the Tribunal was not wrong in holding that this expense was also a capital expense. There is a time fixed by the IT Act when it can be said that a business has been set up. As stated by the Supreme Court in the aforementioned decision, the rules of accountancy have to be applied in a reasonable manner keeping in view the ordinary practice of the business community in such matters. Viewed from this angle, the expense involved in purchasing the milk and determining whether the factory is in a proper working condition and making adjustments, and so on, does not seem to be anything more than a step in the setting up and finalisation of the factory which is the capital asset of the company. After the tests have been carried out, it can be said that the factory has been set up and is ready for commercial production. We would, accordingly, hold that the question referred to us has to be answered in the affirmative, in favour of the assessee and against the Department. But we would leave the parties to bear their own costs.