Law:

Section:

Section 37(1) of the income-tax act, 1961-Business expenditure-Assessee-firm constituted on 1-7-1967 for carrying on hotel business-In lieu of his capital contribution, on partner put his building at firm's disposal with effect from 1-7-1967-Hotel formally inaugurated on 24-2-1968-All necessary staff also engaged on or about 24-2-1968-Whether business could be deemed to have been commenced on 1-7-1967-Held, on facts, yes-Whether expenditure incurred before 24-2-1968 for putting impugned building in shape was allowable as revenue expenditure-Held, on facts, yes Facts By a partnership deed dated 1-7-1967, the assessee-firm, consisting of A. R and S, was formed for carrying on the hotel business. In lieu of his capital contribution to the firm, A put his building of 28 rooms at the firm's disposal with effect from 1-7-1967. The assessee spent a sum of Rs. 77,120 for putting the building in a new shape and for making it more suitable for the hotel business. But there were no major structural changes except those of putting up the lift or making the building more ventilated. For the assessment year 1968-69, the assessee claimed that the aforesaid expenditure consisted of Rs. 45,708 on account of revenue expenditure which should be allowed to it as deduction. The ITO disallowed its claim on the ground, inter alia, that since the inauguration of the hotel took place on 24-2-1968 and all the necessary staff-managers, cooks, bearers, etc.-was engaged on or about 24-2-1968, it could not be said that the assessee's business was set up before 24-2-1968 and, consequently, the impugned expenditure being incurred prior to that date was not deductible as revenue expenditure. The AAC, on appeal, held that having regard to the settled legal position that as soon as an activity which is an essential activity in the course of carrying on business is pursued the assessee must be held to have commenced the business, the impugned business must be deemed to have been commenced from the date on which the building was handed over to the firm by its owner. Accordingly, the AAC upheld the assessee's claim on the ground that the impugned expenditure was incurred after the commencement of…

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