- (1.)THESE three references are all interconnected and are, therefore, being dealt with by us in one single judgment. In all the three references, the assessee is Sir Shadi Lal Sugar and General Mills Ltd. Reference No. 14 of 1961 is under the Income-tax Act and relates to the assessment years 1946-47 and 1947-48 while Income-tax Reference No. 568 of 1961 relates to the assessment years 1948-49 and 1949-50. The previous year corresponding to each of these assessment years ended on 30th September, so that the first of the previous years concerned ended on 30th September, 1945, and the last one on 30th September, 1948. The excess profits tax reference relates to the assessment 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.
(2.)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 sugar mills under one of the clauses of the objects of the public limited company which owns the sugar mills. Under this clause, the public limited company was authorised to add to the manufacture of sugar, manufacture of any other article or other business or machinery for utilising the by-products or as the company may otherwise deem advantageous. The case was that, on the basis of research carried on by one Mr. Desai of the Indian Agricultural Institute of the Government of India at New Delhi and the process patented by him, the assessee decided to start the manufacture of butyl alcohol, also described as butynoy for the purpose of utilising the molasses, which were a by-production of the sugar mills. The assessee negotiated with the Government of India and obtained from it the necessary permission to start the business and also got the necessary technical data. It was on December 2, 1944, that the directors of the assessee-company informed the shareholders that the directors had set up a plant to manufacture butyl alcohol at Mansurpur, and that this plant was nearing completion and would start working shortly. According to the assessee, the fabrication of the plant was completed on March 4, 1945, and the plant actually went into production on March 5, 1945. Consequently, all the expenses incurred up to March 4, 1945, in respect of this plant were capitalised by the company and treated as capital expenditure while the expenses with effect from March 5, 1945, were claimed as expenditure wholly and exclusively laid out for the purpose of business of manufacture of butyl alcohol. The plant had a productive capacity of 100 gallons of butyl alcohol per day. It was claimed that an amount or Rs. 24,075 was expended in the previous year ending 30th September, 1945, and the corresponding amounts expended for the three succeeding previous years were Rs. 43,231, Rs. 53,664-3-6 and Rs. 18,342-10-3. Against these expenses were set off the price of butyl alcohol that was produced and either sold or remaining in stock. The net amount thus worked out as expenditure was claimed as a loan in carrying on this business of manufacture of butyl alcohol during these four years. The Income-tax Officer disallowed this claim on the ground that in fact the plant never went into manufacture of butyl alcohol and always remained only at the experimental stage. This amounted to saying that whatever little butyl alcohol was produced was only the result 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 purpose of manufacture of butynol and acetone in the assessment years 1946-47 and 1947-48?"

In the reference made in respect of the subsequent two assessment years 1948-49 and 1949-50, the corresponding question framed is in the same language except that for the years mentioned in the earlier reference the years of each later year reference have been substituted and, further, for the amounts in respect of which reduction was claimed as given in the earlier reference, the amounts claimed in the subsequent reference have been substituted.

(3.)IN addition, in the reference relating to the years 1948-49 and 1949-50, an additional question referred is:
"Whether, on the facts and in the circumstances of the case, and in view of section 114 of the District Boards Act, the sum of Rs. 4,000 and Rs. 2,000 were deductible under section 10(2) of the Income-tax Act for the assessment years 1948-49 and 1949-50 respectively?"
This question was referred to us because the assessee had claimed that, in respect of its entire business including business of sugar mills, the assessee had paid a sum of Rs. 4,000 in the previous year relating to the assessment year 1948-49 and a sum of Rs. 2,000 in the previous year relating to the assessment year 1949-50 to the District Board because these amounts were due in respect of circumstances and property tax which was assessed on the assessee's properties which formed the capital, the machinery and the plant of the assessee's business of manufacturing sugar and other products. The income-tax authorities disallowed the claim in respect of this on the ground that, under section 114 of the District Board Act, the tax as circumstance and property was calculated on the basis of the income of the assessee and the tax was, therefore, in the nature of a tax on income which was not a legitimately deductible expenditure under section 10(2) of the Income-tax Act. Since the assessee contested this view of the Income-tax Appellate Tribunal, the question reduced by us above has been referred to us as the second question for our opinion.