1. At the instance of the revenue under s. 66(2) of the Indian I.T. Act, 1922, this court directed the Tribunal to refer the following question for determination by the High Court :
'Whether, on the facts and in the circumstances of the case, the Tribunal's decision as to the assessee's claim in respect of the amount of Rs. 1,31,356, claimed as revenue expenditure, during the assessment year is correct or not ?'
2. After hearing this reference, we find that the question that has been directed to be referred to this court is required to be framed as under :
'Whether, on the facts and in the circumstances of the case, the Tribunal's finding that the assessee had set up its business during the previous year relevant to the assessment year 1960-61 was perverse or based on no evidence ?'
3. It is this question that we propose to deal with.
4. A company by name Wolf Electric Tools (Holdings) Ltd., incorporated in the United Kingdom (hereinafter referred to as 'the U.K. company') are the manufacturers of certain types of portable electrical tools. The products of the said company were being marketed in India through Messrs. Rallis India Ltd. (hereinafter referred to as 'the Indian Company'). The Indian company decided to manufacture electrical tools in India in collaboration with the U.K. company. An agreement was entered into between the Indian company and the U.K. company, whereby they decided to form a private limited liability company under the name 'Ralliwolf Private Ltd'. (the assessee) with an authorised capital of Rs. 50 lakhs under the Companies Act, 1956. The assessee-company was accordingly formed and incorporated on October 30, 1958. The objects with which the assessee-company were incorporated will be referred to later.
5. A separate agreement was entered into between the assessee-company and the U.K. company, whereunder the U.K. company was to provide to the assessee-company the requisite process and formulae relating to the manufacture of tools and also the requisite drawings, designs and technical know-how, etc., for the starting of the factory in India. The U.K. company agreed to subscribe for 3,525 shares of Rs. 100 each in the assessee-company, the amount whereof was to be adjusted against the cost of machinery to be supplied by it.
6. Following are some of the important dates which are relevant for the purpose of this reference :
(a) The land for construction of the factory by the assessee-company was acquired on November 7, 1958.
(b) The first payment of Rs. 30,000 for construction of the factory was made to the contractors, International Engineering Company Private Ltd., on November 18, 1958.
(c) One item of plant consisting of 'Norrisfield' heavy duty grinder was purchased on December 18, 1958.
(d) Initial order for the purchase of raw material was placed on November 1, 1958, but the deliveries against bulk of the orders were to be made only in 1959.
(e) Two foremen were engaged some time in October, 1958, but they were immediately sent to U.K. for training in the factory of the U.K. company in production methods.
(f) A factory manager and a works engineer were appointed in March 21, 1959.
7. For the assessment year 1960-61, with reference to which the above question is raised, the relevant accounting period was from October 30, 1958, to August 29, 1959. The published accounts and the balance-sheet of the assessee-company for the accounting period showed purchases of raw materials of the amount of Rs. 2,99,936, which remained as the closing stock at the end of the accounting period. Certain expenses were incurred by the assessee-company during the accounting period and the amount of such expenses, including depreciation and development rebate allowance amounted to Rs. 1,31,356. In the directors' report for the said period it was, inter alia, stated as under :
'Up to the date of these accounts, the company had not yet started manufacturing operations and it was engaged in building and equipping the factory, procurements of materials and other necessary preliminaries. During the period technical staff were recruited and sent overseas for training in methods of production.'
8. In response to the notice issued to the assessee-company under s. 22(2) of the Indian I.T. Act, 1922, the assessee filed a return showing business loss of Rs. 1,31,356. The ITO held that since the assessee did not carry on any business during the accounting period, loss by way of expenditure could not be allowed to it as loss carried forward under s. 24(2) of the Act. According to the ITO, no business was carried on by the assessee-company at any time during the course of the accounting period.
9. In an appeal preferred by the assessee, the AAC, after going into the facts in greater detail confirmed the view that was taken by the ITO.
10. In a further appeal before the Tribunal, the Tribunal felt that further investigation into the assessee's claim was necessary. Accordingly, the Tribunal remanded the case to the AAC by its order dated October 18, 1962. Thereafter, the AAC submitted his remand report on February 29, 1964. The findings of the AAC in the remand report are summarised in para. 12 of the statement of case.
11. Thereafter, the matter came up for hearing before the Tribunal. At this stage it was urged, for the first time, on behalf of the assessee that its business was not only to manufacture and market complete units of tools but also to sell spare parts and it was on the later activity that emphasis was accordingly laid in the course of the arguments before the Tribunal to show that the assessee-company had actually carried on business during the accounting period. The Tribunal held that the assessee in fact had carried on business in regard to the sale of spare parts, which was an integral part of its composite business. The break-up of the total purchases made by the assessee-company was provided by the Tribunal at this further hearing, details whereof are mentioned in para. 2 of the order of the Tribunal. Including the purchases of the component parts for sale as spares for use in manufacture for Rs. 88,219 and imported components for manufacture of complete tools, also available for sale as parts if and when necessary, for Rs. 1,47,879 the total purchases added up to Rs. 2,99,935. These aggregate purchases were shown as the closing stock at the end of the accounting period. The Tribunal also examined the position in respect of the next accounting period ended August 27, 1960. Upon analysis, the Tribunal found that in the next accounting period the aggregate sales amounted to Rs. 26,35,573, out of which the sales of parts amounted to Rs. 74,330, while the sales of manufactured or assembled tools amounted to Rs. 25,56,463. In view of these figures, for the subsequent year the Tribunal found certain sales of spare parts and the assessee's case that it was not merely a manufacturer but also a trader in spare parts was borne out by the accounts for the next year. Accordingly, the Tribunal held that the assessee was carrying on business in spare parts as an integral activity associated with manufacture and the assessee was regarded as carrying on the business during the relevant accounting period. Alternatively, it held that during the relevant accounting period the assessee had commenced to carry on manufacturing business as there was procurement of raw materials during the relevant period. The Tribunal took the view that in view of its finding that the carrying on of business in spare parts was an integral part of manufacturing activity, the entire revenue expenditure after the raw materials were procured would be allowable as deduction. The ITO was directed to satisfy himself as to whether in the claim made before the Tribunal there was any expenditure of capital nature. The Tribunal directed that if there was no expenditure of capital nature, then the amount as claimed by the assessee should be allowed. However, if there was any capital expenditure included therein, then to that extent there would be disallowance. The Tribunal further directed that the ITO would be justified in disallowing any expenditure incurred prior to the ordering of raw materials. He was directed to go into the facts and decide the case in accordance with law.
12. It is from this order of the Tribunal that the above question arises for our determination.
13. Mr. Joshi, on behalf of the revenue, submitted that during the relevant accounting period at no time the assessee-company was carrying on any business activity. Before any expenditure can be allowed as a deduction, it must be established, he submitted, that the business was set up in the present case at no time during the accounting period and, therefore, the Tribunal was in error in giving directions to the ITO, as it did. He submitted that the mere purchase of raw materials cannot mean that the business is set up.
14. In view of the order of the Tribunal, the material thing that has to be considered in the present case is what were, inter alia, the objects for which the assessee-company was formed and incorporated and in so far as any of such material objects are concerned can the business be regarded as set up The expression 'setting up' means, as defined in the Oxford English Dictionary, 'to place on foot' or 'to establish', and in contradistinction to 'commence'. The distinction is this that when a business is established and is ready to be commenced then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions under s. 10(2). (See Western India Vegetable Products Ltd. v. CIT : 26ITR151(Bom) ).
15. In the present case, the Tribunal in its order has clearly found that trading in spare parts was a part of the activities of the assessee-company. The assessee by purchasing items during the relevant accounting period could be said to have commenced business. On examination of facts, the Tribunal was satisfied that the assessee was carrying on business in spare parts as an integral activity associated with manufacture. This was one of the grounds on which the Tribunal took the view that the assessee carried on business during the relevant accounting period. Having regard to the question that has been framed, we have to consider whether this view taken by the Tribunal can be regarded as perverse or based on no evidence.
16. The assessee-company was incorporated on October 30, 1958. Amongst the objects for which the company was incorporated, we will refer to the principal object, viz., object No. 1, which is as under :
'(1) To carrying on the business of tool makers, electrical and mechanical engineers and contractors, iron-founders, manufacturers of agricultural implements and other machinery, brass founders, metal workers, boiler makers, wheelwrights, machinists, iron and steel converters, smiths, woodworkers, builders, painters, metallurgists, water supply engineers, gas and electricity makers, framers, printers, carriers and merchants, and to buy, sell, manufacture, import and export, repair, convert, alter, let on hire, and deal in portable electric tools, and tools of all kinds, implements and machinery of all kinds, vehicles of any kind, rolling stock and hardware of all kinds and the component parts thereof and accessories thereto.'
17. In view of this being one of the primary objects for which the assessee-company was incorporated, the manufacture of the various items mentioned in this object clause was not merely the principal object for which it was incorporated but it had also as one of its primary objects to buy sell or deal in portable electrical tools and tools of all kinds, implements and machinery. If buying and selling and dealing in these tools is one of the essential parts of the business of the assessee-company, then simply because in the relevant accounting period no manufacturing activity was started, it cannot be said merely for that reason that the assessee's business was not set up during the relevant accounting period. As found by the Tribunal in its order, during the first accounting period ended on August 29, 1959, the following purchases were made by the assessee :
Rs.Raw materials 54,934.12Locally bought out component parts for sale as sparesfor use in manufacture 88,219.34Imported components for manufacture of completetools shipment per 'Nowshepa' also available forsale as part if and when necessary 1,47,879.38Other items 8,903.12---------------2,99,935.96---------------
18. These purchases were actually shown as closing stock at the end of the period, i.e., on August 29, 1959. It is also found that during the next accounting period ended August 27, 1960, it had effected aggregate sales amounting to Rs. 26,35,573 out of which sales of manufactured and assembled tools came to Rs. 25,56,463 whilst the sales of parts came to Rs. 74,330. It is undoubtedly true that in the relevant accounting period there were no sales effected of the spares by the assessee, but it had effected purchases, which can be utilised either for manufacturing of the various items or for sale of spares. If, as indicated earlier, one of the objects for which the company was incorporated was to buy and sell or to deal in portable electrical tools or tools of all kinds, implements and machinery, then the very fact that in the relevant accounting period for the assessment year 1960-61, purchases were effected by the company would go to show that there was material on the basis of which the Tribunal could have taken the view that trading in spare parts was a part of one of the activities of the assessee-company, and by purchasing the various the assessee could be said to have commenced the business. What we have to consider in the present case is, is the decision of the Tribunal perverse or based on no evidence If regard be had to the details for the first two accounting periods, as indicated in the order of the Tribunal, and bearing in mind one of the objects for which the company was formed, it cannot be said that the finding of the Tribunal that carrying on business in spare parts was an integral activity for which the assessee-company was, inter alia, incorporated is perverse or based on no evidence.
19. We may incidentally refer to the observations of the Gujarat High Court in the case of CIT v. Saurashtra Cement and Chemical Industries Ltd. : 91ITR170(Guj) , where one of the questions that came up for consideration before the court was regarding commencement of business. The Gujarat High Court pointed out that 'business' connotes continuous course of activities. All the activities which go to make up the business need not be started simultaneously in order that the business may commence. The business would commence when the activity which is first in point of time and which must necessarily precede all other activities is started. At page 176, by way of illustration, the following instance was given :
'Take, for example, a case where an assessee engages in the business of a trader which consists of purchasing and selling goods. The assessee must necessarily purchase goods in order to be able to sell them and purchase of goods must, therefore, necessarily precede their sale. Can it be said in such a case that, when the assessee purchases goods for the purpose of sale, he does not commence his business Is it necessary that he must start the activity of selling goods before he can be said to have commenced his business We have to consider the question as to when an assessee can be said to have commenced business from a common sense point of view. We have to ask ourselves the question as to when a businessman would regard a business as being commenced Would he not consider a business as having commenced when an essential activity of that business is started The argument of the revenue seeks to confound the commencement of a business with the establishment of the business as a whole and carrying on of all the activities of the business.'
20. These observations of the Gujarat High Court, therefore, suggest that an assessee, whose trading activity is to purchase and sell and deal in portable electrical tools, is said to have commenced business even when a mere purchase has taken place during the relevant accounting period. As in the present case, as indicated in the order of the Tribunal, purchases were effected by the assessee-company during the relevant accounting period and the items purchased may either be used for manufacture or for sale, the Tribunal was justified in taking the view that the assessee can be said to have commenced its business. We are not concerned, in the present case, with the reappreciation of the material facts. What we have to consider is, whether, having regard to the facts of the present case, the conclusion reached by the Tribunal can be regarded as perverse or based on no evidence. It is not possible for us to take the view that the finding arrived at by the Tribunal is perverse or is based on no evidence.
21. Accordingly, the question, as framed by us, is answered in the negative in favour of the assessee. The revenue shall pay the costs of the assessee.