1. The question raised in this reference is somewhat interesting and perhaps a little novel, but we have come to the conclusion that the view taken by the Tribunal was substantially correct. The reference arises in the following circumstances.
2. The respondent-assessed, Indian Drugs and Pharmaceuticals Ltd.,, is a Government undertaking promoted to start the manufacture of drugs and pharmaceuticals. The assessment year in question is the year 1965-66, the corresponding previous year being the year which ended on March 31, 1965. It is common ground that during the previous year the factory building of the assessed was in the process of construction and the plant and machinery were in the process of installation. The business had not been set up and none of the units had commenced production.
3. During the previous year, the assessed had certain types of miscellaneous receipts. It supplied tender forms regarding construction and erection of plant and machinery to contractors on payment of charges. The gross receipt amounted to Rs. 50,540 and after deduction of estimated expenditure, the net receipts came to Rs. 40,540. The company also realised amounts of Rs. 28,241 by way of sale proceeds of trees, grass, etc., and a sum of Rs. 17,818 by way of sale proceeds of stones and boulders. This was consequential to the pieces of land being cleared for the purpose of construction of the factory. The assessed also supplied water and electricity to the contractors engaged in the task of constructing the factory and installing the machinery. The total receipts were Rs. 76,201 and the ITO estimated a profit of 10 per cent. of these charges amounting to Rs. 7,520 as the assessed's profits on the supply of water and electricity. The ITO was of the opinion that the sums of Rs. 40,540, Rs. 28,241, Rs. 17,818 and Rs. 7,520 represented income taxable in the hands of the assessed under the head 'Income from other sources'.
4. The assessed appealed to the AAC. The AAC pointed out that these items of receipts had also been there in the two earlier years and that in the appellate orders for those years he had held that these items of receipts were not revenue chargeable to tax. In the appellate order for 1963-64, the AAC had held that the receipts in respect of tender forms was a part of the construction activities undertaken by the company and that if the receipt from the sale of tender forms were to be taken as revenue in nature, all the expensive involved at the different stages of construction should also be allowed as expenses. In respect of sale of trees, he pointed out that the trees had to be removed not with the intention of carrying on any business in timber but because their removal was necessitated by other circumstances. The trees, he pointed out, formed capital assets and clearance of the site. It appears that, in dealing with the appeal for 1964-65, the AAC had held that the receipts by way of water and electricity charges and on the sale of boulders and stones could not be considered as income. But a copy of that order is not available to us. Following the orders for the earlier assessment years, the AAC deleted the above additions from the assessment for 1965-66.
5. The Revenue preferred an appeal to the Income-tax Appellate Tribunal. It may be mentioned here that for the earlier assessment year 1963-64 and 1964-65, appeals had been preferred to the Tribunal by the ITO. The Tribunal had agreed with the reasoning given by the AAC and rejected the Department's contentions. However, when the appeal for the assessment year 1965-66 came up before them, the Tribunal considered the matter afresh and again came to the conclusion that the items in question were not taxable ones. The reasoning of the Tribunal is contained in the following paragraph of its order, which may be usefully extracted :
'We do not find any ground for interfering with the order of the Appellate Assistant Commissioner. Any receipt or payment by an assessed had necessarily to be related to a source of income and if it can be related to a specific source, it cannot be related to the residuary source. In the present case, the impugned amounts were clearly referable to the source of income under the head 'Business, profession and vocation'. The fact that the business was not yet completely set up did not detract from the existence of the source. The business was in the process of being set up and the receipts and payments in respects of that source, while the business was being set up, must necessarily be related to that source. Since the business was not still fully set up, the receipts and payments would be clearly on capital account. The receipts on account of sale of tender forms and on account of excess realised for electricity and water charges were, in fact, from contractors engaged in the task of constructing the factory building and erecting the machinery. The receipts, thereforee, directly went to reduce the cost of construction and erection and should be treated as deductions from such costs and not as revenue receipts. Similarly, receipts on account of sale of trees and grass and stones and boulders were in connection with the work to be done for clearance of the land to be used for the purpose of erection of the factory. These amounts would go to reduce the cost of land utilised for the construction of the factory and erection of the equipment. These receipts were directly related to the capital structure of the business which was being set up. On the other hand they did not by themselves set up an independent source of income unrelated to the business which was being set up. It is from this point of view that these receipts are distinguishable from interest on deposits of surplus money. Interest was realised by utilisation of surplus money and the utilisation created a separate independent source. The impugned receipts, on the other hand, did not create any independent source and were in fact inextricably linked with the process of setting up the business by special reference to the clearance of the land and erection of building and equipment. As the Supreme Court has pointed out in Nalinikant Ambalal Mody v. S. A. L. Narayan Row, CIT : 61ITR428(SC) , whether an income falls under one head or another has to be decided according to the common notions of practical men, and the question under which head an income comes cannot depend on when it was received. The receipts were, thereforee, clearly referable to the source of business, profession or vocation and since it was not fully set up at the time they were received, the receipts were of a capital nature and rightly treated as such by the Appellate Assistant Commissioner.'
6. Aggrieved by the order of the Tribunal, the Commissioner applied for a reference to this court and the following question has been referred to us for decision.
'Whether, on the facts and in the circumstances of the case, (a) receipts of Rs. 40,540 on account of sale of tender forms, (b) of Rs. 28,241 on account of sale of grass and trees, (c) of Rs. 17,818 on account of stone and boulders, and (d) receipt of Rs. 7,520 by way of recovery from contractors for providing them with electricity and water at the sites, constituted income, profits and gains of the assessed-company chargeable to tax under any of the head specified in section 14 of the Income-tax Act, 1961, for the assessment year 1965-66 ?'
7. We find ourselves completely in agreement with the reasoning given by the Tribunal. So far as the receipts from the sale proceeds of trees, grass, boulders and stones are concerned, they represent the sale proceeds of capital on account of tender forms and by way of water and electricity charges to the contractors are concerned, we agree with the Tribunal that these cannot be treated as arising out of a source of income separate from the business which was being set up. As pointed out by the Tribunal, since the business had not been fully set up, the receipts and payments would be clearly on capital account. So far as payments are concerned, this proposition is now settle beyond doubt by the decision of the Supreme Court in the case of Challapalli Sugars Ltd. v. CIT : 98ITR167(SC) . As rightly pointed out by the AAC, it would be inconsistent to hold that the expenditure incurred by the assessed prior to the setting up would be of a capital nature but that the receipts would be of a revenue nature, in a case where these receipts and payments pertain to the fixed structure of the company's business that is being set up. We agree with the view taken by the Tribunal that the receipts in respect of tender forms and on account of excess realised on account of water and electricity charges go to represent the cost of construction of the building and erection of the plant and machinery, and should be treated as in the reduction of such cost. Similarly, sale proceeds of trees, grass, stones and boulders go to represent the capital cost of the land utilized for the construction of the factory and the erection of equipment of the factory and the erection of equipments. These receipts were directly related to the capital structure of the business and they cannot be considered as an independent source of income unrelated to the business to the business which was being set up.
8. Learned counsel for the applicant referred to the decision of the Calcutta High Court in CIT v. Ajmera Industries P. Ltd. : 103ITR245(Cal) . In that case the question was whether the income derived by way of rent from a certain building was assessable as income from business or as income from house property. That is not the question here. But that apart, as the Tribunal has rightly pointed out, it is not as if every item of receipt, prior to the setting up of a business, would be only capital in nature. If, for example, the surplus monies of the company are invested to earn interest or if, as in the Ajmera Industries' case : 103ITR245(Cal) , the building constructed was not used by the company but let out to earn rental income, the interest or the rental income would certainly be assessable under the head 'Income from other sources'. But that is not the position in the present case. The receipts are not of such a nature. The receipts here are from sources which are not independent but which are inextricably linked, as pointed out by the Tribunal, with the process of the setting up of the business. The tender forms were supplied by the assessed to the contractors not in order to earn income nor is the sale of tender forms a source of income as understood commonly. This activity was rather a part and parcel of the constructional activities of the assessed. Similarly, the water and electricity were supplied to contractors not with a view to charging them or making a profit. Indeed, a surplus on an estimated basis has been treated income in this respect. But here again the source is not independent of, but is rather closely connected and interlinked with, the process of setting up of the factory. In these circumstances, we agree with the view taken by the Tribunal that the receipts in question did not constitute items taxable under the I.T. Act. We, thereforee, answer the question referred to us in the negative and in favor of the assessed. However, in the circumstances of the case, we make no order as to costs.
9. Before we part with this case, we want to point out that the paper book, got printed by the applicant for being placed before us, does not contain the relevant orders of the AAC for the assessment year 1963-64, 1964-65 and 1965-66. The orders of the AAC in some penalty matter have been printed instead. Again, as already stated, the Tribunal has followed the earlier order of the Tribunal in relation to the assessment year 1963-64 and 1964-65, and neither party appears to have moved the Tribunal for annexing these relevant orders of the Tribunal as part of the case. Copies of these orders have been placed before us by counsel for the respondent and we have referred to them only for purposes of completeness. The order of the Tribunal for the assessment year in question is quite self-contained and our conclusion does not in any manner depend on the findings of fact contained in the earlier appellate orders to which we have made reference.