B.K. Mehta, J.
1. The following questions have been referred to us for our opinion :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that expenses which were not of capital nature otherwise but were incurred prior to February 24, 1968, could not be allowed to the assessee as revenue expenses
(2) If the answer to the above question is in negative, whether the assessee is entitled to get deduction of Rs. 45, 708 as revenue expenses to work out the taxable income
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that expenses of Rs. 7, 672 for payment of the municipal taxes, salary, advertisement expenses. interest, licence fees, etc., incurred prior to February 24, 1968, were not allowable
(4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that Rs. 4,525 expenses for linen and crockery being initial expenses on these two items should be disallowed but the replacement only should be allowed ?'
These question arise on the following facts and circumstances :
Shri Ambala Zaveri, one of the partners of the applicant-firm, owns a building opposite to Ahmedabad Railway Station. On July 1, 1967, the said Shri Ambala along with his daughter, Ramonaben and one Abdulrahim Suleman Desai formed a partnership-firm for carrying on the business of a boarding and lodging house in the name and style of 'Hotel Alankar'. According to partnership deed, which was to be effective from 1st day of July, 1967, the said Shri Ambala Zaveri agreed to place his aforesaid building, known as 'Zaveri Chambers', at the disposal of the firm and to allow the use of the 1st, 2nd, 3rd and 4th floors for the purposes of the business which was treated as his capital contribution and was not entitled to any compensation in consideration thereof. The expenses on account repairs, insurance charges, taxes, etc., incurred and/or to be incurred in connection with the building were to be borne by the firm. The additional sanitary and other facilities were also to be made in the building at the cost and expenses of the firm. The said building was made available for the business of the firm from July 1, 1967, that is the date of the partnership deed. It appears that the assessee-firm spent in all Rs. 77,120 for putting the building in a new shape for making it more suitable for hotel business. Out of the aforesaid amount of Rs. 77,120 a sum of Rs. 31,412 was treated as capital expenditure by the firm but the balance amount of Rs. 45.708 was claimed as repairs and consequently as revenue expenses.
2. The ITO had disallowed this claim for three reason : Firstly, the entire expenditure was incurred on making large scale structural alterations in the building so that it could function as a hotel : secondly, the business could not have been said to have been set up in the previous year corresponding to the assessment year 1968-69, with which we are concerned in this reference, since the inauguration of the hotel took place on February 24, 1968. and thirdly, the expenses were not in connection with or on account of the repairs as there had been no wear and tear on the building. The ITO, therefore, treated the entire expenditure of Rs. 77,120 as capital expenses, He also declined to grant depreciation on the said amount.
3. The assessee, therefore, carried the matter in appeal before the AAC, who re-apprised the facts and circumstances of the case and reached the conclusion that having regard to the settled legal position, as soon as an activity which is an essential activity in the curse of carrying on a business is pursued, the assessee must be held to have commenced the business. He, therefore, did not find any difficulty in accepting the claim of the assessee that the business must be deemed to have been commenced from the date on which the building was handed over to the partnership-firm by its owner, that is 1st July, 1967. The AAC thereafter addressed himself to the main question whether the expenditure incurred can be allowed under s. 30(a)(i) of the I. T. Act, 1961 or whether it was capital in nature incurred prior to the commencement of the business. He referred to the decision of this court in CIT v. Saurashtra Cement and Chemical Ltd. : 91ITR170(Guj) , and having regard to the fact that the business of the assessee consisted of a number of activities it must be deemed to have commenced when the assessee took over the building from its owner, which comprised of 28 rooms with attached bathrooms and which was ultimately put to the business of a boarding and lodging house by slight alterations. He, therefore, allowed the amount of Rs. 45,708 as revenue expenditure since it was incurred after the commencement of the business.
4. The department carried the matter before the Tribunal, which on a consideration of the legal position tried out, on the facts and in the circumstances of the case, when the business could be said to have been established and was ready to commence business. Broadly stated, four important facts weighed with the Tribunal in accepting the appeal of the department and disallowing the claim of the assessee-firm. The reasons are, (i) that the building in question was previously used for offices, and business establishments and, therefore, its very nature could not have been suitable for running a hotel; (ii) that the building had not had certain common facilities like dinning room, kitchen etc., (iii) that substantial architect fees were required to be paid to reshape the building; and (iv) that the staff of manager and bearers was not recruited till February, 1968. The Tribunal was, therefore, of the opinion that the expenses incurred prior to 24th February, 1968 the day on which the hotel was formally inaugurated cannot be considered as revenue expenses and should, therefore, be disallowed. It is in these circumstances that the question set out above have been referred to us.
5. It is axiomatic to say that in order to claim successfully a particular head of expenses as revenue expenses it must have been incurred for the business which is carried on by the assessee in the relevant accounting year being previous year to the year in reference. It should be recalled that the assessment year with which we are concerned in this reference is 1968-69. The assessee claimed that a sum of Rs. 45,708 was spent in the accounting year 1967-68 for certain repairs and for making the building in question more suitable for the purpose of the business agreed to be undertaken by the firm, that of a boarding and lodging house. The ITO, and for that matter the Tribunal which has agreed with the view of the ITO, held that the assessee set up the business on February 24, 1968, and, therefore, the expenses incurred prior to that date were not deductible as revenue expenditure. In order to reach this conclusion, the Tribunal on a consideration of the different decisions of this court as well as of the Bombay High Court in western India Vegetable Products Ltd. v. CIT : 26ITR151(Bom) and CWT v. Ramaraju Surgical Cotton Mills Ltd. : 63ITR478(SC) of the Supreme Court, considered as to whether the assessee was justified in claiming that it had set up the business in the relevant accounting year, viz, 1967-68. The Tribunal found, on consideration of the four circumstances referred to hereinabove, that the assessee could not claim successfully that it had set up a business before February, 1968. In our opinion the Tribunal was not justified in reaching the decision of the Bombay High Court in Western India Vegetable Products case : 26ITR151(Bom) , which can be safely referred to as a basic decision in the matter. We will presently point out as to show the Tribunal has failed to appreciate the said decision in its proper perspective. Apart from the infirmity, since the Tribunal had not the benefit of the decision of this court in Sarabhai Management Corporation Ltd. v. CIT : 102ITR25(Guj) , where this very Division Bench has, on an exhaustive consideration of all the relevant decisions of this court as well as of the Bombay High Court and the Supreme Court ruled that if a business consisted of different integrated activities and if in a given case an assessee undertakes the first category of these integrated activities, it would amount to commencement of business. Since the Tribunal had not got the benefit of this decision in Sarabhai management's case : 102ITR25(Guj) we are of the opinion that the Tribunal has not appreciated and applied the principles correctly for the following reasons :
6. The decision of the Bombay High Court in Western India Vegetable Products Ltd.'s case : 26ITR151(Bom) , should be referred to in order to point out a to how the Tribunal erred in appreciating the decision in the proper perspective and reaching a wrong conclusion as a result thereof. It should be recalled that in Western India Vegetable Products Ltd.'s case. : 26ITR151(Bom) , the assessee was claiming that his business commenced from 20th April, 1946, being the date of certificate of commencement of business. The ITO was of the opinion that the business commenced from 1st November, 1946, when the assessee-company purchased the groundnut oil mills. The Tribunal was of the opinion that the business of the assessee commenced somewhere in the end of September, 1946, when it first purchased the raw material for purposes of being crushed in the mill. A reference was sought by the assessee for the opinion of the High Court on the question whether the mere fact that the first transaction of the purchase of the raw material took place in September, 1946, is by itself a justification for holding that the business commenced from that date. In that context, the Division Bench of the Bombay High Court, speaking through Chagla C.J., referred to the decision of Mr, Justice Rowlatt in Birmingham & District Cattle By-Products Co. Ltd. v. IRC  12 TC 92 . The question about the commencement of business arose in the context of computation of the average amount of capital employed by the company during the accounting period for purposes of excess profits tax. The company contended that it commenced the business from the date of its incorporation. The Commissioner was of the view that it commenced its business when the installation of plant and machinery was complete. Justice Rowlatt upheld the view of the Commissioner and observed as under (p. 97) :
'Referring to their minutes having looked round, and having got their machinery and plant, and having also employed their foremen, and having got their works erected and generally got everything ready, then they began to take the raw materials and to turn out their products.'
7. Chagal C.J., after quoting this finding of Justice Rowlatt, observed that if decision were to be applied to the case of the assessee before the Division Bench of the Bombay High Court, the conclusion would be that the Tribunal has taken a view of the case very favourable to the assessee. Chagal C.J. thereafter pointed out the distinction between 'setting up of business' and commencing of the business' and in pointing out that distinction observed that when a business is established and is ready to commence business then it could be said that it is set up. Now this distinction has been approved and adopted by the Supreme Court in Ramaraju Surgical Cotton Mills case : 63ITR478(SC) , though of course, in the context of the W. T. Act. The Supreme Court was concerned with the question whether the factory of the assessee could be said to have been set up after the commencement of the Act so as to entitle the assessee there to the exclusion of that portion of net wealth which was employed in the factory. This distinction has been throughout recognized in the later decision of this court, viz., CIT v. Sarabhai Sons Pvt. Ltd. : 90ITR318(Guj) , Saurashtra Cement and Chemicals Industries case  102 ITR 25 and in the decision of this very Division Bench in Income-tax reference No. 205 of 1974, decided on October 19, 1978 (CIT v. Speciality Paper Ltd.) (see p. 879 infra). The Tribunal has relied on this distinction made by Chagla C. J in western India Vegetable Products case : 26ITR151(Bom) and examined and analysed the facts of the present case. In our opinion, however, the Tribunal has overlooked what had been stated by Chagla C.J. Western India Vegetable Products case : 26ITR151(Bom) , after pointing out the distinction between 'setting up of business'and 'commencing of business'. We can do no better than quote that every paragraph which will point out significantly as to whom the Tribunal has failed to appreciate this distinction in the proper perspective. Chagla C. J after setting out the passage from justice Rowlatt's judgment held as under (p. 158) :
'That is why it is important to consider the expression used in the Indias Statue for setting up a business is different from the expression Mr. Justice Rowlatt was considering viz., commencing of the business'. It seems to us that the expression 'setting up' means as is 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 commence 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 an business which is commenced and all expenses incurred after the setting up of the business had before the commencement of the business, all expenses during the interregnum would be permissible deduction under section 10(2). Now applying that test to the facts here, the company actually commenced business only on the 1st of November, 1946, when it purchased a groundnut oil mill and was in a position to crush groundnuts and produce oil. But prior to this there was a period when the business could be said to have been set up and the company was ready to commence business. and in view of the Tribunal one of the main factors was the purchase of raw material from which an inference could be drawn that the company had set up its business; but that is not the only factor that the Tribunal has taken into consideration.'
8. The Division Bench of the Bombay High Court, therefore, rejected the reference at the instance of the assessee and upheld the view of the Tribunal. In our opinion, the Tribunal in the present case before us has overlooked this significance of the observation made in the paragraph which we have underlined. It is no doubt true that a business can be said to have been set up when it is established and it is ready to commence business. It does not mean necessarily that the business must be fully equipped in the sense that it could commence all its activities at a time immediately. If it had been the purport of the distinction made by Chagla C.J., then they could not have confirmed the view of the Tribunal before them they could not have confirmed the view of the Tribunal before them since, admittedly, the oil mill purchased on 1st November, 1946, that is subsequent to the purchase of the raw materials. It could not be, by any stretch of imagination said successfully that without the oil mill the assessee before the Bombay High Court could be said to be already to commence the business merely because it had purchased the raw materials. We do not think that the distinction which has been made by Chagla C.J. in Western India Vegetable Products case : 26ITR151(Bom) could have been interpreted in the manner in which the Tribunal has done in the present case before us. This has been clearly brought out by the Division Bench consisting of Bhagwati C.J. and P. D. Desai in Saurashtra Cements case : 91ITR170(Guj) . The Division Bench in Saurashtra Cements case : 91ITR170(Guj) was concerned with the question as to when the business of Saurashtra Cement and Chemical Industries Ltd. could be said to have been set up. This court was required to advise in the reference at the instance of the Commissioners whether, on the facts and in the circumstances of the case, the expenditure, depreciation and development rebate of extraction of limestone from mines could be allowed as business expenditure. In that context, the Division Bench, speaking through Bhagwati C.J. pointed out that broadly stated, it can be said that the business of the assessee before the Division Bench was the manufacture and sale of cement; but in order to determine what was the true scope and width of business of the assessee, the court must consider what were the activities which constituted such business without being misguided by loose expression of vague and indefinite import. In view of the Division Bench the business of the assessee comprised of three categories, the first of which was extraction of limestone; second was manufacturing cement; and the third was sale and supply of cement. The Division Bench found that this business of producing and selling cement could not have been carried on without the first category having been pursued with. Since the business consisted of a continuous process of these activities and the first activity was started with a view to embarking upon the second and the third, it clearly amounted to commencement of the business. It may be that in a given case the whole business may not be set up when the first activity is undertaken. That would be set up only when the plant and machinery are installed. The Division Bench thereafter made the following significant observation (pp. 175, 176) :
'But as pointed out above, business which go more than a continuous course of activities and 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 the other activities is started. Take, for example, a case where an assessee engages in the business of a trader which is 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 purchased 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 commonsense 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 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. This confusion is the result of a loose description of the business of the assessee as a business of manufacture and sale of cement.'
9. On the same line this very Division Bench in Sarabhai Management Corporation's case : 102ITR25(Guj) considered the problem. The assessee in that case was a private limited company and the main object was to acquire immovable property and to give it out either on leave and licence basis or, in the alternative, business accommodation with all appurtenant amenities including the amenities of storage, watch and ward facilities, etc. A bungalow together with the appurtenant compound at Ahmedabad was purchased by the company on March 28, 1964, under a registered sale deed for over Rs. 8 lakhs. Thereafter building repairs, rewiring and installation of lift were carried out by the company for the purpose of converting the residential accommodation into a business and storage accommodation and to render the premises more serviceable to its prospective or lessees. The assessee claimed that it was in position to offer services to licenses on and from October 1, 1964, and, therefore, claimed an expenditure of Rs. 48,004, which was incurred by it between October 1, 1964, and March 31, 1965, as business expenditure for the assessment year 1965-66. That expenditure consisted mainly of salaries to gardeners, servants and others, aggregating to Rs. 7,504.49 and Rs. 24,326.16 for building repairs and Rs. 13,084.92 for electric rewiring legal and stationery charges etc. All the authorities held against the assessee since they were of the opinion that it could not be said to have been ready to commence prior to May 1, 1965, the day on which it give on leave and licence part of the said building and certainly not by October 1, 1964 and, therefore, disallowed the claim. On a reference to this court, this very Division Bench speaking though Divan C. J referred to the decision in Saurashtra Cement and chemical Industries case : 91ITR170(Guj) and applied the reasoning which found favour with the Division Bench in Saurashtra Cement and Chemical Industries case : 91ITR170(Guj) to the facts of the case before it and observed as under (p. 34 of 102 ITR)
'Applying the same reasoning to the facts of the case before us, the business activities of the assessee-company can also be said to fall into three broad categories. The first business activity is to acquire either by purchase or by any other manner immovable property so that the property can be ultimately given out either on leave and licence basis or on lease to others together with the appurtenant services. The second category of the business activity is to put these buildings and building accommodation and land gardens into proper shape and set up the appurtenant services so that ultimately the property can be given out on leave and licence basis and the third business activity is actually to give out on lease or on leave and licence basis. In the present case, the property was acquired on March 28, 1964. Thereafter, for sometime, various types of alterations and additions were being carried out and the activity of getting this property ready for its licence and making this accommodation available to the intended lessees or licenses that the garden staff and other staff was engaged, pieces of equipment and gadgets, etc., were acquired by purchase or otherwise lift was installed and ultimately with effect from May 1, 1965, a portion of the accommodation was actually given out on licence basis at the fee of Rs. 27,00 per month. Therefore, if we have merely to look at giving out on licence as the business activity of the concern, then in a loose sense it can be said that the company commenced its business with effect from May 1, 1965, but that is not the only business activity of the company. the business activity of the company consists of three broad categories which we have pointed out above and the objects clause of the memorandum of association justifies such a conclusion. Therefore, when the company actually let out on leave an licence basis a portion of these particular premises with effect from May 1, 1965, the earlier preceding part of its activities were also part of the business activities of the company, for example, engaging garden staff..... Under the circumstances, the Tribunal, in our opinion has not applied the correct tests and has consequently arrived at an erroneous conclusion regarding the commencement of the business activity of the assessee-company.
Under these circumstances it is clear that any rate from October 1, 1964, the assessee can be said to have commenced its business activity of the second category and, therefore, the assessee-company had commenced and all expenses incurred by the assessee-company between October 1, 1964, and March 31, 1965, namely, the amount of Rs. 48,004, can be said to have been incurred by it as business expenditure.'
10. It may be noted that according to the division bench the assessee-company could have justifiably claimed that it had set up its business from March 27, 1964, the date from which it undertook the first category of activity namely of acquring the buildings. But since the assessee claimed only from October 1, 1964, this court held that, in view of the fact that the company had undertaken the second category of the activities, it must be at least held to have commenced the business from that date.
11. Applying these broad principles to the facts of this case, it is really difficult to see how the Tribunal lost sight of the fact that the business of a boarding and lodging house is not a business of the type which could be commenced overnight. It would comprise of certain preliminary activities which have got to be carried out before it can be said that the business has commenced in the popular sense. For the purpose of starting the business of a boarding and lodging house, the assessee has got to obtain a suitable building where it can, with minor changes as little as possible, make the building more serviceable and suitable for the business of a boarding and lodging house. It should be noted that the building, which had been placed at the disposal of the firm, was a building comprising of as many as 28 independent rooms with attached bath-rooms which were let out to different offices and commercial establishment before they were made available for the business of this firm. It is no doubt true that the assessee carried out certain repairs and changes, but in our opinion, the Tribunal has without any warrant in that behalf concluded wrongly that the changes were major structural changes. The list of repairs which has been provided before the Tribunal clearly indicates that there were no major structural changes except that of putting up the lift or making it more ventilated. The AAC has found that the building comprised of 28 single rooms with attached bath-rooms and that it was not difficult for him to accept the claim of the assessee that the business commenced from the date of the acquisition of the building. It is no doubt true that the assessee had started engaging staff from 1st January, 1968, and all the necessary staff of managers, cooks, bearers, etc., was engaged by about 28th February, 1968. It is also true that formal inauguration of the hotel was made on 24th February, 1968. These facts of some repairs, renovation and such other structural changes and the employment of the necessary staff cannot be said to be such facts that it could be urged successfully in support of the view of the Tribunal that the assessee had not set up the business. The business of boarding and lodging house would necessarily comprise of variegated activities commencing from the stage of acquisition of a proper and suitable building making it more suitable and convenient for the business of a hotel, purchasing linen, cutlery, furniture, etc., as may be required for the business; appointing the staff managers, bearers and ultimately reaching the stage of receiving the customers. It would be de hors the commercial sense to assert that it is only when one reaches a take-of stage for receiving customers that one can be said to have set up the business for a boarding and lodging house. The Tribunal in our opinion has laid a wrong emphasis on the requirement of being ready for commencement of business s pointed out in the distinction made by Chagla C. J in western India Vegetables Products Ltd case : 26ITR151(Bom) , where it expressed the distinction between 'commencing a business' and 'setting up a business by saying that when a business is established and is ready to commence business then it can be said of that business that it is set up. The words 'ready to commence' would not be necessarily mean that all the integrated activities are fully carried out and/or wholly completed so that the business can be commenced. In our opinion, the said requirement is also complied with in a given case where an assessee has undertaken the first of the kind of integrated activities of which the business is overall comprised of. In that view of the matter, therefore the Tribunal was not justified in reaching the conclusion as it did in saying that the assessee had not set up the business till 24th February, 1968.
12. The learned counsel for the revenue urged that in view of the decision of this court in Addl. CIT v. Speciality Paper Ltd. (income-tax reference No. 205 of 1974 decided on October 19, 1978 (see p. 879 infra), the Tribunal has rightly applied the test which was also recognized and approved by the Supreme Court in Ramaraju Surgical Cotton Mills case : 63ITR478(SC) as to whether an assessee has undertaken the business activities to put them in such a shape that he could be said that the business activities to put them in such a shape that he could be said to be ready to go into the business and it is only them that it can be said that the business had been set up. We are afraid that the learned counsel is reading more than what has been suggested in the test by the Supreme Court or by us in that Speciality Paper Ltd.'s case (see p. 879 infra). In first place, it should be emphasised that whether a business has been set up or not is always a question of fact which has to be decided on the facts and in the circumstances of each case subject to the broad guidelines provided by the different decisions in that behalf. The decision in Speciality Paper Ltd's case turns on its own facts which were very eloquent and which we have enumerated in our decision. The company there had gone into a trial production and in the test and trial which they had taken for purpose of deciding whether they would be able to achieve the commercial production and produce the product for which the business was set up, namely, of speciality paper they found that the entire effort had misfired and unless some additional plant was rejected and also the capacity raised, the company was not able to continue the business of production. It was in those facts that since the company could not achieve the quality or the quantity of the product for making it a commercial production that the Division Bench of this court held that in the peculiar facts and circumstances of that case the company could not have been said to have set up the business. In our opinion, therefore, that decision turns on its own facts and would nor be of any assistance to the case of the revenue here.
13. It is always a question of fact whether in a given case a business has been set up or not, and in order to decide whether in a given case the business has been set up or not, the court has to consider what is the nature of the business, whether it comprises of integrated activities, such other relevant factors for purposes of determining as to whether in a given case it can be said that the business has been set up to not. The very fact that in the present case a partnership business of a boarding and lodging house and for that purpose the first thing was to acquire a proper and suitable building, then to make it more suitable and efficient for the purposes of the business and thereafter to employ the competent staff and to start the business in right earnest. If this was the nature of the business and we have no doubt in our mind that it is, it cannot be gainsaid that the moment the assessee acquired the building and started putting it in shape it must be held that the business of boarding and lodging house was set up. We have not been able to appreciate for what purpose such a huge building have been placed at the disposal of the firm without any compensation except that of the business of a boarding and lodging house. It is no doubt true that some repairs and structural changes have been made. But they are not of a substantial or major type and were effected only with a view to make the building more suitable and efficient for the purpose of the business. In that view of the matter therefore we are of the opinion that the Tribunal has committed an error of law in holding that the assessee had not set up the business till 24th February, 1968. In our opinion the assessee had set up the business when the building was placed at the disposal of the firm, that is on July 1st, 1967.
14. Before we answer the question it should be noted that question No. 1 postulates that the expenses which were incurred were in the nature of revenue expenses since the question as formed concedes the position that the expenses were not of a capital nature but were otherwise.
15. The result is that we answer question No. 1 in the negative that is in favour of the assessee and against the revenue. Question No. 2 is consequently answered in the affirmative, that is in favour of the assessee and against the revenue. Question No. 3 is answered in the negative, in favour of the assessee and against the revenue and question No. 4 is not required to be answered since it was not pressed.
16. The Commissioner shall pay costs of this reference to the assessee.