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Commissioner of Income-tax Vs. Sarabhai Sons Pvt. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 85 of 1970
Judge
Reported in[1973]90ITR318(Guj)
ActsIncome Tax Act, 1961 - Sections 3(1) and 37; Wealth Tax Act, 1957 - 5(1)
AppellantCommissioner of Income-tax
RespondentSarabhai Sons Pvt. Ltd.
Appellant Advocate J.M. Thakore, Adv.
Respondent Advocate K.H. Kaji, Adv.
Cases ReferredWestern India Vegetable Products Ltd. v. Commissioner of Income
Excerpt:
.....be allowed as revenue deduction in computing trade profits - whether finding of tribunal that business of assessee had been set up in previous year was unreasonable - new business set up by assessee after july 1966 - finding of tribunal that business of assessee set up prior to 31.03.1972 was contrary to evidence or based on no evidence at all - held, assessee not entitled to claim deduction. - - was it set up prior to 31st march, 1966, or was it set up subsequent to that date ? if it was set up prior to 31st march, 1966, the previous year of the new business for the assessment year 1966-67 would be the period from the date of the setting up of the business and ending on 31st march, 1966, and the revenue expenditure incurred during this period would be a permissible deduction,..........facts and in the circumstances of the case, the tribunal was right in holding that in the previous year the business of the assessee had been set up ?' 3. now the question as to when a business is set up would ordinarily be a question of fact, unless of course it can be said that in arriving at its decision on this question, the tribunal has misdirected itself in law by not properly appreciating the legal connotation of what is setting up of a business. here, the case of the revenue is not that the tribunal has misconceived the true legal meaning of what is setting up of a business and applied a wrong test for the purpose of determining the question as to when the new business of the assessee was set up. the contention of the revenue is that, on the facts on record, it was impossible for.....
Judgment:

Bhagwati, C.J.

1. The reference arises out of assessment to income-tax made on the assessee for the assessment year 1966-67, the relevant previous year being the financial year ending 31st March, 1966. The assessee is a private limited company which has been acting as managing agent of Swastik Oil Mills Ltd. since several years past. Some time towards the end of 1965, the assessee decided to start a new business for manufacture of scientific instruments and communication equipment. The assessee appointed one Dr. Ramanathan as General Manager of the new business in November, 1965, and Dr. Ramanathan immediately thereafter started exploring possibilities for purchase of machinery and equipment necessary for the purpose of carrying on the business. In January, 1966, the assessee placed orders for machinery and equipment and some of the machinery and equipment was received by the assessee in February, 1966. The assessee also started placing orders for raw materials and stores from January, 1966, and diverse amounts were expended by the assessee at the time of placing such orders. The assessee for some time occupied rented premises in Naroda Industrial Estate from the Gujarat Industrial Development Corporation in February, 1966. The preparations for setting up the new business thus went on for a few months and in July, 1966, the machinery was installed and the assessee thereafter started manufacturing scientific instruments and communication equipment. The assessee in the course of the assessment to income-tax for the assessment year 1966-67 claimed that an aggregate sum of Rs. 16,237 spent by it in connection with the new business during the period ending 31st March, 1966, should be allowed as a revenue deduction in computing the trading profits of the assessee. The Income-tax Officer, however, rejected the claim of the assessee on the ground that the new business in respect of which the expenses were stated to have been incurred was not set up prior to 31st March, 1966, and the expenses incurred by the assessee could not, therefore, be allowed as a revenue deduction. The assessee preferred an appeal to the Appellate Assistant Commissioner and before the Appellate Assistant Commissioner, the claim for deduction was confined to a sum of Rs. 13,770. The Appellate Assistant Commissioner disagreed with the view taken by the Income-tax Officer and held, relying on the decision of the Bombay High Court in Western India Vegetable Products Ltd. v. Commissioner of Income-tax, that since assessee purchased raw materials and stores in January, 1966, the new business of the assessee must be held to have been set up in January, 1966, and the assessee was, therefore, entitled to deduction of revenue expenditure made by it during the period from 1st January, 1966, up to 31st March, 1966. The Income-tax Officer being aggrieved by this decision given by the Appellate Assistant Commissioner in favour of the assessee, preferred an appeal to the Tribunal but the Tribunal also took the same view as the Appellant Assistant Commissioner and held that the new business of the assessee was set up in January, 1966, during the previous year and the claim of the assessee for deduction was, therefore, rightly allowed by the Appellant Assistant Commissioner. This view taken by the Tribunal is challenged in the present reference made at the instance of the revenue.

2. Before we proceed to examine the question which has been referred to us for our opinion, we may point out at the outset that the question needs to be reframed. The question which has been referred to us for our opinion is in these terms :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in the previous year the business of the assessee had been set up ?'

3. Now the question as to when a business is set up would ordinarily be a question of fact, unless of course it can be said that in arriving at its decision on this question, the Tribunal has misdirected itself in law by not properly appreciating the legal connotation of what is setting up of a business. Here, the case of the revenue is not that the Tribunal has misconceived the true legal meaning of what is setting up of a business and applied a wrong test for the purpose of determining the question as to when the new business of the assessee was set up. The contention of the revenue is that, on the facts on record, it was impossible for the Tribunal to have come to the decision that the business of the assessee was et up in January, 1966, or at any time prior to 31st March, 1966. We would, therefore, reframe the question so as to read :

'Whether the finding of the Tribunal that the business of the assessee had been set up in the previous year was unreasonable or contrary to evidence or based on no evidence at all ?'

4. This question as reframed, we now proceed to consider.

5. Now the question as to when a business is set up assumes importance because, according to section 3(1)(d) of the Income-tax Act, 1961, the previous year for a business newly set up in a financial year means the period beginning with the date of the setting up of the business and ending with the financial year and it is only if expenditure is incurred by an assessee during the previous year that he can claim it as a revenue deduction in computing the trading profits of the business. Here, in the present case the assessee claimed to deduct an aggregate sum of Rs. 13,770 as revenue expenditure in the assessment for the assessment year 1966-67 and this revenue expenditure could be claimed by the assessee only if it was incurred during the previous year and the new business of the assessee could have the previous year for the assessment year 1966-67 only if it was set up prior to 31st March, 1966. It was for this reason that the question arose before the Tribunal as to when the new business of the assessee was set up; was it set up prior to 31st March, 1966, or was it set up subsequent to that date If it was set up prior to 31st March, 1966, the previous year of the new business for the assessment year 1966-67 would be the period from the date of the setting up of the business and ending on 31st March, 1966, and the revenue expenditure incurred during this period would be a permissible deduction, provided the other conditions of section 37 were satisfied. But if it was set up subsequent to 31st March, 1966, the revenue expenditure incurred prior to that date would not be a permissible deduction in the assessment of the assessee for the assessment year 1966-67.

6. Now, the question as to when a business can be said to be set up is no longer a matter of doubt or debate. It is concluded by a decision of the Supreme Court in Commissioner of Wealth-tax v. Ramaraju Surgical Cotton Mills Ltd. We shall presently refer to that decision but before we do so, it is necessary to refer to one other decision and that is the decision and that is the decision of the Bombay High Court in Western India Vegetable Products case. The Bombay High Court pointed out in this case that there is a clear distinction between a person commencing a business and a person setting up a business and for the purpose of section 2(11) which was the section of the Indian Income-tax Act, 1922, corresponding to section 3(1)(d) of the Income-tax Act, 1961, what is required to be considered is the setting up of a business and not the commencement of business. It is only when a business is established and is ready to commence business that it can be said of that business that it is set up. Before it is ready to commence business, it is not set up. This view taken by the Bombay High Court was approved by the Supreme Court in Commissioner of Wealth-tax v. Ramaraju Surgical Cotton Mills Ltd. There the question was whether a new spinning unit started by the assessee was set up after the commencement of the Wealth-tax Act, 1957, so as to qualify the assessee for exemption under section 5(1)(xxi) of that Act. The licence for establishing the new spinning unit was obtained by the assessee from the Government of India in August, 1955; the assessee had placed orders for purchase of necessary spinning machinery and plant in January and February, 1956, and the construction of factory buildings had started in March, 1956, and was in progress on 1st April, 1957, when the Wealth-tax Act, 1957, came into force. The construction of factory buildings was completed by December, 1957, and the erection of spinning machinery and plant in factory buildings was completed in several stages commencing from June, 1957, and a licence from the Inspector of Factories for working the factory was obtained in June, 1958. The question arose before the Supreme Court on these facts as to when the new spinning unit could be said to have been set up by the assessee; whether it was before 1st April, 1957, or after. The Supreme Court, speaking through Bhargava J., pointed out :

'Thereafter, the High Court referred to a decision of the Bombay High Court in Western India Vegetable Products Ltd. v. Commissioner of Income-tax, and, on its basis, concluded that the proper meaning to be assigned to the expression 'set up' in section 5(1)(xxi) would be 'ready to commence business'. We are unable to agree with the learned counsel for the Commissioner that, in arriving at this view, the High Court committed any error. A unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing organisation that it can be said that the unit has been set up.'

7. The Supreme Court accordingly held that the new spinning plant was set up after 1st April, 1957, since it was long after that date that it could be said to be ready to discharge the function for which it was set up. These observations of the Supreme Court lay down the test which must be applied for the purpose of determining when a business can be said to be set up. If this test is applied to the facts found by the Tribunal - which facts we have already enumerated while stating the facts giving rise to the reference - it is clear that the new business started by the assessee was not set up until July, 1966. The new business which was sought to be established by the assessee was a business of manufacturing scientific instruments and communication equipment and it could not be said to be ready to discharge the function for which it was being established, namely, manufacture of scientific instruments and communication equipment, until the machinery necessary for the purpose of manufacture was installed. It is only when the machinery was installed that the business could be said to be put into such a shape that it could start functioning as a manufacturing organisation. It was not sufficient that the assessee obtained the land on lease from the Gujarat Industrial Development Corporation or appointed Dr. Ramanathan as a General Manager or placed orders for purchase of raw materials and stores or ordered out the necessary machinery and equipment. These were merely operations for the setting up of the business. The business could be set up only as a culmination of these operations when all that was necessary for the setting up of the business was done. The new business in the present case could not, therefore, be said to be set up by the assessee until July, 1966, when the machinery was installed and the factory was ready to commence business.

8. We, therefore, answer the question as reframed by saying that the finding of the Tribunal that the business of the assessee was set up in the previous year, that is, prior to 31st March, 1966, was contrary to evidence or based on no evidence at all. It was impossible for the Tribunal to have come to that decision on the facts found by it. The question must, therefore, be answered in the affirmative. The assessee will pay the costs of the reference to the Commissioner.


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