1. In this case, at the instance of the assessee, the following question has been referred to us :
'Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 48,004 incurred between October 1, 1964, and March 31, 1965, could be allowed as business expenditure ?'
2. The assessment year under consideration is 1965-66, the relevant accounting year being the year ending March 31, 1965. The assessee is a private limited company. It was incorporated on March 24, 1964. The main object of the company was to acquire immovable property and to give out either on leave and licence basis or on lease, office accommodation or residential accommodation, together with all appurtenant amenities. Soon after its incorporation the board of directors of the assessee-company passed a resolution on March 26, 1964, resolving that the assessee should purchase a portion of the main bungalow belonging to Ambalal Sarabhai in the 'Retreat' compound, Shahibag, Ahmedabad, together with the appurtenant land admeasuring 12,175 square yards for a sum of Rs. 8,73,500. The land together with the building was purchased and the document of purchase was registered on March 28, 1964. The case of the assessee before the revenue authorities and before the Tribunal was that it started procuring material for providing necessary facilities with which the building was to be given on licence. According to the assessee, it was in a position to offer services to licence on and from October 1, 1964. The assessee company, therefore, claimed that expenditure of Rs. 48,004 which was incurred by it between October 1, 1964, and March 31, 1965, was a business expenditure. The assessee-company claimed deduction of the said expenditure and it contended that it was entitled to carry forward the loss shown in its return. The Income-tax Officer rejected the assessee's claim on the ground that it had not started or commenced its business in the year of account. according to the Income-tax Officer, the assessee company commenced business only from May 1, 1965, the day on which it gave on leave and licence part of the said building. Being aggrieved by the decision of the Income tax Officer, the assessee company went in appeal. The Appellate Assistant Commissioner dismissed the appeal. Thereafter, the matter was carried in further appeal to the Tribunal and the Tribunal upheld the orders of the revenue authorities and dismissed the appeal field up by the assessee company. The Tribunal was of the view that on the evidence on record it was not possible to hold that the assessee was ready to carry on its business from October 1, 1964, as claimed. The Tribunal held that it was not possible to say that the assessee was ready to carry on business in the accounting year relevant to the assessment year under reference. Thereafter, at the instance of the assessee, the question set out hereinabove has been referred to us for our opinion.
3. In order to appreciate the contentions, both of the assessee-company and of the revenue authorities, it is necessary to refer to some of the objects of the company as set out in the memorandum of association. The objects of the company are, according to the objects clause (1) (a) :-
'to establish, erect, maintain provide, regulate and let on lease or licence, dwelling houses, buildings office and residential and storage accommodation and all other appurtenances, conveniences, services, privileges, benefits, advantages and amenities such as supply of water, electricity, gas or other motive power, telephone connections, internal telephone teleprinter and communications and facilities, swimming pools, dining and other refreshments rooms, canteens, common roads, passages, drainage, transport and other services, supply of food and victuals, sports, games, recreation centres, libraries, medical and health services, industrial health facilities and services, industrial relations department, storage and safe custody of goods and movables, transport of moneys, valuables and documents, watch and ward, housing, education and recreation, holidays homes and other social amenities and other conveniences.'
4. Clause (2) of the objects clause provides as follows :
'To acquire, by purchase, lease, exchange or otherwise, land, buildings and hereditaments of any tenure or description or any estate or interest or rights over or connected with land so situate and to turn the same to account as may seem expedient, and in particular by preparing building sites and by constructing, reconstructing, altering, improving, decorating, furnishing and maintaining offices, flats, houses, factories, warehouses, shops, wharves, buildings, works and conveniences of all kinds and by consolidating or connecting or subdividing properties.' Clause (3) provides as follows : 'To manage land, building and other property, whether belongings to the company or not and to collect rents and income and to supply to tenants and occupiers and others all kinds of services, conveniences, privileges, benefits, advantages and amenities, including those enumerated in clause (1), refreshments, attendants, messengers, light, waiting rooms reading rooms, lavatories, toilet, laundry conveniences, electric conveniences, stables, garages and other advantages.'
5. Clause (24) of the objects clause provides :
'To purchase, take on lease or in exchange or otherwise acquire, for the purpose of the business of the company, improve, manage, develop, cultivate, work, sell, exchange, surrender, lease, mortgage, charge, convert, turn to account, dispose of and deal with movable and immovable property and rights and privileges of all kings and in particular lands, buildings, easements, mortgages, debentures, produce concessions, options, contracts, patents, licences, machinery, plant, stock-in-trade, business concerns and undertakings and claims, privileges, concessions, and choses in action of all kinds.'
6. Thus, from these different parts of the objects clause in the memorandum of association of the assessee company, it clearly emerges that the main object of the company was to acquire immovable properties and to give residential or, in the alternative, business accommodations, either for office purposes or, in the alternative, business accommodation, either for office purposes or for storage purposes with all appurtenant amenities including the amenities of storage, watch and ward facilities, canteens, refreshments rooms, etc. Thus the business of the company is to render services in the shape of providing accommodation with all appurtenant amenities and as a part of these business activities, it has to acquire and make available to its licensees or lessees such residential or business accommodation together with the appurtenant amenities and services.
7. The immovable property, 'Retreat', at Shahibag was purchased as stated above by the resolution of the board of directors passed on March 26, 1964, and the actual documents of sale was executed and registered in favour of the assessee company on March 28, 1964. Annexure 'J' to the statement of the case is a statement setting out details of the expenses incurred during the accounting period 1964-65. For purpose of easier reference, the expenses are split up into two, namely, expenses incurred prior to October 1, 1964, and expenses during the period October 1, 1964, to March 31, 1965. The aggregate amount of Rs. 48,373.04 which was subsequently reduced to Rs. 48,004 at the stage of the appeal before the Appellate Assistant Commissioner, consists mainly of salaries to gardeners, servants and to others aggregating to Rs. 13,074.92 for electric rewiring. The other items of legal and registration charges, stationery and printing, conveyance charges, etc. do not account for more than Rs. 1,489. The correspondence which has been annexed in the paper book and which is part of the record of the case indicates that between January, 1965, the assessee company was purchasing various types of equipment, like hot-plates, refrigerator, handcart, cycle, electric fittings in the shape of fans and fittings, garden equipment, furniture and fixtures and thus it was acquiring equipment so as to make the services of the different types of gadgets and machinery available to those who chose to occupy the property. The correspondence which has been annexed to the statement of the case also goes to show that correspondence was being carried on for installation of a lift and it was expected that the period of delivery would be fourteen months for the lift from the date of the receipt of the lay out approval. Mr. Patel for the assessee company has emphasized that though a licensee started occupying the premises with effect from May 1, 1965, only an amount of Rs. 6,000 was spent for building repairs and all other items of expenditure had been incurred by the company prior to March 31, 1965. The Income Tax Officer, the Appellate Assistant Commissioner and the Tribunal have all of them come to the conclusion that the company could not be said to be ready to commence its business or to be in a state to commence its business prior to May 1, 1965, and certainly not by October 1, 1964.
8. From the materials on record it clearly emerges that a residential bungalow or a part of a residential bungalow together with the lands appurtenant to the said portion was purchased by the assessee company and whatever building repairs, rewiring, installation of lift, etc., was carried on was done by the assessee company for the purpose of converting residential accommodation to business and storage accommodation and to render these premises more serviceable to its prospective licensees or lessees. Even as it stood on the date of the purchase by the assessee company the building was capable of being used for residential accommodation and one of the objects of the company was to let out residential accomodation together with all appurtenant facilities, etc. The question that we have to ask ourselves is, at what could the assessee be said to have completed its preparations for rendering these services available, that being the main object with which it was incorporated and thus be in a position to commence business.
9. As has been pointed out by Bhagwati C. J. in Commissioner of Income-tax v. Saurashtra Cement & Chemical Industries Ltd., in connection with cement factory :
'Loosely, it may be said that the business of the assessee was manufacture and sale of cement. But in determining question arising under fiscal legislation, loose use of expression often tends to confound the real issue. To determine what was the business of the assessee, we must consider what are the activities which constituted such business without being misguided by loose expression of vague and indefinite import.'
10. Applying the same test to the present assessee company, loosely it may be said that the business of the assessee company in the case before us was to let out residential or office accommodation together with all appurtenant services, making the garden facilities available, and making the kitchen and canteen facilities available was also part of its business and once the kitchen facilities, garden facilities and others were available and were made available, it can be said that the business activities of the company were started. It is possible that one business activity preceded the other as was the case in Commissioner of Income Tax v. Saurashtra Cement & Chemical Industries Ltd. But what is material for our purposes is as to what are the definite business activities, that is, regular course of activities which the company was required to carry on, for example, watch and ward facilities, facilities by way of providing kitchen staff, other service staff, gardeners, etc., and equipment would be part of the business activity of the company and when the company carried on these activities by engaging the adequate staff, it can be said that the company was carrying on its business activities. Hence, in each such case, what is required to be done is to determine what was the business of the assessee and in particular what are the activities which constituted such business. We must also point out the confusion which is likely to be created by the two concepts, setting up the business for the particular business concern and the commencement of business of the particular assessee.
11. In Western India Vegetable Products Ltd. v. Commissioner of Income-Tax, a Division Bench of the Bombay High Court consisting of Chagla C. J. and Tendolkar J. has held that there is a clear distinction between a person commencing a business and for the purpose of the Indian Income-tax Act it is the setting up of the business and not the commencement of the business that is to be considered. It is only after the business is set up that the previous year of that business commences and any expense incurred prior to the setting up of a business would not be a permissible deduction. When a business is established and is ready to commence business, 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. There may, however, be an interval between the setting up of the business and the commencement of the business and all expenses incurred during that interval would be a permissible deduction.
12. In Commissioner of Wealth tax v. Ramaraju Surgical Cotton Mills Ltd., the question before the Supreme Court was in the context of section 5(1)(xxi) of the Wealth-tax Act, 1957, which provided that it a new and separate unit is set up after the commencement of the Act by a company established with the object of carrying on an industrial undertaking in India, that portion of the net wealth of the company which is employed by it in such unit would be excludible in computing the net wealth of the company. There the question which arose for decision before the Supreme Court was 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 to exclusion of that portion of the net wealth which was employed in the factory, and thus the observation of the supreme court regarding the setting up of a concern or a unit have to be read in the context of the Wealth-tax Act and not in the context of the Income-tax Act. The question before the earlier Division Bench in Commissioner of Income Tax v. Saurashtra Cement & Chemical Industries Ltd. is not when the busness of the assessee could be said to have commenced and, on that aspect of the case, the decision of the supreme Court is of very little assistance.
13. Mr. Kaji for the revenue has laid considerable emphasis on the decision of the Division Bench of this court in Commissioner of Income-tax v. Sarabhai Sons Pvt. Ltd. The Division Bench there observed that there is a clear distinction between commencing a business and settings it up. For the purpose of section 3(1)(d) of the Income-tax Act, 1961, what is required to be considered is the setting up of a business. When a business is established and is ready to start business it can be said to be set up. The business must be put into such a shape that it can start functioning as a business or a manufacturing organization. It must be pointed out, as is clear from Sarabhai Sons Pvt. Ltd., that the main question before the Division Bench was whether on 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 so evidence at all. Therefore, the main question which was considered by the Division Bench in that case was the question of appreciation of evidence on record and to find out whether there was evidence to support the conclusion that the business of the assessee had been set up in the previous year or whether the finding of the Tribunal that it had been set up in the previous year was unreasonable or contrary to evidence. The decision in Sarabhai Sons Pvt. Ltd. has been explained by the same division Bench in Commissioner Of Income-tax v. Saurashtra Cement & Chemical Industries Ltd. in these terms :
'That decision raised the question as to when a certain business carried on by the assessee could be said to have been set up : whether it was set up prior to 31st March, 1966, or subsequent to that date' and the Division Bench proceeded to observe :
'We fail to see how a decision given on one set of facts can bind us to reach a similar decision on a totally different set of facts. There is nothing in this decision which would deflect us from the view of which we are otherwise inclined to take.' In Commissioner of Income-tax v. Saurashtra Cement & Chemical Industries Ltd., at page 175 of the report, it is observed :
'It is necessary in order to determine this question to consider what constituted the business of the assessee. Loosely, it may be said that the business of the assessee was manufacture and sale of cement. But in determining questions arising under fiscal legislation, loose use of expression often tends to confound the real issue. To determine what was the business of the assessee, we must consider what are the activities which constituted such business without being misguided by loose expressions of vague and indefinite import. The activities which constituted the business of the assessee were divisible into three categories :
The first category considered of the activity of extraction of limestone by quarrying leased area of land. This activity was necessary for the purpose of acquiring raw material to be utilised in manufacture of cement;
The second category comprised the activity of manufacture of cement by user of the plant and machinery set up for the purpose; and
The third category consisted of the activity of selling manufactured cement.
These three activities combined together constituted the business of the assessee. Each one of these activities was as much essential for the purpose of carrying on the business of the assessee as the others. If the assessee ceased to carry on any one of these activities, the business would come to an end. Each one of these activities constituted an integral part of the business of the assessee. Why then can it not be said that the assessee commenced its business when it started the first of these activities The activity of quarrying the leased area of land and extracting limestone from it was as much an activity in the course of carrying on the business as the other two activities of manufacture of cement and sale of manufactured cement. The business could not in fact be carried on without this activity. This activity came first in point of time and laid the foundation for the second activity, when completed, laid the foundations for the third activity. The business consisted of a continuous process of these three activities and when the first activity was started with a view to embarking upon the second and the third activities, it clearly amounted to commencement of the business. It may be that the whole business was not set up when the activity of quarrying the leased area of land and extracting limestone was started. That would be set up only when the plant and machinery was installed, the manufacture of cement started and an organization for sale of manufactured cement was established. But, as pointed out above, business is nothing 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 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 purchase 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 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 business 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. This confusions the result of a loose description of the business of the assessee as a business of manufacture and sale of cement.'
14. 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 accomodation and lands and 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 additional were being carried out and the activity of getting this property ready for its licences that the garden staff and other staff was engaged, pieces of equipment and gadgets, etc., were acquired by purchases or otherwise, lift was installed and ultimately with effect from May 1, 1965, a portion of the accomodation was actually given out on licence basis at the fee of Rs. 27,000 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 and 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 the garden staff, kitchen staff or other staff, buying the equipment and getting the equipment ready, making the staff familiar with the working of that equipment etc. They are all part of the business activities of the company so that thing would be in shape for use of the licensee or lessee, as the case may be. Under these circumstances following the principle lad down by the Division Bench of this court in Commissioner of Income-tax v. Saurashtra Cement & Chemical Industries Ltd., it must be held that it is only in a loose sense that the business of the company can be said to be to give out on leave and licence basis residential or office accommodation together with the appurtenant services. The business of the company was of a three-fold category as mentioned above after a proper analysis and once that analysis and is made, it is clear that from October 1, 1964, the company was carrying on the second category of is business, namely, the business activity of making the residential accommodation with all the appurtenant services available to the intended lessees or licences. We find from the order of the Tribunal that though the decision of this High Court in Commissioner of Income-tax v. Saurashtra Cement & Chemical Industries was cited, the Tribunal did not think that it had any application to the facts of the case. We are unable to see how the principles laid down in Saurashtra Cement & Chemical Industries Ltd. case cannot be said to have any bearing on the facts of the present case. In our opinion, the desirability of avoiding thinking in a loose sense and clearly analysing the nature of the business activity of the assessee was essential for the purpose of arriving at the correct decision in this case. 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.
15. 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 business 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. Under these circumstances, on the facts and in the circumstance of the case, this expenditure of Rs. 48,004 incurred between October 1, 1964, and March 31, 1965, should have been allowed as business expenditure. We, therefore, answer the question referred to us in the affirmative and in favour of the assessee. The Commissioner will pay the costs of this reference to the assessee.