Suhas Chandra Sen, J.
1. The Tribunal has referred the following question of law to this court under Section 256(2) of the I.T. Act, 1961 :
'Whether, on the facts and in the circumstances of the case and having regard to the provisions of Section 3 read with Section 28(1) of the I.T. Act, 1961, the Tribunal was right in holding that the amount of opening stock of Rs. 3,03,000 could be considered in arriving at the result in the manufacturing and trading account relating to the assessment year 1965-66 ?'
2. The assessee, M/s. Incheck Tyres Ltd., is engaged in the business of manufacture of tyres. The relevant previous year of the assessee ended on 30th June, 1964, corresponding to the assessment year 1965-66.
3. The assessee-company had been incorporated on April 1, 1960. In the proceedings for assessment to tax for the accounting year relevant to the assessment year 1965-66, the ITO added Rs. 3,03,000 for the following reasons:
'On examination of various details it was further found that the cost of the materials debited to manufacturing a/c. consumed during the course of pre-production period has not been excluded. Assessee had, of course, capitalised a sum of Rs. 49,646 on account of fuel power charges pertaining to pre-production period. It is not denied that raw materials and stores were not consumed during the experimental stage prior to commercial production. After taking into account the expenditure incurred on power and fuel, in my opinion, 121/2% of the total raw materials and stores andspare parts consumed can be estimated to have been consumed for experimental purposes and thereby the cost of manufacturing account has been inflated to that extent. This would mean an addition of Rs, 3,02,855 or say Rs. 3,03,000. By making this addition the gross profit rate would go to reasonable figure.'
4. The assessee appealed to the AAC and he confirmed the view taken by the ITO. According to him, the opening stock of materials debited to the manufacturing account was relatable to the pre-production period and this amount of Rs. 3,03,000 referable to expenses relating to the pre-production period. He further held that for stores and spare parts no adjustment was made for items in the pre-production period.
5. The assessee carried the matter further before the Tribunal. It was contended on behalf of the assessee before the Tribunal that there was no warrant for disallowing the expenses because the expenses were referable to expenses for the purpose of business of the assessee and when the expenditure was incurred in the course of business the expenditure was allowable because the expenditure related to cost of raw materials which were to be considered in the debit side in manufacturing and trading account for the purpose of arriving at the proper gross profit. It was also stated that, after all, the items used were for the purpose of making the quality products and that even some raw materials that were used during the experimental stage were ultimately used as raw materials by manufacturing process. It was further contended that the company undertook a very big project and in a big project it could not be expected that the assessee would earn profit from the very beginning and that in the immediately subsequent years the assessee itself declared a gross profit of 17% .
6. The Revenue, on the other hand, contended that having regard to the provisions of Section 28(1) of the Act the expenditure was not relatable to manufacture of tyres and as such the expenses were not deductible revenue expenses when the assessee itself capitalised certain expenses.
7. The Tribunal held as follows :
'We are inclined to hold that the assessee is entitled to succeed. Section 3(1)(d) of the I.T. Act, 1961, states : 'For the purposes of this Act, 'previous year' means in the case of a business or profession newly set up in the said financial year, the period beginning with the date of the setting up of the business or profession and ending with the said financial year.' According to Section 3(1)(b) 'previous year' means if the accounts of the assessee have been made up to a date within the said financial year, then, at the option of the assessee, the twelve months ending on such date. Section 28(1) of the I.T. Act states J ' The following income shall bechargeable to income-tax under the head 'Profits and gains of business or profession', (1) the profits and gains of any business or profession which was carried on by the assessee at any time during ' the previous year'.' The Revenue sought to rely upon Section 28(1) without considering the implication of the meaning of 'newly set up' as found in the definition of 'previous year' in Section 3 of the Act.
The profits or gains of any business which have been carried on by the assessee during the previous year should be taken along with the provisions of Section 3 relating to 'previous year'. Then we have to consider whether the expenses were allowable under the provisions of deductions as contemplated in the different sections of the Act. The Revenue wanted to state that production should be linked up with the expenses on raw materials incurred for the purpose of production in that year.'
8. The Tribunal, relying upon the decision of the Bombay High Court in the case of Western India Vegetable Products Ltd. v. CIT : 26ITR151(Bom) and the decision of the Supreme Court in the case of CWT v. Ramaraju Surgical Cotton Mills Ltd. : 63ITR478(SC) , held that when the assessee's business had been set up, the ITO was not justified in disallowing the expenditure on the ground that it was prior to the commencement of the assessee's business. The Tribunal referred to the directors' report that the commercial production of the company commenced from December, 1963. The Tribunal, therefore, held that the business was set up before the commercial production commenced and, therefore, there was no reason to disallow the expenses in this case on the basis that the expenditure was incurred earlier to the commencement of commercial production. The only argument of the Revenue before the Tribunal was that the expenditure was not allowable; in view of the wording of Section 28 of the I.T. Act, the expenditure was not connected with the business of the assessee. The Tribunal came to the conclusion as follows:
' When this was the position of law and when the assessee incurred the expenses for the purpose of arriving at a manufacturing and trading account, the entire debits with reference to the opening stock along with the purchase price of raw materials during the year are to be considered in the matter relating to computation of manufacturing profit or loss of the assessee-company.'
9. At the instance of the Commissioner the question set out earlier has been referred by the Tribunal. The distinction between the setting up of the business and commencement of manufacturing operation is well recognised. The cases that have been cited before us do not depart from the principles laid down in the decisions which have been referred to by the Tribunal.
10. The only argument that has been urged on behalf of the Revenue before us is that in this case the expenditure that has been allowed by the Tribunal was incurred even before the setting up of the business of the assessee. Now this argument is a departure from the stand taken before the Tribunal. Before the Tribunal it was argued that the expenditure was incurred before the actual commencement of production by the assessee-company. The Tribunal pointed out the distinction between the setting up of a business and the commencement of production and relied on a number of decisions for the purpose of bringing out this distinction. A large number of cases have been cited before us which have only reaffirmed the distinction pointed out by the Tribunal between setting up of a business and commencement of manufacturing operations. The cases reported in CIT v. Sarabhai Sons Pvt. Ltd. : 90ITR318(Guj) , CIT v. Industrial Solvents and Chemicals Pvt. Ltd. : 119ITR608(Bom) , CIT v. Forging and Stamping Pvt. Ltd., : 119ITR616(Bom) , Bhodilal Menghraj and Co. P. Ltd. v. CIT : 119ITR968(Bom) and Sarabhai Management Corporation Ltd. v. CIT : 102ITR25(Guj) , do not lay down any principle contrary to the distinction that has been drawn by the Tribunal, Therefore, it is not necessary to deal with these cases in detail.
11. The case that is now sought to be made out before us by the Revenue was not made out before the Tribunal. This was also not the case of the ITO ; this argument was also not considered by the AAC. The question whether the expenditure was incurred even prior to the setting up of business was not gone into at any stage.
12. The argument that is now being canvassed before us raises a question of fact which was neither argued nor considered nor investigated by the Tribunal. In that view of the matter we are unable to hold that there was no material before the Tribunal to come to the conclusion that it did.
13. In view of the aforesaid, the question referred to us is answered in the affirmative and in favour of the assessee.
14. Parties will pay and bear their own costs.
Sabyasachi Mukharji, J.
15. I agree.