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TMI Blog1981 (2) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 questions arise on the following facts and circumstances Shri Ambalal Zaveri, one of the partners of the applicant-firm, owns building opposite to Ahmedabad Railway Station. On July 1, 1967, the said Shri Ambalal along with his daughter, Ramonaben and one Abdulrahim Suleman Desai formed a partnership-firm for carrying on the business of boarding and lodging house in the name and style of " Hotel, Alankar ". According to the partnership deed, which was to be effective from 1st day of July, 1967, the said Shri Ambalal 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 to be treated as his capital contribution and was not entitled to any compensation in consideration thereof. The expenses on account of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med 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. The department carried the matter before the Tribunal, which, on consideration of the legal position, tried to find 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, by its very nature, could not have been suitable for running a hotel; (ii) that the building had not had certain common facilities like dining room, kitchen, etc. ; (iii) that substantial architect fees were required to be paid to reshape the building; and (iv) that the staff of manager ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 02 ITR 25, 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 [1976] 102 ITR 25 (Guj), we are of the opinion that the Tribunal has not appreciated and applied the principles correctly for the following reasons: The decision of the Bombay High Court in Western India Vegetable Products Ltd.'s case [1954] 26 ITR 151, should be referred to in order to point out as 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 [1954] 26 ITR 151 (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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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. [1973] 90 ITR 318, Saurashtra Cement and Chemical Industries' case [1973] 91 ITR 170 (Guj), Sarabhai Management Corporation's case [1976] 102 ITR 25 (Guj) 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.). The Tribunal has relied on this distinction made by Chagla C.J. in Western India Vegetable Products' case [1954] 26 ITR 151 (Bom) and examined and analysed the facts of the present case. In our opinion, however, the Tribunal has overlooked what has been stated by Chagla C.J. in Western India Vegetable Products' case [1954] 26 ITR 151, after pointing out the distinction between "setting up of business " and Cs commencing of business". We can do no better than quote that very paragraph which will point out significantly as to how the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not have confirmed the view of the Tribunal before them since, admittedly, the oil mill was 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 ready 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 [1954] 26 ITR 151 (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 J. in Saurashtra Cement's case [1973] 91 ITR 170 (Guj). The Division Bench in Saurashtra Cement's case [1973] 91 ITR 170 (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 Commissioner whether, on the facts and in the circumstances of the case, the expenditure, depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 confusion is the result of loose description of the business of the assessee as a business of manufacture and sale of cement. " On the same lines this very Division Bench in Sarabhai Management Corporation's case [1976] 102 ITR 25 (Guj) considered the problem. The assessee in that case was a private limited company and the main object of the company 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious types of alterations and additions were being carried out and the activity of getting this property ready for its licensees and making it serviceable for its licensees was attended to and it is in the process of making this accommodation available to the intended lessees or licensees 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. 27,000 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 earlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut 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 stag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 purposes 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 erected 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 not be of any assistance t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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