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TMI Blog1976 (3) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... December 31, 1965. The assessee-company was incorporated on November 4, 1963. For assessment year 1965-66, it submitted its return for the period November 4, 1963, to December 31, 1964, showing a loss of Rs. 46,970. This amount of loss was made up of various items of expenses, such as, salaries, wages, rates and taxes, postage, printing, travelling, interest, etc. The object of the company is to manufacture aluminium and copper conductors. On a scrutiny of the various statements as well as the directors' report, the Income-tax Officer came to the conclusion that the company had not started its business during the year of account and, therefore, the loss as claimed was not allowable. The company actually started production of conductors on June 27, 1965, and for the period from January 1, 1965, to June 26, 1965, the company claimed a loss of Rs. 58,600. For assessment year 1966-67, the Income-tax Officer disallowed the claim of loss of Rs. 58,600 for the period prior to the date on which the production was commenced. According to the Income-tax Officer the assessee-company commenced its business on June 27, 1965, and, therefore, the expenditure incurred prior to that date from Janua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India Vegetable Products Ltd. v. Commissioner of Income-tax [1954] 26 ITR 151 (Bom) Chagla C.J. pointed out that there was a clear distinction between a person commencing a business and a person setting up a business and for the purposes of the Indian Income-tax Act, 1922, the setting-up of the business and not the commencement of the business was 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 could be said of that business that business 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 permissible deductions. Mr. Kaji for the revenue has pointed out that in that decision Chagla C.J. did not follow the decision of Rowlatt J. in Birmingham and District Cattle By-products Co. Ltd. v. Commissioners of Inland Revenue [1919] 12 TC 92 (KB) because the language with whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t cannot be simultaneous with the setting up of the, unit, as urged on behalf of the Commissioner, but must precede the actual setting up of the unit. In fact, it is the operations for establishment of a unit which ultimately culminate in the setting up of the unit." In Commissioner of Income-tax v. Sarabhai Sons Pvt. Ltd. [1973] 90 ITR 318 (Guj), a Division Bench of this High Court has held there is a clear distinction between commencing a business and setting it up. For the purpose of section 3(1)(d) of the Act of 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. In that case before the Gujarat High Court the assessee, a private limited company, decided to start a new business for the manufacture of scientific instruments and communication equipment. It placed orders for machinery and equipment in January, 1966, and some of the machinery was received in February, 1966. It also placed orders for raw materials and stores and took on lease premises fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same Division Bench which delivered the judgment in Sarabhai Sons Pvt. Ltd.'s case [1973] 90 ITR 318 (Guj) delivered the judgment in Saurashtra Cement and Chemical Industries case [1973] 91 ITR 170 (Guj) as well. In this case it his been pointed out that " business " connotes a continuous course of activities. 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 all other activities is started. The facts before the Division Bench in Saurashtra Cement and Chemical Industries case [1973] 91 ITR 170 (Guj) were as follows: A company was formed in 1956 for the manufacture and sale of cement. As part of its business the assessee obtained a mining lease for quarrying lime-stone and started the mining operations in 1958. It claimed the expenditure incurred for the purpose of extracting limestone as also depreciation and development rebate for the machinery installed for that purpose for assessment years 1960-61 and 1961-62. On these facts it was held that the activities which constituted the business of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ganisation 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 purchases 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 common sense point of view. We have to ask ourselves the question as to when a businessman would regard a business as being commenced ? Would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities of the company could be said to fall into three broad categories. The first business activity was to acquire, either by purchase or by any other manner, immovable property, so that the property could 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 was to put the building accommodation and lands and gardens in proper shape and set up the appurtenant services so that ultimately the property could be given out on leave and licence basis. The third business activity was to actually give out accommodation on lease or on leave and licence basis. The property was acquired on March 28, 1964. Thereafter, for some time, various types of alterations and additions were being carried out and the activity of getting the property ready for its licensees and making it serviceable for its licensees was attended to and it was in the process of making this accommodation available to the intended lessees or licensees that the garden staff and other staff were engaged, pieces of equipment and gadgets. etc., were acquired by purchase or otherwise, lift was installed and ultimat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... telegraphic cables and underground cables, and all other materials used in the manufacture of the above items as dealers in or manufacturers of any other articles or things of a character similar or analogous to the foregoing or any of them or connected therewith. One of the objects of the company was also to acquire, purchase and take over any concern engaged in the manufacture of electrical cables, conductors and accessories and to start such new concerns also in any area of the Indian Union and abroad. Article 3 of the articles of association is included in the articles dealing with capital and the marginal note is " Taking over a concern ". The article is in these terms : " The directors after the incorporation of the company shall enter into an agreement between the company on one part and M/s. Prem Industrial Corporation at Ahmedabad on the other part to acquire, purchase and take over as a going concern the business, properties, assets and the undertaking carried on under the name of ' Prem Industrial Corporation ' at Ahmedabad and all or any of the belongings, stock-in-trade, funds, assets, rights, privileges, liabilities, obligations and contracts of the said concern wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing concern of Prem Industrial Corporation, Ahmedabad, and it actually took over some of the contracts which Prem Industrial Corporation had entered into with the Electricity Boards of different States in India. The assessee-company took over the raw materials in the shape of the aluminium wires worth Rs. 1 lakh or so and it also got the benefit of some contracts which the Prem Industrial Corporation had entered into even before the assessee-company was incorporated. It seems that prior to June 26, 1966, the assessee-company had canvassed for and secured orders for the supply of aluminium conductors worth more than Rs. 1 crore. These orders were with different Electricity Boards. The balance-sheet for the year ending December 31, 1964, shows that the company had secured loan from the Gujarat State Finance Corporation against mortgage of lands, buildings, plants and machinery, furniture and fixtures and other fixed assets of the company to the extent of Rs. 1,85,018. The balance-sheet disclosed that the company had given a counter-guarantee to Bank of India Ltd., for guarantee given by bank for Rs. 4,000 for purchase of two cars and a further counter-guarantee to Central Bank of Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onductors. The orders acquired by the assessee-company from the different Electricity Boards ensured ready market for the company when the company actually went into production and it purchased raw materials and stock in advance so that it could go into production on an appropriate scale and supply the goods against the orders which it had already received. As has been pointed out by Bhagwati C.J. in Saurashtra Cement and Chemical Industries' case [1973] 91 ITR 170 (Guj), even the activity of acquiring raw materials can be part of the business activity of a manufacturing unit because, unless the raw materials are ready, the production cannot start and unless the production has started, the goods cannot be actually sold. All the time we have to bear in mind that the test is of commonsense and what in the eye of a businessman can be said to be the commencement of the business. Since selling the goods manufactured by the assessee-company is an important part of the business activity, it can be said that the assessee-company in the instant case commenced its business and its business was set up when it started securing orders against further production. One business activity may preced ..... X X X X Extracts X X X X X X X X Extracts X X X X
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