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Western India Vegetable Products Ltd., Bombay v. Commissioner Of Income-Tax, Bombay City
Summary of the Opinion — Chagla, C.J.
Factual and Procedural Background
The assessee company was incorporated on December 29, 1945 and obtained a certificate of commencement of business on April 20, 1946. Its business was running an oil mill. For the assessment year 1947–1948 the company claimed various business expenses aggregating Rs. 27,884-11-9 as allowable deductions.
The Income Tax Officer (I.T.O.) took the view that the company had only commenced business when it purchased the ground‑nut mill on November 1, 1946, and disallowed expenses incurred prior to that date. On appeal the Appellate Assistant Commissioner (A.A.C.) treated expenses incurred after the certificate of commencement (April 20, 1946) as allowable and (apart from Rs. 3,615 which was not appealed) allowed Rs. 24,269. The Department appealed to the Income‑Tax Tribunal, which fixed September 1, 1946 as the relevant date (the Tribunal relied on the first purchase of raw material on September 1, 1946 and other matters) and disallowed expenses prior to that date.
Because the three income‑tax authorities had fixed three different relevant dates (I.T.O. — November 1, 1946; A.A.C. — April 20, 1946; Tribunal — September 1, 1946), the assessee sought a reference to this Court. The Tribunal declined to make the reference; the Court directed the assessee to make a reference and framed an initial question. After considering the statement of the case, the Court indicated a different formulation of the question to be referred.
Legal Issues Presented
- Whether the mere fact that the first transaction of purchase of raw material took place in September 1946 is by itself a justification for holding that expenses made from April 1946 were not for the purpose of the business of the company?
- Whether there was evidence before the Tribunal to hold that the assessee company set up its business as from September 1, 1946?
Arguments of the Parties
Appellant's Arguments (Assessee / Applicant)
- Mr. Palkhiwalla relied strongly on the judgment of the Appellate Assistant Commissioner and on the various items of expenses which had been allowed by the A.A.C.
- The central contention advanced by Mr. Palkhiwalla was that the Tribunal overlooked the nature of those expenses and failed to apply its mind to them; he argued that the Tribunal's order showed it did not take these expenses into consideration.
Respondent's Arguments
- Mr. Joshi (referred to in the opinion) relied on the English decision in The Birmingham and District Cattle By‑Products Co. Ltd. v. Commissioners of Inland Revenue (Rowlatt J.), which treated preparatory acts (erection of works, purchase of plant, etc.) as not amounting to commencement of business until the company actually started receiving raw materials and producing outputs.
- The respondent's position (as reflected by reliance on that authority) supported the view that the business had not commenced until operations (such as receipt and processing of raw materials) actually began.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| The Birmingham and District Cattle By‑Products Co. Ltd. v. Commissioners of Inland Revenue (Mr. Justice Rowlatt) | On the facts, preparatory acts (arranging erection of works, purchase of plant and machinery, entering agreements) were treated as preparatory; the business was held to have commenced only when the installation was completed and the company actually began to receive raw materials and manufacture products. | The Court acknowledged the case as a strong authority which, if directly applied, would support the I.T.O.'s position (that commencement occurred on the date plant was operable and processing began). However, the Court examined the statutory language in the Indian statute and distinguished the concepts of "setting up" and "commencing" for purposes of s. 2(11) and s. 10(2), concluding that the Tribunal's factual finding on the date the business was set up (September 1, 1946) was supported by evidence and should stand. |
Court's Reasoning and Analysis
The Court proceeded in several analytical steps, grounded in the statute and the record before the Tribunal:
- Statutory framework: Deductions were claimed under s. 10(2) in relation to a business. The Court directed attention to s. 2(11), which defines the "previous year" and (as explained in the opinion) provides that for the purpose of a business the previous year begins from the date of the setting up of the business. The Court treated these provisions as central to the question when expenses become deductible.
- Distinction between "setting up" and "commencing": The Court emphasized a legal distinction — "setting up" (defined by reference to the Oxford English Dictionary as "to place on foot" or "to establish") is different from "commencing". A business may be "set up" (i.e., established and ready to commence) before it actually "commences" operations; there may be an interregnum between the two.
- Consequence for deductibility: Expenses incurred after the business has been set up but before actual commencement (i.e., during the interregnum) are, on the Court's reading, permissible deductions under the statute. Expenses incurred prior to the setting up are not allowable because the previous year of the business has not yet begun.
- Factual application to the case: The Court accepted that the company actually commenced operations on November 1, 1946 (purchase of the ground‑nut oil mill and the capacity to crush ground nuts). But the Tribunal's task was to decide when the business had been set up. The Tribunal had pointed to several facts (certificate of commencement, purchase of mills, purchase of raw materials, and scrutiny of the expense details set out by the A.A.C.) and fixed September 1, 1946 as the date from which the business could be said to have been set up.
- Review standard and deference to the Tribunal: The Court stressed its limited advisory jurisdiction and that it was not to re‑weigh sufficiency of evidence on a reference. The Court accepted the Tribunal's statement that it had considered the detailed expenses and concluded that the Tribunal's finding was not based on a total absence of evidence. Therefore the Court would not displace that finding.
- Result on the referred question: The Court reformulated the Tribunal's question to ask whether there was evidence before the Tribunal to hold that the assessee company set up its business as from September 1, 1946, and answered that question in the affirmative.
Holding and Implications
Holding: The Court answered the referred question in the affirmative: there was evidence before the Tribunal to hold that the assessee company set up its business as from September 1, 1946.
Direct consequences for the parties: The Court upheld the Tribunal's factual finding (that the date of setting up was September 1, 1946), which aligns with the Tribunal's earlier decision to disallow expenses incurred prior to that date and allow expenses incurred thereafter (as reflected in the Tribunal's order). The Court refused to overturn the Tribunal on the basis that there was no evidence to support its conclusion.
Costs and disposition (as stated in the opinion): "We will... answer that in the affirmative. No order as to costs. Notice of motion dismissed with costs."
Broader precedent: The opinion did not purport to lay down a novel legal principle beyond the statutory interpretation of "setting up" versus "commencement" in the particular tax context; the Court applied established standards of deference to the Tribunal's factual findings and did not announce a new, sweeping rule beyond the facts of the case.
Other Formal Information from the Opinion
Attorneys for applicant: Daphtary, Ferreira & Dewan.
Attorney for respondent: N.K. Petigara.
Delivered by: Chagla, C.J.
Chagla, C.J:—
The assessee company was incorporated on December 29, 1945 and it obtained a certificate of commencement of business of April 20, 1946. The business of the assessee company was that of running an oil mill.
The assessee company was assessed to tax on its business profit for the assessment year 1947-1948 and it claimed various expenses as allowed deductions aggregating to Rs. 27,884-11-9. The view taken by the Income Tax Officer was that the assessee company had only commenced business when it purchased the ground nut mill on November 1, 1946 and therefore he disallowed all the expenses which were incurred prior to the November 1, 1946. The assessee company went in appeal to the Appellate Assistant Commissioner and substantially the view taken by the Appellate Assistant Commissioner was that the expenses incurred after getting the certificate of commencement of the business should he treated as expenses incurred for the purpose of carrying on the business in the year of account and therefore barring the sum of Rs. 3,615 in respect of which the assessee had not appealed, the Appellate Assistant Commissioner or sioaer allowed the balance of Rs. 24,269. The department appealed to the Tribunal and the Tribunal took the view that the first purchase of raw material for the purpose of being crushed in the mill which was to be erected was made on September 1, 1946. They also took the view that some time must have been taken in making arrangements for the purchases and therefore the material date they fixed was September 1, 1946 and they disallowed the expenses previous to September 1, 1946 and allowed expenses subsequent to that date. Therefore it is to be noticed that the three income tax authorities had fixed three different dates as the relevant dates. The Income Tax Officer fixed the date as November 1, 1946 on the basis of the purchase of the ground-nut oil mill, the A.A.C fixed April 20, 1946 as the date on which the certificate of commencement of business was granted to the company and the Tribunal fixed September 1, 1946 as the date on the basis that some time should be allowed to the assessee company prior to the actual purchase of raw materials. The assessee company asked the Tribunal to make a reference to this Court. The Tribunal having declined, we directed the assessee company to make a reference and to refer to us the following question:
“Whether the mere fact that the first transaction of purchase of raw material took place in September 1946 is by itself a justification for holding that expenses made from April 1946 were not for purpose of business of the company?”
Now, having perused the statement of the case, we are inclined to agree with the Tribunal that the appropriate question which should have been referred to us was:
“Whether there was evidence before the Tribunal to hold that the assessee company commenced its business as from September 1, 1946?”
The question that we asked the Tribunal to refer carried in it an implication that the only fact that the Tribunal took into consideration was that the first transaction of purchase of raw materials took place on September 1, 1946. That underlying assumption seems to be incorrect because in the statement of the case the Tribunal points out that there were many other facts taken into account in fixing the date of the commencement of the business like certificate of commencement of business the date of the purchase of the mills, the details of the expenses given in the order of the A.A.C and so on.
Mr. Palkhiwalla has placed strong reliance on the judgment of the Appellate Assistant Commissioner and also on the various items of expenses which have been allowed by the Appellate Assistant Commissioner, and the whole gravamen of Mr. Palkhiwalla's charge against the Tribunal is that the Tribunal has overlooked the nature of these expenses and has not applied its mind to them, and Mr. Palkhiwalla says that the order of the Tribunal makes it clear that they did not take into consideration these expenses. Now, when we look at the order of the Tribunal in para 1 the Tribunal says this:
“Business can only be said to have commenced when some activity in relation to carrying on the business is done. It may be the purchase of raw material, placing an order for raw material, sales and so on.”
Therefore they are giving illustrations of what a business, activity may be. When we asked them to submit a statement of the case they have amplified and elaborated this statement which appeared in para 1 of the statement and have elaborated the statement. They have told us that they have taken into consideration the details of the expenses given in the order of the A.A.C Now, we are not prepared to reject the statement of a responsible body like the Income-Tax Tribunal when it informs us that in arriving at its decision the details of the expenses were taken into consideration. Therefore the question that we have ultimately to answer and which is the real question that arises on the order of the Tribunal is “Whether there was evidence before the Tribunal for holding that the assessee company commenced its business as from September 1, 1946?”
Now, it is rather unfortunate that in the order of the Tribunal and also in the question which they themselves have suggested really arises, they should have used the expression “commenced” although in frairness to the Tribunal it may be pointed out that the very interesting question which has been debated at the Bar was never urged, argued or even suggested before the Tribunal, and the question that has been raised before us is that there is a distinction and a clear distinction between a person commencing a business and a person setting up a business, and that for the purposes of the Indian Law what we have to consider is the setting up of a business and not the commencement of a business.
Now, turning to our Statute, the deductions claimed are under s. 10(2) and they are in relation to a business and in order that those deductions can fee allowed the business must be carried on by the assessee. In this case it is not disputed that the business was carried on in the relevant previous year which is the financial year 1946-1947, but the important question that has got to be considered is from which date are the expenses of this business of to be considered permissible deductions and for that purpose the section that we have got to look to is s. 2(11) and that section defines the “previous year” and for the purpose of a business the previous year begins from the date of the setting up of the business. Therefore it is only after the business is set up that the previous year of that business commences and in that previous year the expenses incurred in the business can be claimed as permissible deductions. Any expenses incurred prior to the setting up of a business would obviously not be permissible deductions because those expenses would be incurred at a point of time when the previous year of the business would not have commenced. We must therefore look at the decision of the Tribunal as really referring to the setting up of the business in the language of s. 2(11) and not expenses connected with the commencement of the business. Mr. Palkhiwalla says that if that be the correct approach, then the Tribunal has misdirected itself in considering the commencement of the business and not the setting up of the business. Let us try and understand whether there is any difference between the two expressions “setting up” and “commenced” and if so, what is the difference. It has often been said that the English language does not contain synonyms and every English expression must mean something different, however slight the difference, from any other expression. English language is full of nuances and if possible we must give a different meaning to the expression “setting up” from the expression “commenced.” Mr. Joshi very strongly relied on a judgment of Mr. Justice Rowlatt reported in The Birmmingham and District Cattle By-Products Co. Ltd. v. Commissioners of Inland Revenue.(2) In that case the assessee company was incorporated on June 20, 1913 and between that date and October 6, 1913 the Directors arranged for the erection of works and the purchase of plant and machinery, and entered into agreements relating to the purchase of products to be used in the business and to the sale of finished products. On October 6, 1913 the installation of plant and machinery being completed, the company commenced to receive raw materials for the purpose of manufacture into finished products. For the purposes of Excess Profits Tax a question arose as to the computation of average amount of capital employed by the company during the accounting period and the company contended that it commenced business on the date of its incoproration, viz., on the June 20, 1913 and that the pre-war standard should be based on the profits shown by revised accounts for the period June 20, 1913 to June 30, 1914, and Mr. Justice Rowlatt held, upholding the view of the Commissioners, that the business of the company had commenced on October 6, 1913. Now, this is indeed a very strong case on facts in support of the Commissioner, because the view taken by Mr. Justice Rowlatt is that everything that had been done by the company before the installation of the plant and machinery was completed was preparatory to the commencement of the business and it was only when the company actually started receiving raw materials for the purpose of manufacture into finished products, the plant and machinery being ready, that it could be said that the assessee company had commenced business, and this is what the learned Judge says at page 97:
“Referring to their minutes, having looked round, and having got their machinery and plant, and having also employed their foreman, and having got their works erected and generally got everything ready, then they began to take the raw materials and to turn out their products.”
Therefore if this case were to be applied to the present assessee, then we would be driven to the conclusion that if anything, the Tribunal has taken a view of the case very favourable to the assessee because on the facts of this case it would seem that the Income Tax Officer was right in holding that the net expenses prior to November 1, 1946 should not be allowed as permissible deductions. That is why it is important to consider whether the expression used in the Indian Statute for setting up a business is different from the expression Mr. Justice Rowlatt was considering, viz., “commencing of the business.” It seems to us that the expression “setting up” means, as is defined in the Oxford English Dictionary, “to place on foot” or “to establish,” and in contradiction to “commence” the distinction is this that 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. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commmenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions under s. 26. Now, applying that test to the facts here, the company actually commenced business only on November 1, 1946 when it purchased a ground nut oil mill and was in a position to crush ground nuts and produce oil. But prior to this there was a period when the business could be said to have been set up and the company was ready to commence business, and in the view of the Tribunal one of the main factors was the purchase of raw materials from which an inference could be drawn that the company had set up its business; but that is not the only factor that the Tribunal has taken into consideration. The Tribunal has, as pointed out in the statement of the case, scrutinised the various details of the expenses given in the order of the A.A.C and having scrutinised those expenses the Tribunal has come to the conclusion even on an interpretation more favourable to the assessee than the one we are giving to the expression “setting up” that these expenses do not show that the business was set up prior to September 1, 1946. In our opinion, it would be difficult to say that the decision of the Tribunal is based upon a total absence of any evidence. As we have often said, we are not concerned with the sufficiency of evidence on a reference. It is only if there is no evidence which would justify the decision of the Tribunal that a question of law would arise which would invoke our advisory jurisdiction which after all is a very limited jurisdiction.
We will, therefore, redraft the question submitted by the Tribunal as follow “Whether there was evidence before the Tribunal to hold that the assessee company set up its business as from September 1, 1946?” and we will answer that in the affirmative. No order as to costs. Notice of motion dismissed with costs.
Attorneys for applicant; Daphtary, Ferreira & Dewan.
Attorney for respondent: N.K Petigara.
Answer accordingly.
P.M.P
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