Dr. B.P Saraf, J.:— By this reference under section 256(1) of the Income-tax Act, 1961, made at the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following two questions of law to this court for opinion:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee had set up their business in the previous year relevant to the assessment year 1974–75?

2. Whether the Tribunal was right in holding that the interest income of Rs. 1,54,325 should be assessed as business income under section 28 and not under ‘income from other sources’?”

2. The assessee, Messrs. L and T McNeil Ltd., is a company incorporated under the Companies Act, 1956. The assessment year involved is 1974–75 for which the previous year was the period from October 1, 1972, to December 31, 1973. It was incorporated on March 10, 1973, with the main object of manufacturing, buying, selling and dealing in all kinds of vulcanisers, tyres and tube presses and to set up a heavy machine shop.

3. The assessee-company filed its return of income under the Income-tax Act, 1961 (for short, “the Act”), for the assessment year 1974–75 relevant to the previous year October 1, 1972, to December 31, 1973, declaring a loss of Rs. 1,88,310. In its profit and loss account, the assessee credited the interest of Rs. 1,54,325. The assessee claimed that the business had been set up during the previous year and, as such, it was entitled to deduction of expenditure debited to the profit and loss account as revenue expenditure. The Income-tax Officer did not accept the claim of the assessee on the ground that the assessee had not set up its business during the relevant previous year. It was observed by the Income-tax Officer that even though the company had procured orders for supplying machinery to outsiders, it could not be said that the business had commenced in the previous year as neither the plant and machinery had been installed nor any manufacturing activity commenced in the previous year. The Income-tax Officer, therefore, did not allow the claim for deduction of expenditure incurred by the assessee as revenue expenditure. The Income-tax Officer also taxed interest income under section 56 of the Act under the head “Other sources” as he was of the opinion that in the absence of commercial character, income from such source cannot be brought to tax as business income under section 28 of the Act. The assessee took the matter in appeal before the Appellate Assistant Commissioner of Income-tax. The Appellate Assistant Commissioner, in view of the undisputed fact that the assessee-company had not set up any manufacturing unit in the previous year, did not accept the contention of the assessee. While doing so, the Appellate Assistant Commissioner observed that according to the balance-sheet, the capital work-in-progress had been shown against capital expenditure. The Appellate Assistant Commissioner also observed that no manufacturing activities had commenced in the relevant previous year. The Appellate Assistant Commissioner con-firmed the order of the Income-tax Officer and also held that interest income had been correctly classified as “Income from other sources” falling under section 56 of the Act as no business had commenced in the previous year.

4. The assessee went in further appeal to the Income-tax Appellate Tribunal (for short, “the Tribunal”). The Tribunal accepted the contention of the assessee and reversed the findings of both the Income-tax Officer and the Appellate Assistant Commissioner and held that in view of the fact that the assessee had purchased some raw materials and obtained some orders for supplying machinery during the relevant previous year, it could be said that the assessee had set up its business during the relevant previous year. It may be expedient to mention here that there is no dispute in this case that though the main business of the assessee was to undertake manufacturing activities, the plant and machinery were installed on June 10, 1974, long after the end of the relevant previous year and the actual manufacturing commenced only thereafter and the first order was executed on September 27, 1974.

5. The Tribunal, however, held that the activity of receiving orders for supply of machinery and purchase of some raw materials during the previous year constituted setting up of business even though the plant and machinery required for manufacture were installed later only on June 10, 1974, and the actual manufacturing commenced thereafter. It was, therefore, held that the expenditure incurred by the assessee during the relevant previous year was allowable as deduction and the interest income was also assessable as business income under section 28 of the Act and not as income from other sources under section 56 of the Act as done by the Income-tax Officer.

6. Aggrieved by the order of the Tribunal, the Revenue applied for reference under section 256(1) of the Act. Hence, this reference at the instance of the Revenue.

7. Learned counsel for the Revenue submits that the finding of the Tribunal that the assessee had set up its business during the relevant previous year is erroneous, inasmuch as it is based only on the fact that the assessee had, during the relevant previous year, purchased some raw material and obtained some orders for supply of machinery. Learned counsel further submits that the Tribunal failed to appreciate the true meaning of the words “has set up its business” which has already been decided by this court and the Supreme Court in a number of decisions. According to learned counsel, the receipt of orders for supply of machinery by the assessee-company, without having any establishment and building and machinery for manufacturing the same, is not a relevant factor for deciding whether the business of the assessee had been set up during the relevant previous year or not. Learned counsel placed reliance on the decisions of this court in Western India Vegetable Products Ltd. v. CIT, [1954] 26 ITR 151, CIT v. Forging and Stamping Pvt. Ltd., [1979] 119 ITR 616 and Commissioner Of Income-Tax, Bombay v. Ralliwolf Ltd., [1980] 121 ITR 262. Learned counsel also relied on the decision of the Gujarat High Court in CIT v. Sarabhai Sons Pvt. Ltd., [1973] 90 ITR 318, wherein the decision of this court in Western India Vegetable Products Ltd.'s case, [1954] 26 ITR 151 had been followed. Reference was also made to the decision of the Supreme Court in CWT v. Ramaraju Surgical Cotton Mills Ltd., [1967] 63 ITR 478.

8. Learned counsel for the assessee, on the other hand, submitted that to decide whether the business had been set up or not in the previous relevant year, it is not necessary that building is constructed or machinery has been installed. It is enough that some activities have been undertaken by the assessee which are commercial in nature. In this connection, learned counsel referred to the purchase of some raw materials by the assessee to be used in manufacturing and also receipt of some orders for supply. Learned counsel tried to distinguish the judgments of this court and the Supreme Court referred to by learned counsel for the Revenue and placed reliance on the judgment of the Gujarat High Court in Sarabhai Management Corporation Ltd. v. CIT, [1976] 102 ITR 25, which is affirmed by the Supreme Court in CIT v. Sarabhai Management Corporation Ltd., [1991] 192 ITR 151.

9. We have carefully considered the rival submissions. The question as to when the business can be said to have been set up is no more res integra.” Setting up “a business means to establish a business. As observed by Chagla C.J, in Western India Vegetable Products Ltd. v. CIT, [1954] 26 ITR 151, 158.

“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.”

10. In the above case, Chagla C.J, also dealt with the treatment of the expenditure incurred after the setting up of the business but before it is commenced and observed (at page 158):

“But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced 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 section 10(2).”

11. This view was approved by the Supreme Court in CWT v. Ramaraju Surgical Cotton Mills Ltd., [1967] 63 ITR 478. In the above case, the controversy before the Supreme Court was whether the new unit started by the assessee was set up after commencement of the Wealth-tax Act, 1957, so as to qualify the assessee for exemption from wealth-tax under section 5(1)(xxi) of the Wealth-tax Act, 1957. The assessee in that case was carrying on the business of manufacture of absorbent cotton wool. In March, 1955, the board of directors of the assessee-company resolved to establish a new spinning unit for which a licence was obtained from the Government of India in August, 1955. The assessee placed orders for purchase of necessary spinning machinery and plant in the months of January and February, 1956. The construction of the factory buildings was taken in hand in March, 1956, and these constructions were completed by December, 1957. The erection of the spinning machinery and plant in the building was completed in several stages commencing from June, 1957. A licence from the Inspector of Factories for working was obtained in June, 1958. The Wealth-tax Act had come into force with effect from April 1, 1957. The question before the Supreme Court was whether on these facts a new spinning unit could be said to have been set up by the assessee before April 1, 1957. The Supreme Court approved the decision of this court in Western India Vegetable Products Ltd. v. CIT, [1954] 26 ITR 151, and observed (at page 481 of 63 ITR):

“A unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up. It is only when the unit has been put into such a shape that it can start functioning as a business or a manufacturing organisation that it can be said that the unit has been set up.”

12. It was further observed (at page 482):

“Operations for the establishment of a unit, from the very nature of that expression, can only signify steps that have to be taken to establish the unit. The word ‘set up’…., in our opinion, is equivalent to the word ‘established’, but operations for establishment cannot be equated with the establishment of the unit itself or its setting up.”

13. The Supreme Court made it clear that the operations for establishment of the unit cannot be simultaneous with the setting up of the unit 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. Applying these principles to the facts of the case before it, the Supreme Court held that the new spinning plant of the assessee was set up after the 1st April, 1957, since it was long thereafter that it could be said to be ready to discharge the function for which it was set up.

14. This court in CIT v. Industrial Solvents and Chemicals Pvt. Ltd., [1979] 119 ITR 608, was again called upon to decide a somewhat similar controversy. Applying the principles laid down in Western India Vegetable Products Ltd.'s case, [1954] 26 ITR 151 (Bom), to the facts of the case it was observed (at page 614 of 119 ITR):

“In our case, the activity of the assessee-company was to produce industrial solvents, viz., ether. Can the assessee-company be said to be ready to commence it's business, viz., production of ether, merely when the machinery was installed or even when the plant was charged initially with 200 gallons of raw material? In our opinion, when the question is so put, the answer is obvious and the answer is that till some end-product which is the business of the company is or can be obtained, it cannot be said that the company is ready to commence production and it is such readiness to commence production which has been indicated in Western India Vegetable Products Ltd.'s case, [1954] 26 ITR 151 (Bom), as equivalent to the setting up of the business.”

15. Thus, the principles for determining when a business can be said to have been set up are well-settled. If a question arises as to whether a particular business can be said to have been set up in the relevant assessment year, that question, as observed by this court in CIT v. Forging and Stamping Pvt. Ltd., [1979] 119 ITR 616, will have to be determined on the facts and circumstances in each case.

16. Reference was made by counsel for the assessee to the decision of this court in CIT v. Caltex Oil Refining (I.) Ltd., [1976] 102 ITR 260. We have perused the same. We do not find that the view taken in the above case in any way goes counter to its earlier decisions. It is rather reiteration of the same. It was only on consideration of the facts of that case that it was held that as the business of the assessee included the business of purchase of goods for the purpose of sale, it can also amount to setting up of the business.

17. So far as the Gujarat High Court decision in Sarabhai Management Corporation Ltd. v. CIT, [1976] 102 ITR 25 is concenred, we find that the ratio of this judgment is in no way different from that of the decision of this court referred to above. In fact, in this case, the Gujarat High Court has relied upon the decision of this court in Western India Vegetable Products Ltd.'s case, [1954] 26 ITR 151. The conclusion of the court in that case in favour of the assessee was only in view of the facts and circumstances of that case which were completely different. We do not find any conflict between the decisions of the Bombay High Court and the Gujarat High Court in so far as the principles of law are concerned. The conclusions differ only because of the different facts and circumstances appearing in each case.

18. In view of the foregoing discussion and the well-settled legal position, we are of the clear opinion that in the instant case the Tribunal was not correct in holding that the assessee had set up its business in the previous year corresponding to the assessment year 1974–75. Accordingly, we answer the first question referred to us in the negative, that is, in favour of the Revenue and against the assessee.

19. Learned counsel for the assessee submits that in view of our answer to the first question being in favour of the Revenue, the second question should not be answered and the matter should be remanded to the Tribunal with a direction to consider whether the interest received by the assessee is income of the assessee or not. We do not find that any such controversy was there before any of the authorities at any stage. The admitted position throughout had been that the interest received by the assessee was its income. The only dispute was regarding the head under which it should be assessed. The assessee's case was that it should be assessed as income from business whereas the authorities held it to be income from other sources. In such a case, the assessee cannot be allowed now to go behind its own admission that the interest receipt was its income and raise a fresh controversy for the first time at the reference stage. The prayer of counsel for the assessee on this count is not tenable in law and the same is, therefore, rejected. In view of our answer to the first question being in favour of the Revenue, the answer to the second question is self-evident, that is, under the facts and in the circumstances of the case, the interest income earned by the assessee during the relevant previous year could not be assessed as business income under section 28 of the Income-tax Act, 1961. It has been rightly assessed as income from other sources. Accordingly, the second question referred to us is, therefore, answered in the negative, that is, in favour of the Revenue and against the assessee.

20. Under the facts and circumstances of the case, we make no order as to costs.