Ramanujam, J.:— The original assessments of the assessee-company for the years 196-66 and 1966-67 were completed on October 31, 1966, and April 13, 1967, respectively. Later, the ITO reopened the assessments under s. 147(b) of the I.T Act, 1961, and completed the reassessments on May 8, 1969. The assessment for the year 1967-68 is an original assessment which was completed on September 2, 1969. In the first two assessments, the ITO had allowed the claim of the assessee to relief under s. 84 in respect of Rubber Reclamation Factory. Later, in his reassessments, the ITO had held that the assessee was not entitled to the relief under s. 84 on the ground that the profits of the Rubber Reclamation Division had arisen from working of machineries not exclusively owned by the assessee and that of the total value of the machinery employed in the Division, not less than 20% was of the machinery taken on lease from Messrs. Rubber Products Company, Coimbatore, which had used these machineries previously in its own business. According to the ITO, the assessee was not entitled to any relief at all under that section in respect of the profits in respect of the Rubber Reclamation Division. For the same reason, he disallowed the relief claimed by the assessee in the original assessment dated September 2, 1969, for the year 1967-68.

2. The assessee appealed to the AAC who found that the Rubber Reclamation Division was formed along with the Chain Division during 1960, that the land was purchased on November 9, 1959, that the construction of the building was started in 1961, and completed stage by stage, that the application for electricity was made on September 1, 1960, that the transformer was energised on February 21, 1962, that the letter from the assessee to the Superintending Engineer also indicated that the factory had commenced production with effect from August 1, 1962, that some of the machineries had been purchased on June 25, 1962, September 26, 1962, December 12, 1962, and December 30, 1962, and that the formal inauguration had also been done on February 12, 1963. On these facts, the AAC held that the Rubber Reclamation Division was commenced on February 12, 1963, and that as the secondhand machinery was not transferred to the Rubber Reclamation Division at the time of its formation, the assessee was entitled to relief under s. 84.

3. The Revenue took the matter in appeal to the Tribunal. The Tribunal held that normally the formation of the company will include purchase of the land, construction of the factory building, installation of the machineries and on completion of these stages, the company can be taken to have been set up. The Tribunal further held that the Rubber Reclamation Unit was formed by the transfer of the machines previously used and, therefore, the condition in s. 84(2)(ii) was not satisfied and, therefore, the assessee was not entitled to claim relief under s. 84. In this view, the Tribunal allowed the departmental appeal. Aggrieved by the order of the Tribunal, the assessee has sought and obtained a reference on the following two questions:

“1. Whether, on the facts and in the circumstances of the case, there was transfer within the meaning of section 84(2)(ii) of machinery by Rubber Products Company, Coimbatore, to the new new industrial undertaking of the assessee under the agreement dated April 1, 1963, for the assessment years 1965-66, 1966-67 and 1967-68?

(2) Whether, on the facts and in the circumstances of the case, the assessee was not entitled to relief under section 84 merely because some machinery whose value was not below 20% of the total machinery had been used by Rubber Products Company of Coimbatore prior to the agree-ment dated April 1, 1963, for the assessment years 1965-66, 1966-67 and 1967-68?”

4. For a proper disposal of this reference, it is necessary to consider the scope and object of s. 84 which is the predecessor of the present s. 80J. The said s. 84, so far as relevant for the purpose of this case, is extracted below:

“84. Income of newly established industrial undertakings or hotels.—

(1) Save as otherwise hereinafter provided, income-tax shall not be payable by an assessee on so much of the profits and gains derived from any industrial undertaking or business of a hotel or from any ship, to which this section applies, as does not exceed six per cent, per annum on the capital employed in such undertaking or business or ship, computed in the prescribed manner.

(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:

(i) it is not formed by the splitting up, or the reconstruction, of a business already in existence;

(ii) it is not formed by the transfer to a new business of a building, machinery or plant previously used for any purpose…”

5. Sub-s. (1) of s. 84 gives certain benefits to newly established industrial undertakings, and sub-s. (2) says that that benefit will be applied only to an industrial undertaking which fulfils the conditions set out therein. Clause (i) of sub-s. (2) says that for claiming the benefit of sub-s. (1), the new industrial undertaking should not have been formed by the splitting up or reconstruction of a business already in existence, and clause (ii) says that the new industrial undertaking should not have been formed by the transfer to a new business of a building, machinery or plant previously used for any purpose.

6. The main question that was canvassed before the Tribunal by the Reyenue was that the Rubber Reclamation Division was formed by the transfer of machinery which has been previously used for extraction of rubber by another assessee. The assessee contended that the lease of the machinery from another party will not amount to a transfer of the machinery to the industrial undertaking and, therefore, there being no transfer, as contemplated by clause (ii) of sub-s. (2), the assessee is entitled to claim the benefit of s. 84. There cannot be any dispute that if the transfer of the used machinery has taken place after its-formation, then, the bar under clause (ii) of sub-s. (2) will not apply. But, if there is a transfer of the machinery and if the transfer had taken place in the process of formation or setting up of the new industrial undertaking, then the assessee may not be entitled to claim the benefit of s. 84. Therefore, we are now concerned with two questions, namely:—

“(1) Whether the lease of the machinery from a third party was in the course of the formation of the new industrial undertaking? and

(2) Whether the lease of the machinery will amount to a transfer so as to attract clause (ii) of sub-s. (2) of s. 84?

7. When a new industrial undertaking can be taken to have been formed has been the subject-matter of judicial pronouncements. In Western India Vegetable Products Ltd. v. CIT, [1954] 26 ITR 151, dealing with a case arising under the Indian I.T Act, 1922, the Bombay High Court had observed as follows (p. 158):

“…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 contradistinction 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.”

8. In Ramaraju Surgical Cotton Mills Ltd. v. CWT, [1962] 46 ITR 820, this court, dealing with the expression “setting up” occurring in s. 5(1)(xxi) of the W.T Act, has observed that unless a factory is erected and plant and machinery are installed therein, it cannot be said to have been set up, that the resolutions of the board of directors, the orders placed for purchasing the machinery and the licence obtained from the Government for constructing the factory, are merely initial stages towards the setting up, however necessary and essential they may be, to further the achievement of the end, that the actual functioning of the factory or its going into production cannot alone be taken as setting up of the factory, and that the setting up is a stage anterior to the commencement of the factory, and that, therefore, the proper meaning of the expression “setting up” would be “ready to commence business”. The above decision was the subject-matter of appeal before the Supreme Court in CWT v. Ramaraju Surgical Cotton Mills Ltd., [1967] 63 ITR 478 and the Supreme Court had held in that case that the unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up, that 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 and that the operations for the establishment of a unit, from the very nature of that expression used in the proviso to s. 5(1)(xxi) of the W.T Act, can only signify steps that have to be taken to establish the unit. Therefore, the applicability of the proviso has to be decided by finding out when the company commenced operations for establishment of the unit and which operations must be antecedent to the actual date on which the unit is held to have been set up for the purpose of s. 5(1)(xxi) of the W.T Act. In CIT v. Falliwolf Limited, [1980] 121 ITR 262, the Bombay High Court has pointed out that the distinction between “settingup” and “commencement of business” and said that when the business is established and is ready to be commenced, then it can be said that the business has been set up. Before it is ready to commence business, it cannot be said that it is set up, and that any expenditure during the interval between the setting up of a business and its commencement would be a permissible deduction under s. 10(2) of the Act. In this case, reference has been made to two earlier decisions in Western India Vegetable Products Ltd. v. CIT, [1954] 26 ITR 151 and the decision of the Gujarat High Court in CIT v. Saurashtra Cement and Chemical Industries Ltd., [1973] 91 ITR 170, and it was held that an assessee can be said to have commenced business even when a mere purchase has taken place during the relevant accounting period and that it is not necessary that the assessee must carry out every activity such as purchase and sale within that year.

9. The decisions above referred to clearly indicate that a new undertaking can be said to have been formed only when it is ready to commence the production of an article for the production of which it is established and the formation of the company will not include the initial steps taken for establishment. In the light of the principles laid down in the above decisions, we have to find out whether in this case the formation of the new industrial undertaking was before the setting up of the machinery which had been taken on lease from a third party. The AAC has held that the Rubber Reclamation Division had been formed long before the assessee took the machinery on lease, that merely on the basis that the company had been inaugurated on February 12, 1963, it cannot be taken to have been formed on that date, and any transfer of the machinery to the undertaking thereafter should be taken to be after the formation of the company and, therefore, clause (ii) of sub-s. (2) of s. 84 will not be a bar for the company claiming relief under s. 84. The Tribunal, however, took the view that the mere fact that the new company has been inaugurated will not show that it is ready to commence production and that even the supply of electrical energy by the Madras State Electricity Board cannot be taken to be a conclusive proof to show as to when the company was formed. But the Tribunal, however, took the view that the necessary machinery could have been installed subsequent to April 1, 1963, and that it is impossible to state that the new undertaking was formed before April 1, 1963. The assessee is aggrieved against the said finding of the Tribunal. In this case, the facts as found by the Tribunal are these:

The unit is a Rubber Reclamation Unit. The vital machine is the rubber reclaiming machine. Unless that machine is set up, it is impossible to say that the unit is ready to commence the production of rubber, that the invoice issued by the foreign firm for the supply of the said machinery is dated December 12, 1962. But there is no evidence as to when the machinery landed in India and when the same was installed in the assessee's Rubber Reclamation Unit. The Tribunal, on these facts, held that the rubber reclaiming machine would have been installed only by the end of March, 1963, so that it will be in a position to produce rubber on or after April 1, 1963. The assessee relied before the Tribunal on the date of power supply and also the other steps taken to acquire the land, constructing the building, etc. The Tribunal, however, held that these factors are not quite relevant, that merely because there is an inaugural function it cannot be said to be a completion of the new undertaking. No doubt, the Tribunal proceeded on the basis that the rubber produced had been sold only in the subsequent year commencing from April, 1, 1963, and so the unit should be taken to have started only on April 1, 1963. But, as has been pointed out in the decisions referred to above, production cannot be equated to the formation of the company. The formation is the stage anterior to the production and, therefore, both the time of formation and the time when the company commenced production cannot be equated. As a matter of fact, the Supreme Court in CWT v. Ramaraju Surgical Cotton Mills Ltd., [1967] 63 ITR 478, has clearly stated that the concept of commencement of production of company cannot be confused with the concept of the formation of the company, that the formation of the company precedes commencement of production, but that the formation will definitely connote a stage when all the necessary steps had been completed and the company is ready to commence production. Therefore, the Tribunal in this case may not be right in holding that since the actual commencement of the production was only after 1963, the Rubber Reclamation Unit should be taken to have been formed only after April 1, 1963. But, at the same time we are not inclined to disagree with the ultimate conclusion arrived at by the Tribunal. In this case, the formation of the company can only be taken to be after April 1, 1963, for, the company was ready to produce rubber only after April 1, 1963, and not earlier, that the very machinery which is essentially necessary for producing the rubber was imported from the foreign country on December 12, 1962, and there being no actual evidence that it reached Madras and was installed before April 1, 1963, the Tribunal appears to be right in holding that the formation of the company was only after April 1, 1963, and could not be earlier. In this view of the matter, agreeing with the Tribunal, we hold that the formation of the company was only after April 1, 1963, and in this case, as there was a transfer of the machinery to the new unit by Rubber Products Company of Coimbatore on April 1, 1963, it should be taken to be in the process of formation of the company and not after its formation. As already stated, if the transfer of the machinery has been in the process of the formation of the company, then the relief under s. 84(1) will not be available to the assessee in view of clause (ii) of sub-s. (2). In this case, the assessee having been held to have acquired the machinery on lease while forming the undertaking, it cannot claim the benefit, because of clause (ii) of sub-s. (2) of s. 84.

10. Their we come to the question as to the scope of the expression “transfer” occurring in sub-s. (2)(ii) extracted above. According to the learned counsel for the assessee, the expression “transfer” occurring in the said clause will not include a lease, that the expression “transfer” in the context can only mean an absolue transfer such as a conveyance by sale, etc., and that the said expression should be understood in a restricted sense. It has been held in Capsulation Services Pvt. Ltd. v. CIT, [1973] 91 ITR 566 (Bom), that the expression “transfer” occurring in s. 15C(2)(i) of the Indian I.T Act, 1922, should be given its normal and natural meaning, that the ordinary modes of transfer as referred to in the Transfer of Property Act, are sale, mortgage, lease, gift and exchange, that though in case of sale, gift or exchange, there may be complete transfer of ownership and in the other two cases of transfers, i.e, mortgage or lease, the entire bundle of rights that go to constitute ownership are not transferred but only some limited rights or interests in or to the property are transferred; the expression “transfer” cannot be understood as meaning an absolute transfer, that, therefore, s. 15C(2)(i) includes a case where a transfer is effected by creation of a lease in a building in favour of the new business or the person carrying on the new business and that the lease will not cease to be a transfer merely because it is a monthly tenancy. We are not in a position to accept the assessee's contention that the word “transfer” occurring in sub-s. (2) of s. 84 should be understood in a restricted sense so as to include only transfers under which the entire ownership is transferred to the new company.

11. In Ghanshyamdas Kishan Chander v. CIT, [1980] 121 ITR 121 (AP), the expression “transfer”, in relation to a capital asset in s. 2(47) of the I.T Act, was held to be different from the expression “transfer” used in s. 58(a) of the Transfer of Property Act. While the expression “transfer” in s. 58(a) of the Transfer of Property Act, includes even mortgage of the immovable property, the same connotation cannot be extended to the expression “transfer” in the I.T Act. Parliament has designedly used the expression “sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law” in the definition of “transfer” in s. 2(47) of the I.T Act. Unless the entire interest is transferred to the transferee or assigned, without retaining any interest whatsoever in the transferor or the original owner and thus effective conveyance of a capital asset is made, the transaction cannot be said to fall within the meaning of “transfer” as defined in s. 2(47) of the I.T Act. Thus, the Andhra Pradesh High Court construed the expression “transfer” in a restricted way so far as it occurs in s. 2(47). That court has referred to an earlier decision of the Supreme Court in Alapati Venkataramiah v. Commissioner Of Income Tax, Hyderabad, [1965] 57 ITR 185, wherein the court has observed as follows (p. 192):

“Before section 12B can be attracted, title must pass to the company by any of the modes mentioned in section 12B, i.e, sale, exchange or transfer. It is true that the word ‘transfer’ is used in addition to the word ‘sale’, but even so, in the context, transfer must mean effective conveyance of the capital asset to the transferee. Delivery of possession of immovable property cannot by itself be treated as equivalent to conveyance of the immovable property.”

12. On the basis of the above decisions, we are not in a position to restrict the meaning of the word “transfer” occurring in clause (ii) of sub-s. (2) of s. 84. The object of enacting sub-s. (2) of s. 84 will be frustrated if lease or mortgages are excluded from the definition of “transfer”. The new undertaking by taking over the used machinery under a mortgage or under a lease for a long period while forming the new company, will escape the bar contained in s. 84(2), while the new undertaking which is being formed by purchase of the machinery which has been used by others will alone be affected by the bar and that will be contrary to the object behind the section. The provision of s. 84(2)(ii) can be defeated by the new undertaking being formed by taking over, on a long lease, the machinery of others instead of purchasing the machinery. We, therefore, hold that the expression “transfer” occurring in sub-clause (ii) of sub-s. (2) is comprehensive enough to include a lease. This is the view expressed in Kamak-shya Narain Singh (Raja Bahadur) v. CIT, [1943] 11 ITR 513. (PC) and Traders and Miners Ltd. v. CIT, [1955] 27 ITR 341 (Pat).

13. The learned counsel for the assessee then referred to rule 19 of the I.T Rules, 1962, which deals with the computation of capital employed in an industrial undertaking or a hotel, That rule says as follows;

“19. Computation of capital employed in an industrial undertaking or a hotel.—(1) For the purposes of section 84, the capital employed in an undertaking or a hotel to which the said section applies shall be taken to be—

(a) in the case of assets acquired by purchase and entitled to depreciation—

(i) if they have been acquired before the computation period, their written down value on the commencing date of the said period;

(ii) if they have been acquired on or after the commencing date of the computation period, their average cost during the said period;

(b) in the case of assets acquired by purchase and not entitled to depreciation—

(i) if they, have been acquired before the computation period, their acutal cost to the assessee;

(ii) if they have been acquired on or after the commencing date of the computation period, their average cost during the said period;

(c) in the case of assets being debts due to the person carrying on the business, the normal amounts of those debts;

(d) in the case of any other assets, the value of the assets when they became assets of the business:

Provided that if any such assets has been acquired within the com-putation period, only the average of such value shall be taken in the same manner as average cost is to be computed.

Explanation.—For the purposes of clauses (a) and (b) of this sub-rule, the value of any building, machinery or plant or any part thereof which having been previously used for any purpose is transferred to the undertaking or hotel at the time of its formation, shall not be taken into account for computing the capital employed in cases to which the Explanation to section 84 applies.

(2) Where the price of any asset has been satisfied otherwise than in cash, then the value of the consideration actually given for the asset shall be treated as the price at which the asset was acquired.

(3) Any borrowed money and debt due by the person carrying on the business shall be deducted and in particular there shall be deducted any debts incurred in respect of the business for tax (including advance tax) due under any provision of the Act.”

14. It is no doubt true that sub-rule (1) of rule 19 refers to an acquisition by purchase. But the Explanation to that sub-rule refers to the transfer of any building, machinery or plant to the new undertaking. It is no doubt true that this makes a distinction between an acquisition by purchase and other transfers. According to the learned counsel for the-Revenue, since the acquisition by purchase has been specifically referred to as one mode of transfer, the expression “transfer” occurring subsequently has to be understood restrictively taking note of the context in which it is used. But such a construction is not possible while construing sub-clause (ii) of sub-s. (2) of s. 84. As contended by the learned counsel for the Revenue, in this case, we are not concerned with the question of computation of capital and computation of capital does not arise at this stage, and, in any event, the computation provision in the rules cannot be understood as taking away or affecting the eligibility conditions set out in s. 84(2)(ii). Thus, we are inclined to agree with the view of the Tribunal that the expression “transfer” occurring in sub-s. (2) of s. 84 cannot be understood in a limited sense.

15. In this view of the matter, we answer both the questions in the affirmative and against the assessee. The assessee will pay the costs of the Revenue. Counsel's fee Rs. 500 (one set).