1. In this case at the instance of the assessee the following two questions have been referred to us for our opinion :

"(1) Whether, on the facts and circumstances of the case, conclusion reached by the Tribunal in holding that the assessee did not commence its business prior to June 26, 1965, and consequently not entitled to expenditure incurred by it amounting to Rs. 58,600 from January 1, 1965, to June, 26, 1965, was correct in law ?

(2) If the answer to the first question is in the affirmative, whether the Tribunal was justified in disallowing the claim of loss of Rs. 46,970 for the assessment year 1965-66 ?"

2. We are concerned in the instant case with assessment years 1965-66 and 1966-67. The assessee is a private limited company and its year of account is the calendar year. The relevant previous years are January 1, 1964, to December 31, 1964, and January 1, 1965, to 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 January 1, 1965, onwards was not allowable.

3. The assessee took the matter in appeal but the Appellate Assistant Commissioner confirmed the view of the Income-tax Officer and dismissed the appeal. The matter was taken in further appeal before the Tribunal. According to the Tribunal, the point which required decision in this case was whether the assessee-company could be said to have commenced its business activities from the beginning of the accounting period, viz., November 4, 1963, so as to enable the assessee to claim the expenditure incurred by it from that date as business expenditure. The revenue did not dispute the fact that the business had commenced on June 27, 1965. Therefore, a portion of the expenditure incurred during the accounting year relevant to assessment year 1966-67 was allowable as business expenditure. The Tribunal held that the decision of the Income-tax Officer and the Appellate Assistant Commissioner was correct, namely, that the assessee did not commence its business prior to June 26, 1965, and hence there was no necessity to change that conclusion. Thereafter, at the instance of the assessee, the questions set out hereinabove have been referred to us for our opinion.

4. Section 3(1)(d) of the Income-tax Act, 1961, defines what is meant by "previous year" so far as the facts of this case are concerned. According to that section, for the purposes of the Act, "previous year" means -

"(d) in the case of a business or profession newly set up in the said financial year, the period beginning with the date of the setting up of the business or profession and ending with the said financial year, or if the accounts of the assessee have been made up to a date within the said financial year, then, at the option of the assessee, ending on that date.... as the case may be."

5. It is undoubtedly true that since the company was incorporated on November 4, 1963, and the business of the assessee was newly set up, it would be the date of the setting up of the business which would be material. In this connection there are several decisions specifying what can be said to be the date of setting up of the business. Under the Indian Income-tax Act, 1922, also, section 2(11)(c) defined "previous year" in the same manner and there also it was the period from the date of the setting up of the business or profession which was the material date.

6. In Western 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. Commissioner of Inland Revenue [1919] 12 TC 92 (KB) because the language with which Rowlatt J. was concerned was "commencing of the business" and not "setting up of the business". At page 158, Chagla C.J. observed :

"It seems to us, that the expression 'setting up' means, as is defined in the Oxford English Dictionary, 'to place of 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. 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 the test which Chagla C.J. laid down was that the company was ready to commence business on a particular date if that date can be ascertained, that is, the date from which the business was set up though actual production might have started later on.

7. In Commissioner of Wealth-tax v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478 (SC) the Supreme Court referred to the decision of Chagla C.J. in Western India Vegetable Products Ltd.'s case [1954] 26 ITR 151 (Bom). The Supreme Court in that case was concerned with the words

"in a new and separate unit set up after the commencement of the Act by way of substantial expansion of its undertaking"

. At page 482 of the report, Bhargava J., delivering the judgment of the Supreme Court, observed :

"The words 'set up' in the principal clause, 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. The applicability of the proviso has, therefore, to be decided by finding out when the company commenced operations for establishment of the unit, which operations must be antecedent to the actual date on which the company is held to have been set up for purposes of the principal clause. This is also the meaning that the Bombay High Court derived in the case in Western India Vegetable Products Ltd. [ 1954] 26 ITR 151 (Bom), where that court was concerned with the interpretation of the expression 'set up' as used in section 2(11) of the Income-tax Act... The criterion for determining the period of exemption is based on the commencement of the operations for the establishment of the unit. These operations for establishment of the unit 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."

8. 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 from an industrial estate. These preparations went on and in July, 1966, the machinery was installed and production was commenced. The assessee claimed to deduct a sum of Rs. 16,237 spent in connection with the new business during the period ending March 31, 1966, for the assessment year 1966-67. On these facts it was held that the new business could not be said to be ready to discharge the function for which it was established, namely, the manufacture of scientific instruments and communication equipment until the machinery necessary for the purpose of manufacture was installed. Obtaining land on lease, placing orders for machinery and raw materials, were merely operations for the setting up of the business. In the case before the Division Bench the business could not be said to be set up until July, 1966, when the machinery had been installed and the factory was ready to commence business. The revenue expenditure incurred before that date would not be a permissible deduction in the assessment for assessment year 1966-67. The Division Bench arrived at these conclusions in the light of the decision of the Bombay High Court in Western India Vegetable Products Ltd.'s case [1954] 26 ITR 151 (Bom) and the decision of the Supreme Court in Ramaraju Surgical Cotton Mills Ltd.'s case [1967] 63 ITR 478 (SC). The Division Bench held that it was only when the machinery was installed that business could be said to be put into such a shape that it could start functioning as a business or a manufacturing organisation. It was not sufficient that the assessee obtained the land on lease from the Gujarat Industrial Development Corporation or appointed Dr. Ramanathan as the General Manager or placed orders for purchase of raw materials and stores or ordered out the necessary machinery and equipment. These were merely operations for the setting up of the business and the business could be set up only as a culmination of these operations when all that was necessary for the setting up of the business was done and it was only after the machinery was installed and the factory was ready to commence business that it could be said that the new business was set up by the assessee.

9. The three decisions to which we have referred above were again considered by a Division Bench of this court in Commissioner of Income-tax v. Saurashtra Cement & Chemical Industries [1973] 91 ITR 170 (Guj). The 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 has 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 the assessee were divisible into three categories : the first category consisted of the activity of extraction of limestone by quarrying the leased area of land. This activity was necessary for the purpose of acquiring the raw material to be utilised in the manufacture of cement. The second activity comprised the activity of manufacture of cement by use of the plant and machinery set up for that purpose and the third category consisted of selling manufactured cement. These three activities combined together constituted the business of the assessee. The activity of quarrying the leased area of land and extracting limestone from it was as much an activity in the course of carrying on the business as the other two activities of manufacture of cement and sale of manufactured cement. This activity came first in point of time and laid the foundation for the second activity and the second activity when completed laid the foundation for the third activity. Hence, the assessee commenced its business when it started the activity of extraction of limestone. Since extraction of limestone commenced in 1958, the assessee was carrying on business during the relevant years of account. The expenditure incurred by the assessee in carrying on the activity of extraction of limestone as also depreciation allowance and development rebate in respect of machinery employed in extracting limestone were deductible in computing the trading profits of the assessee for assessment years 1960-61 and 1961-62. At page 175 of the report, Bhagwati C.J., delivering the judgment of the Division Bench, observed :

"It is necessary in order to determine this question to consider what constituted the business of the assessee. Loosely, it may be said that the business of the assessee was manufacture and sale of cement. But, in determining questions arising under fiscal legislation, loose use of expression often tends to confound the real issue. To determine what was the business of the assessee, we must consider what are the activities which constituted such business without being misguided by loose expressions of vague and indefinite import...... It may be that the whole business was not set up when the activity of quarrying the leased area of land and extracting limestone was started. That would be set up only when the plant and machinery was installed, the manufacture of cement started and an organisation 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 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 he not consider a business as having commenced when an assential activity of that business is started ? The argument of the revenue seeks to confound the commencement of a business with the estabment of the business as a whole and carrying on of all the activities of the business. This confusion is the result of a loose description of the business of the assessee as a business of manufacture and sale of cement."

10. The test which was laid down was of the starting of an activity which is an essential activity in the course of carrying on the business, or, in other words, is a business activity and the moment that activity started, the assessee must be held to have commenced the business. To take any other view would not only be illogical but also irrational.

11. In Sarabhai Management Corporation Ltd. v. Commissioner of Income-tax [1976] 102 ITR 25 (Guj) we were dealing with the following facts. The assessee was a private limited company. The main object of the company was to acquire immovable property and to give it out either on leave and licence basis or on lease as residential or, in the alternative, business accommodation, with all appurtenant amenities including the amenities of storage, watch and ward facilities, canteens, refreshment rooms, etc. A bungalow together with the appurtenant compound at Ahmedabad was purchased by the company on March 28, 1964, under a registered sale deed for over Rs. 8 lakhs. Thereafter, building repairs, rewiring, installation of lift, etc., were carried on by the company for the purpose of converting the residential accommodation to business and storage accommodation and to render the premises more serviceable to its prospective licensees or lessees. The assessee claimed that it was in a position to offer services to licensees on and from October, 1964, and, therefore, claimed that expenditure of Rs. 48,004, which was incurred by it between October 1, 1964, and March 31, 1965, was a business expenditure for assessment year 1965-66. The Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal all held that the company could not be said to have been ready to commence business prior to May 1, 1965, the day on which it gave on leave and licence part of the said building, and certainly not by October 1, 1964, and disallowed the deduction claimed. This High Court held on reference that the business 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 ultimately with effect from May 1, 1965, a portion of the accommodation was actually given out on licence basis. Thus, though the company actually let out on leave and licence a portion of the building with effect from 1st May, 1965, the earlier and preceding part of its activities were also business activities to ensure that everything was in shape for the use of the occupier. Under these circumstances it was held that, at any rate from October 1, 1964, the assessee could be said to have commenced its business activity of the second category and, therefore, the assessee-company had commenced business on that date and all expenses incurred by the assessee between October 1, 1964, and March 31, 1965, namely, the amount of Rs. 48,004, could be said to have been incurred by it as business expenditure.

12. Thus, it is clear in the light of the decisions of this High Court in Saurashtra Cement and Chemical Industries' case [1973] 91 ITR 170 (Guj) and Sarabhai Management Corporation Ltd.'s case [1976] 102 ITR 25 (Guj) that what the court has to consider is, whether the business of the assessee consists of different categories and whether the activity which was started earlier than the actual commencement of the production in the instant case could be said to have been an essential part of the business activity of the assessee. The company can be said to have set up its business from the date when one of the categories of its business activity is started and it is not necessary that all the categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set up. Again, as Bhagwati C.J., has emphasized in Saurashtra Cement and Chemical Industries' case [1973] 91 ITR 170 (Guj), the test to be applied is as to when a businessman would regard a business as being commenced and the approach must be from a commonsense point of view.

13. In the instant case, we find from the memorandum and articles of association of the company that under the objects clause of the company, the object of the company is to carry on the business of manufacture, buy or otherwise acquire, sell, import, export, distribute, deal in and dispose of and turn to account, produce ACSR, all aluminium and copper conductors, aluminium and copper binding wires, strips, covered conductor, and all types of wires, cables, telephonic and 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 with all its advantages, goodwill and licence providing for reimbursing for the services rendered by the said concern as the promoters and for the out of pocket expenses incurred by them for formation and promotion of the company and providing for utilising by the company the licence obtained by them from the Government of India for manufacturing aluminium conductors, etc., which licence the said company had obtained for the purpose of such manufacture by and the extent of expenses incurred by them in the matter of investigating the possibilities and the desirability of such manufacture and negotiating with other firms."

14. As stated above, the company was incorporated on November 4, 1963. The board of directors of the assessee-company at their meeting held on April 6, 1964, took a note of the report of two of the directors about the value and particulars of machinery, stock and raw materials, stores purchase, furniture, and a statement of expenses incurred by Prem Industrial Corporation, Ahmedabad. After taking note of that report, the directors unanimously resolved that the abovementioned details regarding the stock and value of machinery, raw materials, stores, furniture of Prem Industrial Corporation, Ahmedabad, and the expenses incurred by them were verified and confirmed by the board. Two of the directors were authorised to take over the possession and make payments of all the expenses, rights, privileges, obligations towards know-how agreement and contracts of Prem Industrial Corporation with all its advantages and licence providing for reimbursing for the services rendered by the said concern as the promoters and for the out of pocket expenses incurred by them for formation and promotion of the company, the licence obtained by them from the Government of India for manufacturing aluminium conductors, etc. It is thus clear that the articles of association in terms referred to the taking over the business and assets of Messrs. Prem Industrial Corporation, Ahmedabad. The assessee-company also, as part of the assets of that firm, acquired the know-how for the manufacture of aluminium conductors and other conductors and it got the benefit of the licence which was issued by the Government of India in favour of Prem Industrial Corporation.

15. Mr. Patel has contended before us that the assessee-company was formed for the purpose of taking over the business of the going 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 India Ltd., for guarantee given to various Electricity Boards of Rs. 58,750 against which margin deposit of Rs. 5,875 was paid. Thus, it is clear that long prior to the actual commencement of the manufacture of aluminium conductors, the assessee-company had acquired raw materials, had acquired know-how, the licence and also orders against which subsequently it supplied goods after the manufacturing activities started. Annexure "L" to the statement of the case shows that purchases of aluminium had commenced prior to June, 1965, and different quantities of aluminium and steel had been purchased and kept ready before the actual manufacture of aluminium conductors was started by the company. It is true that in the auditors' report it was stated that depreciation was not claimed but, as Mr. Patel explained, since there was no production depreciation could not be claimed. This is not a case where altogether new machinery is installed after purchasing the same. The company was taking over the business of a going concern, namely, Messrs. Prem Industrial Corporation, Ahmedabad. It got readymade the know-how, some part of the machinery, some stock of aluminium wire and some orders which had been secured by Messrs. Prem Industrial Corporation from different electricity boards. The details of the contracts, annexure "G" to the statement of the case, shows that the first contract dated October 24, 1963, was from Madras State Electricity Board, Madras, and the company was actually incorporated on November 4, 1963. Thus, the promoters of the company, Messrs. Prem Industrial Corporation, passed on the benefit of this contract to the assessee-company and that contract was worth Rs. 60,00,000. Over and above these contracts, other contracts were also secured by the company before it actually started production, as shown in annexure "G" to the statement of the case and by the time it was ready to commence the business, it had already secured orders worth Rs. 1,10,00,000.

16. The business of the company was to manufacture aluminium and other conductors and to sell them. In the instant case, the company has started securing orders well in advance of the date on which it actually started production of aluminium conductors. The selling of aluminium conductors manufactured by it is as much a part of the business activity of the assessee-company as the manufacture of the aluminium conductors. 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 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 precede the other. What is required to be seen is, whether one of the essential activities for the carrying on of the business of the assessee-company as a whole was or was not commenced. In this case the assessee-company has commenced its business by securing orders first and going to production later on. While the orders were being secured simultaneously, the installation of machinery, putting up of the buildings, etc., was being attended to and when the company was ready to go into production, it actually started production and supplied goods against the orders which it had already booked. In view of this particular special feature of this case, namely, that the business activity of securing orders had practically started since the very date of incorporation of the company, it is obvious that the business activity of this assessee-company started from the day of its incorporation and not from the day when the production of aluminium conductors commenced. The Tribunal was, therefore, in error in not analysing the activities of the assessee-company in the instant case into the essential components of that business activity and ascertaining whether one or the other of those component activities had commenced before the actual date of going into production. As pointed out in Sarabhai Management Corporation Ltd.'s case [1976] 102 ITR 25 (Guj) what is material is the date when the company went into one or the other business activity and started one or the other component business activities of the company. In the instant case that was certainly done from the very date of the incorporation of the company. Under these circumstances, the assessee-company was entitled to have the loss of Rs. 46,970 for assessment year 1965-66 treated as business loss and also to have the loss of Rs. 58,600 incurred by it during the period January 1, 1965, to June 26, 1965, in the previous year relevant to assessment year 1966-67, treated as a business loss. The Tribunal was in error when it overlooked this distinction between the component business activity and the business activity as a whole and the Tribunal was in error in holding that the assessee had not commenced its business prior to June 26, 1965.

17. In the light of the above discussion, our answer to the questions referred to us is as under :

Question No. 1. - In the negative as to both the parts, that is, in favour of the assessee and against the revenue as to both the parts.

Question No. 2. - In the negative, that is, in favour of the assessee and against the revenue.

18. The Commissioner will pay the costs of this reference to the assessee.