1. At the instance of the Revenue, the following question has been referred by the Tribunal under section 256(2) of the Income-tax Act, 1961, for our opinion :
"Whether, on the facts and in the circumstances of the case, the assessee is entitled to the deduction of Rs. 28,965 being expenses incurred after August 15, 1970, and before October 6, 1970, on the basis that the assessee had made all arrangements for setting up the business in August, 1970, though the actual commencement of the business was started on October 6, 1970 ?"
2. There was no dispute between the parties that the figure of Rs. 28,965 is incorrect and the correct amount works out to Rs. 47,190. The question will, therefore, stand corrected accordingly.
3. In order to appreciate the scope and ambit of this question, a few relevant facts may be noted at the outest. The respondent-assessee is a private limited company which carries on the business of processing of marine products. The relevant assessment year is 1972-73. In the return filed by the assessee, it, inter alia, claimed deduction in respect of expenses amounting to Rs. 53,158 incurred by it before the actual commencement of the business, but after the setting up of the business. The Income-tax Officer called upon the assessee to furnish full particulars regarding the expenditure by his letter dated May 3, 1973. The assessee set out the details of the claim in its letter dated December 17, 1973. The assessee's case before the Income-tax Officer was that assessee, in connection with the business of processing of marine products, had rented the processing premises from the Government in August, 1970, on annual rental basis and the contracts with the fishermen for supplying fish were completed in June 28, 1970. However, the actual business started only in October, 1970, after the monsoon season when fish and other marine products could be caught from the sea. According to the respondent-assessee, the company had incurred expenditure amounting to Rs. 18,225 prior to July 31, 1970. This expenditure was not claimed by way of permissible deduction under section 37 of the Act but it was capitalised by the assessee while the expenditure which the company had incurred from August 15, 1970, to October 6, 1970, was claimed by way of deduction under section 37 of the Act. The Income-tax Officer made adjustment in respect of certain preliminary expenses of Rs. 5,968 and disallowed the balance of Rs. 47,190 in computing the total income of the assessee.
4. Being aggrieved by the said decision of the Income-tax Officer, the assessee carried the matter in appeal before the Appellate Assistant Commissioner who came to the conclusion, following a number of decisions of High Courts, that, in the instant case, the business was set up on August 15, 1970, and, therefore, the assessee was entitled to deduction of Rs. 47,190 as claimed.
5. Being aggrieved, the Revenue filed a second appeal before the Tribunal. The Revenue's appeal was dismissed by the Tribunal, by following the decision of this court in Prem Conductors Pvt. Ltd. v. CIT [1977] 108 ITR 654. It is thereafter that the aforesaid question was got referred by the Revenue to this court for our opinion.
6. In order to answer this question, a few facts are required to be appreciated. The assessee's business during the accounting year was of processing marine products had to be caught by the fishermen. For that purpose, the assessee had entered into various contracts with fishermen in June, 1970. That cannot be considered and has not been considered to be setting up of business. However, the actual infrastructure required for running of business became available to the assessee by August 15, 1970, when the assessee acquired the Government godown for that purpose by paying advance rent for one year. As that was the monsoon season, actual procuring of fish and their delivery to the assessee did take place on and after October 6, 1970. The Revenue contends that the assessee's business could have been said to have been set up during the relevant assessment year on October 6, 1970, while the assessee contends that the basic infrastructure was made available to the assessee on August 15, 1970, and, therefore, the business could be said to have been set up not from October 6, 1970, but from August 15, 1970, during the relevant assessment year. The Tribunal on appreciation of evidence, has taken the view that the assessee's business could be said to have been established and set up on and after August 15, 1970, and, therefore, whatever expenses the assessee incurred could be said to have been incurred towards the said business and, therefore, can be said to be rightly deducted under section 37 of the Act. The breakup of this expenditure incurred from August 15, 1970, is furnished by the assessee to the Revenue and it reads as under :
(Rs.) Rent 4,978 Travelling 33,189 Miscellaneous 4,695 Salary 3,275 Factory rent 25,300 Managing director's remuneration 10,000 Car maintenance 1,594
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83,031
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7. A mere look at these figures shows that they were all expenses of revenue nature and were not of capital nature. In fact, that is precisely the reason why the Revenue, in its appeal before the Tribunal, concentrated its attack only the ground that these expenses were incurred prior to the setting up of the business which, according to the Revenue, was set up on October 6, 1970, when fish and other marine products could be caught from the sea for bringing them to the assessee's plant. It is obvious that the aforesaid finding reached by the Tribunal is based on relevant evidence on record and cannot be made the subject-matter of grievance in these proceedings. But that apart, this finding is also rendered in the light of the settled legal position as emanating from various decisions of this court and other courts including the Supreme Court. We may, in this connection, refer to a decision of this court in the case of Prem conductors [1977] 108 ITR 654, which relied upon two earlier decisions of this court in CIT v. Saurashtra Cement and Chemical Industries Ltd. [1973] 91 ITR 170 and Sarabhai Management Corporation Ltd. v. CIT [1976] 102 ITR 25. We may also mention that the latter judgment in Sarabhai case [1976] 102 ITR 25 (Guj) was confirmed by the Supreme Court in CIT v. Sarabhai Management Corporation Ltd. [1991] 192 ITR 151. So far as Prem Conductors' case [1977] 108 ITR 654 (Guj) is concerned, and on which reliance has been placed by the Tribunal, the following test have been laid down by this court for deciding the question as to when the expenditure claimed for being allowed under section 37 can be said to have been incurred after the business is set up by the concerned assessee (headnote) :
"For deciding when a company could be said to have set up its business, what the court has to consider is, in the light of the decisions in the cases of CIT v. Saurashtra Cement and Chemical Industries Ltd. [ 1973] 91 ITR 170 (Guj) and Sarabhai Management Corporation Ltd. v. CIT [ 1976] 102 ITR 25 (Guj), 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 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 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. 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 common sense point of view."
8. In Prem Conductors' case [1977] 108 ITR 654 (Guj) the facts were that the assessee-company was to manufacture and sell aluminium and copper conductors and, prior to manufacturing of aluminium conductors, the company had already received advance orders for manufacturer and sale of conductors to be manufactured by it in future. The said step taken by the company was considered to be a step towards the setting up of the business being at least part of the main business and, therefore, the expenditure incurred by the assessee could be considered for deciding the business expenses. In this connection, the following pertinent observations were made by B. J. Divan C. J., speaking for the Division Bench (at page 666)
"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."
9. We may now turn to the earlier decision in Sarabhai Manage management's case [1976] 102 ITR 25 (Guj). In that case, the very question was examined in the light of the diverse business activity of the assessee-company. Three broad categories of activities of the assessee-company 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 gardens into 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. After having acquired the property, suitable alteration and additions were made by the assessee-company so that the property could be got ready for its licensees and for making it serviceable. All the expenses incurred by the assessee-company were treated to be permissible expenditure. 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. As noted earlier, this judgment is upheld by the Supreme Court in CIT v. Sarabhai Management Corporation Ltd. [1991] 192 ITR 151. In that case, the Supreme Court noted the various business activities of the assessee to the effect that it had purchased a property together with the appurtenant compound at Ahmedabad and had carried out repairs, rewiring, installation of lifts, etc., for the purpose of converting the residential accommodation into business and storage accommodation and to render the premises more serviceable to its licensees or lessees. The Supreme Court took the view that even if acquisition of the property for being let out could be said to be only a preparatory stage, the subsequent activities constituted activities in the course of the carrying on of the assessee's business only when the licensee or lessee occupied the premises or started paying rent.
10. We may at this stage refer to another judgment of this court in Hotel Alankar v. CIT [1982] 133 ITR 866. In that case, the assessee was to commence a hotel business and was to start a boarding and lodging house. One of the partners of the firm placed his building at the disposal of the firm as his capital contribution. Expenses amounting to Rs. 45,708 were incurred in installing lights, making the building more ventilated, etc. The hotel was formally inaugurated in February, 1968. The question was whether the expenses incurred in February, 1968, can be considered to be business expenses. For answering this question, the Division Bench of this court, speaking through B. K. Mehta J., observed as under (headnote) :
"When a business is established and is ready to commence business, then it can be said of that business that it is set up. The words 'ready to commence' would not necessarily mean that all the integrated activities are fully carried out and/or wholly completed. The requirement is also complied with in a given case where an assessee had undertaken the first of the kind of integrated activities which the business is overall comprised of. The question whether a business has been set up or not is always a question of fact which has to be decided on the facts and in the circumstances of each case."
11. The following observations of Chagla C. J. in Western India Vegetable Products' case [1954] 26 ITR 151, 158 (Bom) were quoted with approval :
"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 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 all expenses incurred after the setting up of the business and before commencement of the business, all expenses during the interregnum, would be permissible deductions under section 10(2)."
12. In the light of the aforesaid settled legal position, therefore, it is easy to visualised that for the setting up of the business of processing marine products, the assessee, during the assessment year in question, had to make all preparations and had also to provide on the spot the necessary infrastructure. Even conceding that entering into advance contracts with fishermen for collection of fish during the monsoon season may not be taken as a first step towards setting up of business, at least from August 15, 1970, when the assessee acquired a godown where the processing of marine products could start when fish became available after the monsoon, it can be said that that was the starting point of the setting up of the business of processing marine products. Actual arrival of fish later on would not postpone the setting up of such business. The Tribunal was, therefore, right in concurring with the view of the Appellate Assistant Commissioner that the expenditure incurred by the assessee after August 15, 1970, and before October 6, 1970, when collection of fish was to actually start, can be treated to be business expenditure and would get covered under section 37 of the Act.
13. In the result, the question referred for our opinion is answered in the affirmative, in favour of the assessee and against the Revenue. No order as to costs.
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