Indian Kanoon - Search engine for Indian Law

1. This reference arises out of assessments to income-tax made on the assessee for the assessment years 1960-61 and 1961-62, the relevant account years being the years ending 30th June, 1959, and 30th June, 1960. The assessee is a limited company incorporated on 11th JUne, 1956. It was floated by one Nanji Kalidas mehta and the members of his family, On 24th November, 1955, prior ot the incorporation of the assessee, a mining lease was granted by the Goverment of Saurashtra to Nanji Kalidas Mehta for quarring limestone form certain areas of land. This mining leases was obtained by Nanji Kalidas because he intended to set up a cement manufacturing plant and limesone is an essential raw material in the manufacture of cement. Nanji Kalidas Mehta, thereafter, obtained form the Goverment of India on 16th December, 1955, a licence to establish a cement manufacturing plant in the name of "Saurashtra *cement Works ltd." The assessee was in the meantime incorporated on 11th June, 1956, and it took over the beneift of the mining lease as also of the licence to set up a cement manufacturing plant. On 12th December, 1956, the assessee palced an order for plant and machinery of the value of about rupees one crore and on 9th January, 1957, the Ragistrar of Companies granted to the assessee a certificate to commence business. The assessee purchased machinery of considerble value for the purpose of carrying on quarrying oprations and started extracting limestone form the leased area form April, 1958. The plant and machinery which had been ordred by the assessee arrived in the meantime and the assessee completed the installation of the plant and machinery in JUne, 1960, and started manufacture of cement in octber, 1960. Now certain expenditure was incured by the asesse by way of salary, travelling expenses, broker age, bank gurantee, dead rent, electricity charge, salary, ibnsurance charges, etc., in connection with the insatllation of the plant and machienry as also for carrying on oprations for quarrying limestone and in the course of the assessment of the assessee to income-tax for the assessment years 1960-61 and 1961-62, the assessee claimed that this expenditures should be allowed as a premissble deduction. The assessee also claimed to be entitled to an allowance in respect of depreciation and devolpment rebate on the machinery emplyoed in the extraction of limestone. the Income-tax Officer took the view that the expenditure in so far as it rebated to extraction of limestone was allowable as revenue expenditure, but the expenditure incurred in connection with the installation of the palnt and machinery was capital expenditure and could not be deducted in computing the trading profits of the assessee. So far as the claim of the assessee for depreciation and devlopment rebate on the machinery installed in the extraction of limestone was concerned, the Income-tax Officer allowed that claim on the basis though there was no express statement to that effect that extraction of limestone was part of the business of the assessee and the machinery being thus used for the purpose of businessm depreciation and development rebate on it were property chargeable against the trading results of the assessee. The assessee was dissatisfied with the decision given by the Income-tax officer in so far as it disallowed expenditure incurred in connection with the installation of the plant and machinery, and, hence, it preferred appeals to the Appellate Assistant Commissioner, there being a separte appeal in respect of each assessment year. The Appeallate Assistant Coommissioner took the view that extraction of limestone was not a separate business of the assessee, but it was merely an activity for obtaining raw mateiral for the manufacture of cement and though this activity was carried on form April, 1958, the business of manufacture and sale of cement could not be said to have commenced till the end of the relevant accounting years since the installation of the plant and machinery was going on during the relevant years of account and it was completed only it June, 1960, and manufacture of cement did not start untill October, 1960, The expenditure incurred for the purpose of extraction of limestone as also depreciation allowance and deveolpment rebate were, therefor, in the opinion of the Appellatre Assistant Commissioner, wrongly allowed by the Income-tax Oficer. These items could be allowed as permisble deductions in computing the taxable profits of the assessee only if the assessee carried on business during the relevant years of account and since the business of the assessee was not commenced until after the end of the relevant years of account, the assessee was not entitled to deduction in respect of these items. The Appellate Assistant Commissioner, accordingly, enhanced the assessment of the assessee by disallowing these itmes and adding them back. The assessee being aggrieved by the decision of the Apellate Assistant Commissioner preferred appeals to the Tribunal. The assessee contended before the Tribunal that the Appellate Assistant Commissioner had no juridiction to enhance the assessment by disallowing expenditure incurred for the purpose of extracting limestone as also depreciation allowance and deveolpment rebate in respect of machinery employed for that purpose, but this contention was negatived by the Tribunal and the power of the Appellate Assistant Commissioner to enhance the assessment by disallowing these deduction was upheld. However, so far as the merits of the disallowance were concerned, the Tribunal disagreed with the veiw taken by the Appellate Assistant Commission. The Tribunal in a well-reasoned judgment pointed out that the business of the assessee consisted of the three atages : the first stage was procurment of raw materials, the the second stage : the second stage was manufacture of cement and the third stage was sale of assessee. But all the three stages together constitute the business of the assesssee. But all the three stages could not be simultaneously commenced. the first stage had to be commenced earlier so that by the time the plant and the machinery was installed, the raw mateirals would be ready ofr commencement of the process of manufacture and the plant and machinery purpshased at a huge cost of about reupees one crore would not rmain idle. The extraction of limestone which consistitued the first stage of the business was as important an activity of the business as utilisation of limestone in the manufacture of cement, and the business of the assessee must, therefor, be held to have commenced when the assessee started the first stage of the business by extraction of limestone. The Tribunal held that, in the circumstances, the assessee must be regarded as carrying on business form April, 1958, when it started the activity of extraction of limestone and the expenditure incured in carrying on this activity was accordingly allowable as a permisssible deduction. The reveune being dissatisfied with this view taken by the Tribunal applied for a reference and, on the application of the revenue, the following question of law was refered by the Tribunal for the opinion of this court :

" (2) whether, on the facts and in the circumstances of the case, enhancement of assessment by the Appellate Assistant Commissioner was within his competence and, therefor, justified in law?"

3. The second question relates to the competence of the Appellate Assistant Commissioner to enhance the assessment, but that question against the assessee. Let us, therefor, first consider the first question.

4. Now, it is elementary that expenditure in order to be deductible as revenue expenditure must be incurred for the purpose of the business which is carried on by the assessee in the relevant accounting year. it is a sine qua non of expenditure which is a permissible deduction that there should be a business cassried on by the assessee in the reelvant accounting year and the expenditre must be for the purpose of that business. The expendite claimed by way of deduction in the present case was incurred during the accounting years ending 30th June, 1959, and 39th June, 1960, and it was laid out wholly and exclusively for the purpose of carrying on the activity of exyraction of limestone. It could, therefor, be allowed as a permissible deduction only if it could be shown that the assessee commenced its business when it started extraction of limestone or, in other wards, extraction of limestone marked the commencement of the business of the assessee. It was common ground between the parties that extraction of limestone did not constitute a disinct and independent business of the assessee. Though quarrying limestone was within clauses (b) and (f) of the objects clasue of the memorandam of association of the assessee and the assessee could have, therefor, lawfully engaged in the business. the assessee quarried and extracted limestone merely as raw mateiral for manufactue of cement and the question is, whether in carrying on this activity, the assessee could be said to have commenced its business. the Tribunal, on a consideration of the relevant facts, found that the assessee commenced business when it started extraction limestone and the business commenced business when it started extracting limestone and the business was, therefore, carried on by the assessee during the relevant accounting years. This finding is clearly one of fact unless it can be said that in arriving at it, the Tribunal misdirected itself in law by not properly apriciating the legal connotation of what is "commencement of business" or applied a wrong legal test for the purpose of determining the question. That cannot be said in the present case and the only question can, therefore, be whether this finding of the Tribunal could be characterised as unreasonbale or preverse or contrary to evidence or based on no evidence at all.

5. 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 question 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. The activities which constituted the business of the assessee were divisible into three categories : the first category consisted of the activity was necessary for the purpose by quarryng raw material to be utilised in manufacture of cement. The second category comprised the activity of manufactued cement. the three activities cambined together constituted the busness of the assessee. Each one of these activities was as much essential for the purpose of carrying on the business of the assessee as the others. If the assessee ceased to carry on one of these activities, the business would come to an end. Each one of these activities constituted an itegral part of the business of the assessee. Why then can it not be said that the assessee commenced its business when it started the first of these activities? The activity of quarrying the leased area of land and extracting limestone form it was as much an activity in the course of carrying on the business as the ohter two activities of manufacture of cement and sale of manufactured cement. The business could not in fact be carried on without this activity. 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 thrid activity, The business consisted of a continous process of these three activities and when the first activity was started with a view to embraking upon the second and the third activities, it clearly amounted to commencement of the business, 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. Theat 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 nore than a continuous course of activities and all the activities which go to make up the business need 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 ohter activities is started. Take, for example, a case where an assessee engaged in the business of a trader which consist of purchasing and selling goods. The assessee must necessarily purchase goods in order to be able to sell them and purchase of goods must, therfor, necessarily precede their sale, Can it be said in such a case that when the assessee purchases goods for the purpose of sale, he dose not commence his business? Is it necessary that he must start the activity of selling goods before he can be said to have commenceed his business? We have to consider the question as to when an assssee can be said to have commenced business form a commonsense 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 essential activity of that business is started? The argument of the revune seeks to confound the commencement of a business withe establishment of the business as a whole and carrying on og all the activituies of the business. This confusion is the result of alosse descrition of the business of the assessee as a business of manufacture and sale of cement. The revenue says that when the business is of manufacture and sale of cement, how can the assessee be said to have commenced the business whenmanufacture has not started? This argument suffers form the fault of voer simplification and ignores the true nature of the activities which constitute the business of the assessee. We are of the view that as soon as an activity which, in other wards, is a business activity in the course of carying on the business, or which, in other woards, is a business. To take any other view would not only be illogical but also irrational. The conclusion reashed by the Tribunal cannot, therefor, be said to be unreasonable or preverse or based no on evidence at all.

10. We must, therefor, hold that the assessee commenced its business when it started the activity of extraction of limestone by quarrying the leased area of land. Since extraction of limestone cmmenced form April, 1958, it must be held that the assessee was carrying on business during the relevant years of account and the Tribunal was right in taking the view that the expenditure incurred by the assessee in carrying on the activity of extraction of limestone as also dereciation allowance and deveolpment rebate in respect of the machinery employed in extracting limestone were deductible in computing the trading profits of the assessee for the assessement years 1960-61 and 1961-62. We, accordingly, answere the first question referred to us in the affirmative. On this view of the first question taken by us, it becomes unnecessary to consider the second question and we do not, therefore, propose to answer it. The Commissioner will pay the costs of the reference to the assessee.