P.N.BHAGWATI, J. - (1.) THIS reference arises out of assessments to income tax made on the assessee for the asst. yrs. 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 Nov., 1955, prior to the incorporation of the assessee, a mining lease was granted by the Government of Saurashtra to Nanji Kalidas Mehta for quarrying limestone from certain areas of land. This mining lease was obtained by Nanji Kalidas Mehta because he intended to set up a cement manufacturing plant and limestone is an essential raw material in the manufacture of cement. Nanji Kalidas Mehta, thereafter, obtained from the Government of India on 16th Dec., 1955, a licence to establish a cement manufacturing plant in the name of a "Saurashtra Cement Works Ltd." The assessee was in the meantime incorporated on 11th June, 1956, and it took over the benefit of the mining lease as also of the licence to set up a cement manufacturing plant. On 12th Dec., 1956, the assessee placed an order for plant and machinery of the value of about rupees one crore and on 9th Jan., 1957, the Registrar of Companies granted to the assessee a certificate to commence business. The assessee purchased machinery of considerable value for the purpose of carrying on quarrying operations and started extracting limestone from the leased area from April, 1958. The plant and machinery which had been ordered 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 Oct., 1960. Now certain expenditure was incurred by the assessee by way of salary, travelling expenses, brokerage, bank guarantee, deed rent, electricity charges, salary, insurance charges, etc., in connection with the installation of the plant and machinery as also for carrying on operations for quarrying limestone and in the course of the assessment of the assessee to income tax for the asst. yrs. 1960 61 and 1961 62, the assessee claimed that this expenditure should be allowed as a permissible deduction. The assessee also claimed to be entitled to an allowance in respect of depreciation and development rebate on the machinery employed in the extraction of limestone. The ITO took the view that the expenditure in so far as it related to extraction of limestone was allowable as revenue expenditure, but the expenditure incurred in connection with the installation of the plant 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 development rebate on the machinery installed in the extraction of limestone was concerned, the ITO 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 business, depreciation and development rebate on it were properly chargeable against the trading results of the assessee. The assessee was dissatisfied with the decision given by the ITO 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 AAC, there being a separate appeal in respect of each assessment year. The AAC took the view that extraction of the limestone was not a separate business of the assessee, but it was merely an activity for obtaining raw material for the manufacture of cement and though this activity was carried on from 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 in June, 1960, and manufacture of cement did not start until Oct., 1960. The expenditure incurred for the purpose of extraction of limestone as also depreciation allowance and development rebate were, therefore, in the opinion of the AAC, wrongly allowed by the ITO. These items could be allowed as permissible 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 AAC, accordingly, enhanced the assessment of the assessee by disallowing these items and adding them back. The assessee being aggrieved by the decision of the AAC preferred appeals to the Tribunal. The assessee contended before the Tribunal that the AAC had no jurisdiction to enhance the assessment by disallowing expenditure incurred for the purpose of extracting limestone as also depreciation allowance and development rebate in respect of machinery employed for that purpose, but this contention was negatived by the Tribunal and the power of the AAC to enhance the assessment by disallowing these deductions was upheld. However, so far as the merits of the disallowance were concerned, the Tribunal disagreed with the view taken by the AAC. The Tribunal in a well reasoned judgment pointed out that the business of the assessee consisted of the three stages : the first stage was procurement of raw materials, the second stage was manufacture of cement and the third stage was sale of manufactured cement. These three stages together constituted the business of the assessee. 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 machinery was installed, the raw materials would be ready for commencement of the process of manufacture and the plant and machinery purchased at a huge cost of about rupees one crore would not remain idle. The extraction of limestone which constituted 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, therefore, 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 from April, 1958, when it started the activity of extraction of limestone and the expenditure incurred in carrying on this activity was accordingly allowable as a permissible deduction. The Revenue 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 referred by the Tribunal for the opinion of the this Court : "(1) Whether, on the facts and in the circumstances of the case, the expenditure, depreciation and development rebate in respect of extraction of limestone from mines could be allowed as business expenditure ?"
(2.) THE assessee at the hearing of the reference application submitted that another question of law also arose out of the order of the Tribunal, namely, whether the AAC was competent to enhance the assessment and this question of law should also be referred by the Tribunal and accordingly the Tribunal, at the instance of the assessee, referred the following further question to this Court for its opinion : "(2) Whether, on the facts and in the circumstances of the case, enhancement of assessment by the AAC was within his competence and, therefore, justified in law ?" The second question relates to the competence of the AAC to enhance the assessment, but the question would need to the considered only if we decide the first question against the assessee. Let us, therefore, first consider the first question. 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 carried on by the assessee in the relevant accounting year and the expenditure must be for the purposes of that business. The expenditure claimed by way of deduction in the present case was incurred during the accounting years ending 30th June, 1959 and 30th June, 1960, and it was laid out wholly and exclusively for the purpose of carrying on the activity of extraction of limestone. It could, therefore, 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 words, extraction of limestone marked the commencement of the business of the assessee. It was common ground between the parties that extraction of the limestone did not constitute a distinct and independent business of the assessee. Though quarrying limestone was within cls. (b) and (f) of the objects clause of the memorandum of association of the assessee and the assessee could have, therefore, lawfully, engaged in the business of quarrying limestone and selling it, the assessee did not engage in such business. The assessee quarried and extracted limestone merely as raw material for manufacture 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 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 appreciating 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 unreasonable or perverse or contrary to evidence or based on no evidence at all.
(3.) 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 determing 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. 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 leased area of land. This activity was necessary for the purpose of acquiring raw material to be utilised in manufacture of cement. The second category comprised the activity of manufacture of cement by user of the plant and machinery set up for the purpose ; and the third category consisted of the activity of selling manufactured cement. These three activities combined together constituted the business 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 any one of these activities, the business would come to an end. Each one of these activities constituted an integral 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 from it was as much an activity in the course of carrying on the business as the other two activites 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. The business consisted of a continuous process of these three activities and when he first activity was started with a view to embarking 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. 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 activites is started. Take, for example, a case where an assessee engages in the business of a 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 the 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 commonsence 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 Revenue seeks to confound the commencement of a business with the establishment 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. 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 when manufacture has not started ? This argument suffers from the fault of oversimplification 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 is an essential activity in the course of carrying on the business, or which, in other words, is a business activity is started, the assessee must be held to have commenced the business. To take any other view would not only be illogical but also irrational. The conclusion reached by the Tribunal cannot, therefore, be said to be unreasonable or perverse or based on no evidence at all.;