TMI Blog2012 (9) TMI 300X X X X Extracts X X X X X X X X Extracts X X X X ..... t up. The AO as well as CIT(A) have misdirected themselves in this regard by laying emphasis on flow of revenue as a condition precedent for coming to a conclusion that business of the Assessee has been set up as the flow of revenue from supply of water is not relevant as has been laid down in the case of CIT v. Sarabhai Management Corpn. Ltd. (1991 (8) TMI 6 - SUPREME COURT ). - In fact in the past the revenue has been taking a stand that flow of water through the canal would be the point of time when the business of the Assessee can be said to be set up. When that happened, the revenue is taking a stand that there should be flow of revenue on supply of water and only then it can be said that the business of the Assessee has been set up. This apparent contradiction in the stand taken by the Revenue is not acceptable, thus the stand taken by the revenue regarding absence of flow of revenue would be irrelevant. As the business of the Assessee was set up on 21.2.2001 when water was supplied through the main canals and all revenue expenditure after that date have to be allowed as deduction. As on pursuing the details of Schedule-I to the Balance Sheet as on 31.3.2001 which give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited with its registered office at Gandhinagar with an authorized share capital of Rs. 2,000 crores to be divided into 2 crores shares of Rs. 1,000/- each. The entire capital will be scribed by the Government and accordingly the Nigam will be a wholly owned Government Company. The Company should be registered as Public Limited Company under the Companies Act, 1956...." 3. Thereafter, the assessee Corporation was incorporated under the Companies Act, 1956 on 24th March, 1988. The Registrar of Companies ("ROC"), Gujarat issued Certificate of Incorporation. The assessee Corporation, thereafter, was granted Certificate of Commencement of Business by the ROC, Gujarat on 9th May, 1988. On formation of the assessee Corporation, the Government of Gujarat, Narmada Development Department vide Resolution No. MPC/1088/23/K, dated 31-3-1988 transferred en-bloc the entire staff and officers of the Circles and office other heads etc. working under the control of Narmada Development Department to the assessee Corporation. Further, the Government of Gujarat also transferred assets of Sardar Sarovar Narmada Project to assessee Corporation and to effect that transfer, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egarding the categories of the assets transferred by the Government of Gujarat. 7. No profit and loss account was prepared by the assessee in any of the years (AY 1989-90 to 2000-01) and in Note No. 7 forming part of the accounts in the Annual Report 1988-89 it was mentioned as follows: "( a ) No Profit and Loss Account for the period from 24th March, 1988 to 31st March, 1989 has been prepared as the Projects of the Company are under construction and the Company's operation of supply of water and power has not commenced by 31st March, 1989. ( b ) Most of the items classified under incidental expenditure during construction, according to the Company, are relating to the Project and it is therefore the intention of the Company to capitalize the same as and when commercial operations commence." 8. The position of the project executed and establishment of infrastructure continued upto the previous year relevant to the A.Y. 2000-2001. In the Directors' report for the year ended 31st March, 2000 it was observed in the "Highlight of the Project" as "The Sardar Sarovar (Narmada) Project being implemented by your Corporation is a unique multi-purpose project, participate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shtra Branch Canal off- take ) are in progress. Total 633.89 LCM excavation (96.35%, 12.19 LSM lining (95.28%) and 4.73 LCM (92.38%) structural concrete are completed upto March, 2000. The works of six major canal siphons on major rivers i.e. Shedhi, Saidak, Mohar, Watrak, Meshwo and Sarbarmati are in progress and on Khari is completed." While in the Report under head 'Distribution System' it is stated that "Phase-I-"Sardar Sarovar (Narmada) Project Command under Phase-I (i.e. area under NMC ch. 0 to 144 km) covers culturable command area of 4.47 lac Ha. Between the rivers Narmada Mahi. The survey, investigation, planning, designing and estimating of distribution system upto 40 Ha. Block has been completed. The work of Distributaries and some minors are nearly completed. Out of remaining works distributaries minors 41 works amounting to Rs. 262 crores have been awarded. For remaining works tenders are being invited." Phase-II - "The planning of distribution system in the C.C.A. of 3.85 lacs Ha. In Phase-II area is completed. In remaining area of 10 lac Ha. In Phase-II, the same is under progress. The work of above distribution system are yet to be taken up. The distribution o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... houses and there is no provision to continue to operate, once construction is complete and, therefore, the Nigam was carrying on the construction business, and therefore, the moment it had put first bricks for construction and started its first activity with regard to construction, it has commenced its business activity. As a consequence it claimed that the all revenue expenditure incurred by it for the purpose of carrying on its business have to be allowed as deduction. If it is so allowed as claimed by the Assessee, then the result of computation under the head "Income from Business" would be a loss. Even if interest income is taxed under the head "Income from other sources", the loss under the head "Income from Business" will be set off against "Income from other sources" and if so set off, admittedly there would be no total income which will be chargeable to tax. As already stated, the Assessee deposited funds raised by it by issue of bonds etc., which were lying idle in banks and earned interest on such deposits. The Assessee also claimed that the interest it paid to the bond holders should be allowed as a deduction against interest that it earned on deposits u/s.57(iii) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate of Commencement of Business in 1998, do not establish anything except the fact that the assessee can operate as a company or it is authorized or permitted to commence the business. Whether the company has commenced its business or not depends upon the activities it carries on and not on what it can do or authorized to do. It had engaged in activities during these years only in construction of dams, which is the infrastructure with which it has to conduct its business on completion. No doubt, it is true that it had completed a major part of the mega project, but it has not completed the dams to such an extent that it can be exploited for starting supply of water and/or electricity nor it can be said to have set up the business or commenced its business. 23.17 The objects clause contained in the Articles and Memorandum of Association and also an authority of what assessee can do, but here also it does not establish that the assessee corporation was doing or had started its business, in light of the decision of the Supreme Court in the case of Bengal Assam Investors Ltd. [ supra ] and Oriental Investment Co. [ supra ] wherein it was observed that the object clause is a re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stand before the AO that the main object for the formation of the company was to construct dams and canals etc., and the business has commenced from the very first year of incorporation of the Assessee. The AO held that the Assessee was not a contractor and therefore the contention that on formation and beginning of construction activities, it cannot be said that the business of the Assessee has commenced. 18. The Assessee claimed before the AO that receipts by way of rent, tender fees, miscellaneous recovery, interest etc., are incidental and inextricably linked with the project and hence have to be set off against the sums that have to be capitalised and cannot be brought to tax as "Income from other sources". In this regard the Assessee relied on the decision of the Hon'ble Supreme Court in the case of CIT v. Bokaro Steels Ltd. 236 ITR 315 (SC). The Assessee took a plea before the AO vide its letter dated 12.12.2003 that the facts as it prevailed in AY 01-02 are different from the earlier years and submitted as follows: "We would like to submit that during the year under consideration we have started the activity of supplying water to the people through our canal from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its business. The AO thereafter referred to the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkalies, Chemicals Fertilizers Ltd. 227 ITR 172 (SC) and held that interest income earned by the Assessee has to be brought to tax under the head "income from other sources". Thereafter the AO held as follows: "It is seen that the assessee has earned the following interest income during the year: Interest on deposits with Banks : Rs. 1,90,86,976/- Interest on deposits : Rs.24,22,36,641/- Other interest : Rs. 49,27,591/- Rs. 26,62,51,208/- During the course of scrutiny, it was found that other interest of Rs. 49,27,591/- included interest from contractors amounting to Rs. 49,22,091/- and miscellaneous income of Rs.5,500/-. The assessee during the course of scrutiny has, vide its letter dated 12/12/2003, stated as under: "Interest from contractors and miscellaneous interest were earned during the course of execution of the project and the same being incidental to and inextricably linked with the setting up of the project and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT(A) rejected the plea of the Assessee. Before CIT(A) the Assessee raised a specific plea that water had started flowing from canals and drinking water was supplied and therefore business has commenced. On the above plea, the CIT(A) held as follows: "The claim of the appellant that mere flow of water through Narmada Canal amounted to commencement of business hardly has any merit. The reference made by the ld. counsel for the appellant to the observations of the Assessing Officer in earlier years in this regard is not of much relevance. This is evident from the elaborate findings on the issue in this regard in the appellate order for the assessment year 1990-91, which have been reproduced in para-3.2 above. Mentioning of flow of water from Narmada Canal cannot be viewed in isolated manner to conclude that business of the appellant had started. The whole activity of the appellant has to be seen in totality and the composite observations in the appellate order for assessment year 1990-91. It is an admitted position that the appellant did not release any water on commercial basis for irrigation. What was relevant for the purpose of Income-tax Act was whether the appellant engaged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciality Paper Ltd. (133 ITR 879) held that if after the Installation of plant and machinery, it is found that assessee could not go into commercial production, business cannot be said to have been set up. (4) Honble Bombay High Court in the case of Bhodilal Mengharaj Co. (P) Ltd. v. CIT (119 ITR 968) held that where factory had been erected but power connection had not been received, business could not be considered to have been set up. From the foregoing, I therefore find that the Assessing Officer was justified in rejecting the claim of the appellant. These two grounds of appeals are also therefore rejected." (emphasis supplied) 21. Before CIT(A) the Assessee claimed that interest income of Rs. 26,13,28,117/- which was assessed under the head "Income from other Sources" ought to have been assessed under the head "Income from Business". It was also claimed that interest expenses incurred by the Assessee ought to have been considered as expenses incurred in earning interest income and allowed as deduction u/s.57(iii) of the Act. The above plea of the Assessee was rejected by the CIT(A) by following the order of CIT(A) for AY 90-91 wherein it was held as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee also took a stand before CIT(A) that it was an authority within the meaning of Sec.10(20A) of the Act and therefore its income is exempt from tax. On the above plea the CIT(A) held as follows: "6.2 I find that there is no adjudication by the Assessing Officer on this issue in the assessment order. It is therefore not ascertainable whether the appellant made such a claim during the course of assessment proceedings. However, this was purely a legal issue and similar ground of appeal was preferred by the appellant in Asst. Year 90-91 and the same was rejected in accordance with the following observations in para 9.4 of the appellate order for Asst. Year 90-91 as reproduced below: "9.4 I have carefully considered the relevant facts and find that the ld. counsel for the appellant has argued the matter on similar lines as before the Assessing Officer. The appellant Corporation has not come forward with any evidences to the effect that it was an authority constituted in India as referred to u/s. 10(20A) of the I.T. Act as it was not an authority constituted in India as referred to u/s. 10(20A) of the I.T. Act. It has also been brought on record by the Assessing Officer that the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts that during the year, water has started flowing from Canals and drinking water was supplied and therefore, business has commenced during the year. It be so held now. 4. The learned CIT(A) has erred in not giving direction to the learned A.O. to compute the income under the head "Profit and gains of Business or Profession". It is submitted that expenditure and income shown under the head "Incidental expenditure pending capitalization" were in the nature of business expenditure and the learned CIT(A) ought to have given direction to the learned A.O. to compute the income under the head "Profit and gains of Business or Profession". It be so done now. 5. The learned CIT(A) has erred in not allowing depreciation on Canals and other assets which are used during the year for supply of water. It is submitted that direction be given to learned A.O. to allow the depreciation. 5.1 The learned CIT(A) has failed to appreciate that appellant is entitled for depreciation even if the assets are used on trial run. It is submitted that even on that consideration depreciation ought to have been allowed. It be so done now. 6.1 The learned CIT(A) has erred in confirming the order of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring of the appeal." 24. Originally a Division Bench heard the appeal on 24.3.2010. On the issue raised by the Assessee in Gr.No.9 viz., administrative expenses, vehicles expenses, interest expenses etc., which were debited in the books of accounts as "Incidental Expenditure Pending capitalisation" ought to be allowed as deduction u/s.57 of the Act while computing income under the head "income from other sources", the Division Bench found that in Assessee's own case for AY 89-90 to 2000-01 the Tribunal had by its order dated 31.8.2004 disallowed similar claim of the Assessee. The order of the Tribunal is since reported as JCIT v. Sardar Sarovar Narmada Nigam Ltd. 93 ITD 321 (Ahd.). The Division Bench found that in subsequent decisions viz., ACIT v. Torrent Gujarat Biotec Ltd. In ITA No.3139 3140/Ahd/1996 for AY 93-94, the Tribunal by its order dated 5.6.2009 had taken a contrary view on the question whether interest expenditure on funds borrowed pending utilisation for the purpose for which it was borrowed, if it yields interest income on its deployment in deposits, whether would be allowed as deduction as expenditure incurred for earning interest income. The Division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other than the question referred to Special Bench by the Division Bench would be virtually reviewing the earlier order of the Tribunal. He sought time to make application to the President to reconsider his order referring the entire appeal for consideration by the Special Bench. In this regard, it was also submitted that as against the order of the Tribunal on those issues, the Assessee has already preferred appeal before the Hon'ble Gujarat High Court and the same is pending consideration by the Hon'ble High Court. It was his submission that in the circumstances, reference of the entire appeal for consideration by the Special Bench would require reconsideration and for this purpose, the Revenue should be afforded opportunity to make appropriate application to the Hon'ble President of the Tribunal. 28. The learned counsel for the Assessee on the other hand submitted that the question whether Business of an Assessee had been set up during the previous year relevant to a particular assessment year is a question of fact to be decided on the facts and circumstances prevailing in a particular assessment year and therefore the earlier order of the Tribunal cannot hold good for all as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sections (1) and (3) of section 255 to the President of the Appellate Tribunal are obviously administrative functions. They have nothing to do with the exercise of any judicial power. Under sub-section (5), the Appellate Tribunal can regulate its own procedure and the procedure of Benches and for that purpose can frame appropriate regulations. In exercise of that power the Income-tax Appellate Tribunal has framed regulations. In terms of regulation 98A, the concerned Bench which is seized of the matter may in exercise of its judicial functions in an appropriate case make a reference to the President to constitute a Special Bench. The exercise of that function by the Bench of the Tribunal hearing the matter is of course a judicial function but so far as the President's power under sub-section (1) read with sub-section (3) of section 255 to constitute Benches or for that matter Special Benches is concerned, the said power is an administrative power. A reference by the members under regulation 98(A) by passing a judicial order is not the only mode and manner in which the President can be moved to constitute a Special Bench. Even independent of such a reference on the judicial side, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. Ground Nos. 1, 2, 2.1, 3 4 relates to the issue which deals with the question as to whether in the facts and circumstances of the case, it can be said that the business of the assessee has commenced. On the above issue, the ld. counsel for the assessee drew our attention to the decision of the CIT (Appeals) in assessee's case for the A.Y. 1990-91, wherein the CIT(A) had held that the business of the assessee would commence only when the water starts flowing from the canal and/or when power houses start generating electricity. Without prejudice to the contention of the assessee that the business of the assessee commenced from the A.Y. 1989-90 itself when the Assessee took over construction of the project, the construction of which had already been started by the State Government, the ld. counsel for the assessee submitted that at least during the previous year relevant to A.Y. 2001-02, the business of the assessee should be held to have commenced. In this regard, the ld. counsel for the assessee drew our attention to the Directors' Report wherein it was clearly mentioned that Gujarat faced three consecutive water scarcities and the emergency water supply from Narmada River w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y CIT(A) in A.Y. 1990-91 is not squarely applicable in your case. You are, therefore requested to furnish supporting records/documents to justify your claim of commencement of business." 33. It was submitted by the ld. counsel that when flow of water through Narmada canal was achieved by the assessee, the revenue has now taken a stand that there should be revenue generation out of supply of water. According to the ld. counsel for the assessee, this has been an inconsistent stand which the revenue should not be permitted to take. 34. Our attention was also drawn to the fact that the findings of the AO with regard to supply of water from Shedhi branch canal are totally irrelevant and what is relevant is the supply of water through the Narmada main canal as mentioned in the Directors' Report, which fact is not disputed even by the revenue. The ld. counsel for the assessee drew our attention to page 26 of the paperbook, wherein the assessee made his position very clear that the supply of water from Shedhi branch canal was distinct and separate from the supply of drinking water done by the assessee through Narmada canal from February, 2009. The following are the relevant observa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the revenue's objection is therefore that only on generation of income, it can be said that the business of the assessee has been set up/commenced. In this regard, our attention was drawn to page 5 of the Assessing Officer's order, wherein the AO has made the following observations:- "Thus, it is clear that the assessee has not earned income from water supply and the income which has claimed to have been earned from supply of Narmada water was in fact income which belong to Government of Gujarat from supply of water through Shedhi branch canal and which was transferred to Government of Gujarat." 37. The ld. counsel drew our attention to the impugned order of the CIT (Appeals) wherein the CIT (Appeals) has in page 10 proceeded on the basis that the facts that prevailed in the previous year relevant to A.Y. 2001-02 were similar to the facts as it prevailed in the previous year relevant to A.Y. 1990-91. The ld. counsel vehemently submitted that the facts in the previous year relevant to A.Y. A.Y. 2001-02 were different and the CIT(A) has proceeded to decide the appeal of the assessee on a wrong premise. The ld. counsel thereafter drew our attention to the observatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness has been set up. Reference was also made to the following other decisions:- ( a ) CIT v. Sarabhai Management Corpn. Ltd. v. CIT 192 ITR 151 (SC) ( b ) CIT v. Aavaram Ltd. 197 ITR 22 (Guj.) ( c ) CIT v. Western India Seafood (P) Ltd. 199 ITR 777 (Guj.) 39. The ld. counsel also submitted that the CIT(A)'s reliance on the following decisions are erroneous:- (1) ACIT v. Speciality Paper Ltd. 133 ITR 879. It was submitted that the aforesaid decision has been explained in Hotel Alankar v. CIT 133 ITR 866. Our attention was drawn to the following passage of the Hon'ble Gujarat High Court in the case of Hotel Alankar ( supra ) in this regard:- "We are afraid that the learned counsel is reading more than what has been suggested in the test by the Supreme Court or by us in that Speciality, Paper Ltd.'s case. In the first place, it should be emphasised that 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 subject to the broad guidelines provided by the different decisions in that behalf. The decision in Speciality Paper Ltd.'s case turns on its ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been set up/commenced, the ld. DR made the following submissions. He drew our attention to the Annual Report of the assessee for 2000-01 wherein the progress of the project has been highlighted by the assessee as follows:- "DAM AND APPURTENANT WORKS Excavation and concrete works are two major components of the Main Dam works. Upto March, 2001 a total of 63.34 lac cubic meters excavation and 59.51 lac cubic meters concrete works has been done. HYDRO POWER 96.91% open excavation and 90.27% underground excavation for the River Bed Power House have been completed. The work of Canal Head Power House (CHPH) with its auxilliaries and ancillaries equipments is completed in all respect and is now ready for commissioning. The power house is also connected with Gujarat Electricity Board grid at 220 KV Voltage level. The generation at CHPH will start immediately as soon as the dam level reaches to EL 110.64 mt. The turbine generators of RBPH are being supplied by M/s. Sumitomo Corporation, Japan and the material to the tune of 80% are received at site. The balance material is expected to be received by June 2002. The erection of the T.G. sets has been commenced since June 2000. As pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are completed upto March, 2001. The earthwork of Saurashtra Branch Canal (SBC) in reach 0 to 46 km. is completed and earth work of SBC from 46 to 88 km. and 103 km. to 104 km. is in progress. In addition to this the earth work of Narshipura, Vallabhipur and Maliya sub branch in first 30 kms. reach is completed. The work of structures on Saurashtra Branch canal upto 70 km. earthwork of Maliya and Vallabhipur branches in remaining reaches and work of structures across entire reach had been commenced since October, '97. Upto March-2001; total 487.64 LCM (95.25%) earthwork, 9.92 LCM (93.94%) concrete work of structures of SBC and sub-branches have been completed. It is planned to take up work of five pumping stations on SBC during 2001. 41. Pointing to the above, it was submitted by the ld. DR that none of the works undertaken by the assessee can be said to be completed. He also highlighted the fact that in the Directors Report the reference to drinking water supply during scarcity period has been admitted to be through partially completed Narmada Main Canal. It was submitted that the learned counsel for the Assessee's reliance on the Directors report to substantiate his conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e previous year. In this regard, he also drew our attention to the Annual Report wherein the progress of construction has been duly highlighted. He also drew our attention to the fact that the revenue expenses pending capitalisation as per the books as on 31.03.2000 was Rs. 2390.71 crores, whereas the same as on 31.03.2001 was Rs.3281.35 crores. These items of expenses are revenue expenses which in the event of the Tribunal coming to the conclusion that the business of the assessee has commenced, have to be allowed as deduction while computing income from business. He pointed out that the expenses incurred during the previous year which were revenue in nature if held to be allowable as deduction would be much more than the interest income that the assessee earned. If the revenue expenses are allowed as deduction then there would be loss under the head "Income from Business". Such loss has to be set off against the interest income. In that event there would be no taxable income and the other issues raised in the grounds of appeal would not require adjudication. 45. The ld. counsel for the assessee and the ld. DR addressed arguments on the other grounds of appeal. We deem it appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue expenses have to be allowed as deduction. Since there are no receipts of business the expenses so allowed will result in loss under the head "Income from Business". Such loss will be available for set off against income under any other head of income u/s. 71 of the Act. 47. Another aspect which is required to be kept in mind is that there is 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. In Western India Vegetable Products v. CIT 26 ITR 151 (Bom.), the Hon'ble Bombay High Court held that the setting up of the business and not the commencement of the business that is to be considered. The facts of the case before the Hon'ble High Court were that the assessee company was incorporated on the 29th of December, 1945, and it obtained a certificate of commencement of business on the 20th of April, 1946. The business of the assessee company was that of running an oil mill. The assessee company was assessed to tax on its business profits for the assessment year 1947-48 and it claimed various expenses as allowable deductions aggregating to Rs. 27,884-11-9. The view taken by the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company, which was formed in 1939, for the purpose of carrying on the business of manufacturing absorbent cotton wool, resolved in March, 1955, to establish a new spinning unit, for which the industrial licence was obtained in August, 1955. The respondent-company placed orders for the necessary spinning machinery and plant in January and February, 1956. Construction of buildings was begun in March, 1956, and completed by December, 1957. Installation of the machinery and plant was completed by stages commencing from June, 1957. A licence from the Inspector of Factories for working the factory unit was obtained in June, 1958. Time to complete the project was extended by the Government up to March, 1959. In its assessment to wealth-tax for the year 1957-58, the company claimed that in computing its net wealth on the valuation date, viz., September 30, 1956, an amount of Rs. 1,43,727, which was laid out in setting up the new unit should be deducted in accordance with the provisions of section 5(1)(xxi) of the Wealth-tax Act, 1957: The question that fell for determination depended on the interpretation of section 5(1)(xxi) of the Act read with the second proviso to that clause w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness only after 1st April, 1957, when the Act had already come into force. Consequently, the condition laid down in the principal clause of section 5(1)(xxi) was satisfied, and the company became entitled to exemption in respect of the value of the assets used up in setting up this unit. 49. It can thus be seen that the decision in the case of Western India Vegetable Products ( supra ) was referred to by the Hon'ble Supreme Court in the case of Ramaraju Surgical Cotton Mills Ltd. ( supra ) but the conclusion of the Hon'ble Supreme Court rested on the interpretation of the provision of Sec. 5(1)( xxi ) of the Wealth Tax Act, 1957 and the second proviso to the said provision. 50. In the case of CIT v. Sarabhai Sons P. Ltd. 90-ITR-318 (Guj.), the Hon'ble Gujarat High Court had to deal with a case where 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court lay down the test which must be applied for the purpose of determining when a business can be said to be set up. 51. In CIT v. Saurashtra Cement Chemical Industries Ltd. 91 ITR 170 (Guj), the facts were that 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 limestone 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 the assessment years 1960-61 and 1961-62: It was held by the Hon'ble Gujarat High Court 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 user of the plant and machinery set up for that purpose; and the third category consisted of selling manufactured c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess 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 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 third activity. The business consisted of a continuous process of these three activities and when the 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. On a reference, the Hon'ble High Court held that 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 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. The property was acquired on March 28, 1964. Thereafter, for some time, various types of alterations and additions were being carried out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench in that case was the question of appreciation of evidence on record and to find out whether there was evidence to support the conclusion that the business of the assessee had been set up in the previous year or whether the finding of the Tribunal that it had been set up in the previous year was unreasonable or contrary to evidence. The decision in Sarabhai Sons Pvt. Ltd.'s case ( supra ) has been explained by the same Division Bench in Commissioner of Income-tax v. Saurashtra Cement Chemical Industries Ltd. [1973] 91 ITR 170, 178, 179 (Guj.) in these terms : "That decision raised the question as to when a certain business carried on by the assessee could be said to have been set up : whether it was set up prior to 31st March, 1966, or subsequent to that date." and the Division Bench proceeded to observe : "We fail to see how a decision given on one set of facts can bind us to reach a similar decision on a totally different set of facts. There is nothing in this decision which would deflect us from the view which we are otherwise inclined to take." The Hon'ble High Court thereafter preferred to follow its ruling in the case of CIT v. Saurashtra Cement Chemica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... j.) and Prem Conductors Pvt. Ltd. 108 ITR 654 (Guj.), would hold the field and has to be regarded as the view of the jurisdictional High Court. We will now proceed to examine the facts of the Assessee's case for AY 00-01 keeping in mind those principles laid down by the Hon'ble High Court. 55. The Revenue authorities have proceeded on the basis of facts as contained in the Directors report to the shareholders of the Assessee in 13th Annual Report for the year 2000-01. The said report has been accepted as disclosing the real state of affairs both by the Assessee and the Revenue. We shall therefore proceed to decide the issue on the basis of the said report. 56. As we have already seen in the earlier part of this order, the Assessee was formed for the purpose of construction of canal for supply of water for all purposes and also construction of dam for generation of power and distribution of water through the canal. It is the claim of the Assessee that during the year under consideration it had started the activity of supplying water to the people through its canal from the Narmada Dam. The Assessee in this regard relied on its Director's report in the annual report for 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter through Narmada Canal amounted to commencement of business hardly has any merit. The reference made by the ld. counsel for the appellant to the observations of the Assessing Officer in earlier years in this regard is not of much relevance. This is evident from the elaborate findings on the issue in this regard in the appellate order for the assessment year 1990-91, which have been reproduced in para-3.2 above. Mentioning of flow of water from Narmada Canal cannot be viewed in isolated manner to conclude that business of the appellant had started. The whole activity of the appellant has to be seen in totality and the composite observations in the appellate order for assessment year 1990-91. It is an admitted position that the appellant did not release any water on commercial basis for irrigation. What was relevant for the purpose of Income-tax Act was whether the appellant engaged in any business activity. From the facts on record, it is obvious that the appellant did not engage in any commercial activity. The purpose of release of water is not guided by any commercial venture and therefore it cannot be said that the appellant started business activity in the previous year." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e water crisis that prevailed in many regions of the state during the last summer, an emergency water supply from Narmada river was executed. Sardar Sarovar Project, for this emergency supply, put to use its facilities created so far and started the deliverance of water through its partial completed Narmada Main canal. The water from the SSP reservoir was pumped out through installation of 90 water pumps and maintained continuous flow of on an average more than 1000 cusecs through the Narmada Canal upto ch. 149 km. Thereafter, the Gujarat Water Supply and Sewerage Board (GWSSB) arranged further delivery of water to remote interior areas - specifically Saurashtra. This supply arrangement started on 21st February, 2001 and lasted upto 8th June, 2001. In all 421 villages and 29 towns of five districts of Ahmedabad, Bhavnagar, Rajkot, Amreli and Junagadh received this water during the summer. In all 6.25 lacs of rural population and 23.64 lakh urban population was provided with Narmada water during the summer. The total water pumped out during the season works out to be 258.58 MCM. In addition to this, water from Narmada Main Canal was released through canal escapes and village tan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Nadod Taluka of Bharuch district in the State of Gujarat, a canal system emanating from the reservoir called the Sardar Sarovar impounded by the construction of the said dam; power houses at the foot of the said dam and at the canal head and all other works incidental or ancillary to the said project in accordance with the direction of the Government of Gujarat." ( b ) Object Clause 3(A)(9): "To promote schemes to facilitate navigation in the Narmada river" ( c ) Object Clause 3(A)(10): "To promote Schemes for irrigation and water supply in the State for utilization of water from the Sardar Sarovar." ( d ) Object Clause 3(A)(21): "To alter, manage, develop, exchange, lease, mortgage, underlet, sell, give as gifts or otherwise dispose of, improve or deal with the land, property, assets and rights and resources and undertaking of the company or any part thereof for such consideration of the company may thing fit and in particular for shares, stocks, debentures, or securities of any other company having objects altogether or in part similar to those of this company". ( e ) Object Clause 3(A)(26): "To sell, improve, manage, develop, exchange, lease, mortgage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he State for utilization of water from the Sardar Sarovar". We are of the view that in the light of the facts prevailing in Assessee's case, it can be said that the Assessee by supplying water through its main canal had in fact achieved the purpose for which it was established. One of the purpose for which the Assessee was set up was to supply water through canals. The canal was complete in respect of part of the stretch and that enabled supply of water through such canal to certain destinations. The fact that the entire stretch of canal up to the desired destination was not completed would not be sufficient to hold that the Assessee's business was not set up. 66. The flow of revenue from supply of water is not relevant as has been laid down by the Hon'ble Supreme Court in the case of CIT v. Sarabhai Management Corpn. Ltd. 192 ITR 151 (SC). In our view, the AO as well as CIT(A) have misdirected themselves in this regard by laying emphasis on flow of revenue as a condition precedent for coming to a conclusion that business of the Assessee has been set up. In fact in the past the revenue has been taking a stand that flow of water through the canal would be the point of time w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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