TMI Blog1978 (7) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... ic Tools (Holdings) Ltd., incorporated in the United Kingdom (hereinafter referred to as " the U. K. company") are the manufacturers of certain types of portable electrical tools, The products of the said company were being marketed in India through Messrs. Rallis India Ltd. (hereinafter referred to as " the Indian company "). The Indian company decided to manufacture electrical tools in India in collaboration with the U. K. company. An agreement was entered into between the Indian company and the U. K. company, whereby they decided to form a private limited liability company under the name " Ralliwolf Private Ltd." (the assessee) with an authorised capital of Rs. 50 lakhs under the Companies Act, 1956. The assessee-company was accordingly formed and incorporated on October 30, 1958. The objects with which the assessee- company were incorporated will be referred to later. A separate agreement was entered into between the assessee-company and the U. K. company, whereunder the U.K. company was to provide to the assessee-company the requisite process and formulae relating to the manufacture of tools and also the requisite drawings, designs and technical know-how, etc., for the star ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of expenditure could not be allowed to it as loss carried forward under s. 24(2) of the Act. According to the ITO, no business was carried oil by the assessee-company at any time during the course of the accounting period. In an appeal preferred by the assessee, the AAC, after going into the facts in greater detail confirmed the view that was taken by the ITO. In a further appeal before the Tribunal, the Tribunal felt that further investigation into the assessee's claim was necessary. Accordingly, the Tribunal remanded the case to the AAC by its order dated October 18, 1962. Thereafter, the AAC submitted his remand report on February 29, 1964. The findings of the AAC in the remand report are summarised in para. 12 of the statement of case. Thereafter, the matter came up for hearing before the Tribunal. At this stage it was urged, for the first time, on behalf of the assessee that its business was not only to manufacture and market complete units of tools but also to sell spare parts and it was on the latter activity that emphasis was accordingly laid in the course of the arguments before the Tribunal to show that the assessee-company had actually carried on business duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be disallowance. The Tribunal further directed that the ITO would be justified in disallowing any expenditure incurred prior to the ordering of raw materials. He was directed to go into the facts and decide the case in accordance with law. It is from this order of the Tribunal that the above question arises for our determination. Mr. Joshi, on behalf of the revenue, submitted that during the relevant accounting period at no time the assessee-company was carrying on any business activity. Before any expenditure can be allowed as a deduction, it must be established, he submitted, that the business was set up in the present case at no time during the accounting period and, therefore, the Tribunal was in error in giving directions to the ITO, as it did. He submitted that the mere purchase of raw materials cannot mean that the business is set up. In view of the order of the Tribunal, the material thing that has to be considered in the present case is what were, inter alia, the objects for which the assessee-company was formed and incorporated and in so far as any of such material objects are concerned can the business be regarded as set up ? The expression " setting up " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereto. " In view of this being one of the primary objects for which the assessee company was incorporated, the manufacture of the various items mentioned in this object clause was not merely the principal object for which it was incorporated but it had also as one of its primary objects to buy sell or deal in portable electrical tools and tools of all kinds, implements and machinery. If buying and selling and dealing in these tools is one of the essential parts of the business of the assessee-company, then simply because in the relevant accounting period no manufacturing activity was started, it cannot be said merely for that reason that the assessee's business was not set up during the relevant accounting period. As found by the Tribunal in its order, during the first accounting period ended on August 29, 1959, the following purchases were made by the assessee : Rs. Raw materials 54,934.12 Locally bought out component parts for sale as spares for use in manufacture 88,219.34 Imported components for manufacture of complete tools shipment per " Nowshepa " also available for sale as part if and when necessary 1,47,879.38 Other items 8,903.12 ----------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cede all other activities is started. At page 176, by way of illustration, the following instance was given : " 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 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 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. " These observations of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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