These are two departmental appeals for asst. yr. 1977-78, first being on quantum, second representing rectification made on original order under s. 154, which being inter-connected are taken up together and disposed of by this common order. There are several issues in departmental appeals and each of them is taken one by one disposed of accordingly. In first issue, Department is agitated by order of CIT(A), who had allowed appeal Rs. 13,31,145 incurred from 1st April, 1976 to 20th November, 1976 as revenue in nature though commercial production commenced only from 20th Nov., 1976. For Department Mr. Ruhela, Sr. D.R. brought out noval argument which was that expenses assume character of revenue only when there is revenue income. He referred to s. 28, which talks of income and s. 29, which talks of computation of income which section precedes all sections from 30 to 43A and, therefore, he emphasised that income in nature of revenue must exist which would be followed by expenses in nature of revenue. According to him, therefore, till there is generation of income in nature of revenue there can be no expenses in nature of revenue. He also placed reliance on s. 35D in support of his theory that before commencement of business there can be no expenditure in nature of revenue. He also relied on Metropolitan Springs Pvt. Ltd. vs. CIT (1981) 22 CTR (Bom) 260: (1981) 132 ITR 893 (Bom) for proposition that even carrying out of trial production does not amount to manufacture and, therefore, it cannot be said to be that there was any commencement of production. He further argued that allowing of expenditure incurred prior to commencement of production but incurred after setting up of business as expenditure of revenue nature is not only contrary to law but would help only in tax avoidance as has been held by Supreme Court in Mc Dowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126: (1985) 154 ITR 148 (SC). He also relied on two other decisions in CIT vs. Sheo Kumari Devi (1986) 50 CTR (Pat) 350: (1986) 157 ITR 13 (Pat) (FB) and Workmen of Associated Rubber Industry Ltd. vs. Associated Rubber Industry Ltd. (1985) 48 CTR (SC) 355: (1986) 157 ITR 77 (SC) for proposition that words should be given meaning as have been given by Parliament and any meaning given other than one enacted by Parliament would only further tax evasion measures, which should be prevented. On other hand, argument of assessee was that construction activity had been completed before 31st March, 1976 with which Department has no dispute. In support of fact that construction was completed argument that was put-forth was that even trials of machinery were carried out in August, 1975 itself with which fact Department has no dispute. According to assessee, question that is to be answered is what is nature and expenditure incurred from date of setting up of business to date of start of commercial production. According to assessee, setting up of business is of primary importance. According to assessee, once business set up it means that it is ready to commence production though production is not started. All expenditure incurred from date of setting up of business is in nature of revenue. Reference was made to s. 3(1)(d) regarding previous year of business in which emphases has been clearly made on date of setting up of business. It was also argued that Institute of Chartered Accountants of India had in their publication on Treatment of Expenditures during construction period had considered this very aspect and they have observed that accounting practice in giving treatment of such expenditures in accounts as well as tax accounting practice are same as have been held by various Courts including Supreme Court of India. According to this report, once business is set up i.e. all construction activity have been completed, then all expenditures incurred are in nature of revenue. It cannot be treated as capital in nature for reason that these expenses, which are incurred had no relation whatsoever with either construction activity or procurement of plant and machinery or installation and since they in no way effect life on asset by improving or increasing life of asset. This being so, they have observed that expenses have to only be correctly treated as revenue in nature. He further submitted that it is matter of principle which has to be decided by this Tribunal as otherwise assessee being loss it would hardly have any effect on assessee either way as no tax is payable. He further added that apart from observations made by Institute of Chartered Accountants in their respect about authorities, following authorities were cited by him as relevant to issue before us. They are CIT vs. Saurashtra Cement and Chemical Industry Ltd. (1973) 91 ITR 170 (Guj) Western India Vegetable Products Ltd. vs. CIT. Bombay (1954) 26 ITR 151 (Guj) Sarabhai Management Corporation Ltd. vs. CIT 1975 CTR (Guj) 111: (1976) 102 ITR 25 (Guj) Prem Conductors Pvt. Ltd. vs. CIT 1976 CTR (Guj) 324: (1977) 108 ITR 654 (Guj) CIT vs. Ralliwolf Ltd. (1980) 121 ITR 262 (Bom) We have given careful considerations to facts and arguments of both parties. Institute of Chartered Accountants of India in their report on Treatment of Expenditure during consideration period in paras 12.5 to 13.5 have specifically death with this very issue of treatment to be given of expenditures incurred after setting up of business but before commencement of production. These are reproduced below as they are relevant to issue before us: "12.5. As regards general principles which would assist in determination of appropriate date when company can be said to be ready t o commence business, guidance can be obtained from several decided tax cases which are relevant because consideration under which new project can be said to have been set up or established so that it is ready to commence business are almost identical for tax purposes as well as for accounting purposes. following general principles emerge from consideration of some of decided tax cases on this subject: (a) expression "set up" as applied to new project for tax purposes is identical with expression "ready to commence business". (b) setting up of new business or new project represents stage which is anterior to actual commencement of business. (c) There is clear distinction between commencement of business and setting up business: what is important is date on which business is actually set up rather than date on which business is commenced. (d) When undertaking is established and is ready to commence business, it may be said that it has been set up. (e) There may be interval of time between setting up of business and actual commencement of business, in which case all expenses incurred during this interval of time would be permissible deductions for tax purposes and would also have to be treated as revenue expenses for accounting purposes. (f) expression "set up" as used in Income and Wealth Tax Acts with reference to new under taking means that undertaking is complete and ready to be commissioned and ready to commence business. It is implied in this that factory must have been erected and plant and machinery installed, before business can be said to have been set up, but is not essential that business should have been actually commenced. It is also not essential that factory should have actually functioned or gone into production. aforesaid principles are based on following tax decisions: (1) Western India Vegetable Products Limited vs. CIT (1954) 26 ITR (Bom). (2) CIT vs. Sarabhai Sons Ltd. (1973) 90 ITR 318 (Guj). (3) Sarabhai Management Corporation Ltd. vs. CIT 1975 CTR(Guj) 111: (1976) 102 ITR 25 (Guj) (4) CWT vs. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478 (SC). (5) Travancore-Cochin Chemicals Pvt. Ltd. vs. CIT (1967) 65 ITR 651 (SC). Interval Between Establishment of Business and Commencement of Actual Production. As indicated in paragraph 12, new project can be treated as having arrived at Revenue earning stage as soon as it is ready to commence commercial production that is, soon as it is established and is ready for commercial production. However, there is often interval of time between date of project is completed and commissioned and is ready for production and date when commercial production begins. question which is discussed in paragraph relates to treatment of expenditure incurred during this period. In normal course, interval of time between date project is commissioned and is ready for production and date that commercial production actually begins should be very brief. However, several factors sometimes operate to make this interval of time very prolonged and this is especially so in India because of multifarious list of regulations to be completed with before commencing production as well as acute shortage of basic materials and services. For example, fact that certain licences have not been obtained in time from Government or local authority may hold up commercial production. In other cases, plant may be commissioned and completed and may be ready in all respects to commerce production, but there may be delay in obtaining power line or water supply. Sometimes, one project-is linked to another in such way that it relies on latter for its supply of raw materials. This is particularly case with chemical and process industries. For example, fertiliser plant may be established as part of large petro-chemical compelx. One of essential raw materials for making fertilizers may be derived from petro-chemical complex. In such case, even if fertiliser plant is complete in all respects and is commissioned for commercial production, it cannot actually commence production until petro chemical complex has been completed. It will thus be appreciated that circumstances can arise in which interval of time between completion of plant and its readiness for commercial production and time when commercial production actually commences will be very prolonged indeed. During such interval of time, it is inevitable that normal running expenses will continue to be time, it is inevitable that normal running expenses will continue to be incurred. Having regard to consideration outlined in paragraph 12 which dealt in some detail with date of commencement of commercial production, it would follow that all expenses of revenue nature incurred after date when plant is completed and commissioned and ready for commercial production or, to put it differently, all expenses of revenue nature incurred after date when business has been set up or established would have to be charged to Profit and Loss Account and can not longer be capitalised, even though commercial production has not actually commenced. There is no reason to depart from this where there is prolonged interval of time between date of setting up or establishing business and date on which it actually commences commercial production. If commercial production is considerably delayed, problem which would arise is that there would be no income during period of such delay while on other hand, expenditure of revenue nature incurred during period of such delay while on other hand, expenditure of revenue nature incurred during this period would have to be charged to Profit and Loss Account as mentioned above. If period of delay in commencing commercial production is extremely prolonged, only possible concession which may be made is that expenditure incurred during this period can be treated as deferred revenue expenditure, to be amortised over period not exceeding 3 to 5 years after commencement of commercial production. This procedure is not, however, recommended as matter of general policy or practice, but may be resorted to only in those exceptional cases where fairly heavy revenue expenditure is incurred during prolonged period of delay in commencing commercial production. In any case, it would be completely wrong to treat such expenditure as capital expenditure since it does not add in any way to value or cost or utility of plant and other manufacturing facilities which have already been constructed but which have remained idle due to delay in commencing commercial production. After commercial production has been commenced, it is customary to provide depreciation on fixed assets for full annual period disregarding any short period during year when particular assets have remained idle due to various reasons. This is only rule of practical convenience but application of rule also take into consideration of fact that asset does depreciate t o some extent even during idle periods and also, when fixing depreciation rate, some regard is usually given to fact that there will inevitably be few idle periods when particular plant or machinery will not remain in use. However, if there is delay in commencing commercial production, it is suggested that it would be necessary to provide depreciation on fixed assets during this period. In other words it would be necessary to provide depreciation on fixed assets only assessee from date when commercial production is actually commenced ". One of considerations that is weighing in minds of Department is decision of Gujarat High Court in case of CIT vs. Sarabhai Sons Pvt. Ltd. (1973) 90 ITR 318 (Guj). According to Department, this decision lays down that merely being ready to commence production is not sufficient enough but it must actually commence production after which only expenses incur character of revenue. We are afraid reading of this judgment does not in any manner indicate this particular impression of Department. In this case question that was in consideration was "Whether on facts and in circumstances of case, Tribunal was right in holding that in previous year business of assessee had been set up". This particular question was re-modified by their Lordships and re-modified question was "Whether finding of Tribunal that business of assessee had been set up in previous year was unreasonable or contrary to evidence or based on no evidence at all. Their Lordships in page 320 of this decision have observed "Now question as to when business is set up assumes importance because according to s. 3(1)(d) of IT Act, 1961 previous year for business newly set up in financial year means period beginning with date of setting up of business and ending with financial year and it is only if expenditure is incurred by assessee during previous year that he can claim it as revenue deduction in trading profits of business". Their Lordships thereafter considered distinction between person commencing business and person setting up business. By referring to Bombay High Court decision in Western India Vegetable Products (1954) 26 ITR 151 (Bom) which decision was approved by Supreme Court in case of CWT vs. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478(SC). Bombay High Court decision was in relation to s. 2(11) which is present s. 3(1)(d) of IT Act, 1961. They have further observed that "What is required to be consider of is setting up of business and not commencement business. It is only when business is established and is ready to commence business that it can be said of that business it is not set up". Their Lordships reproduced salient paragraph of Supreme Court decision (supra) which read "A unit cannot be said to have been set up unless it is ready to discharge function for which it is being set up. It is only when unit has been put into such shape that it can start function as business or manufacturing organisation that it can be said that unit has been set up. "In this case, their Lordships on facts found that various operations that were carried out by assessee was in nature of setting up of business and they have further observed that business could be set up only as culmination of these operations. In case of CIT vs. Saurashtra Cement & Chemical Industries Ltd. (1973) 91 ITR 170 (Guj). Their Lordships were considering situation of chemical industry, which started mining operations while construction activity in respect of manufacture of cement was still going on. Reference was also made to decision of Gujarat High Court in CIT vs. Sarabhai Sons Ltd. (1973) 90 ITR 318 (Guj). Their Lordships in pages 178 & 179 of this decision have observed that question was "whether finding of Tribunal could be said to be based on evidence or on no evidence at all as whether business was set up prior to 31st March, 1966". They further observed that on facts of that case it was impossible for Tribunal to have come to decision that business was set up prior 31st March, 1966 and held that decision of Tribunal was contrary to evidence or based on no evidence at all. They went on observe "we fail to see how decision given on one set of facts can point up to reach similar decision on totally different set of facts." There is nothing in this decision which would deflect us from view which we are otherwise inclined to take. In case of Saurastra Cement (supra), they have observed that there In case of Saurastra Cement (supra), they have observed that there are several areas of work to be carried on by assessee, one of which being extraction of minerals from mines, which no doubt, were raw materials for plant under construction. They further observed that expenditures incurred by mining Department of assessee in extraction of minerals has to be treated as commencement of business as it was one of activities of business for which assessee has been set up. Since this particular activity is totally separate and distinct from other manufacturing operations, which would be carried on only after completion of factory as such. It was held that carrying on of mining operation to be in nature of revenue. Gujarat High Court in Sarabhai Management Corporation Ltd. vs. CIT 1975 CTR (Guj) 111: (1976) 102 ITR 25(Guj) were considering question of when business was set up. In this case, Company purchased houses, various apartments, with view to let them. question they were considering was on which date business could have been said to have been commenced and what is nature of expenditures incurred before actual letting out. In this decision, they had considered earlier two Gujarat High Court decisions(supra), as also Supreme Court decisions supra. Their Lordships had observed that first business activity is to acquire either by purchase or by any other manner immovable property so that property can be ultimately given out either on lease or on lease licence basis or on lease to others together with appurtenant services. second category is to put these buildings into proper shape and set up appurtenant services so that ultimately property can be given out on lease and licence basis and third activity is actually to give and licence basis and third activity is actually to give it on lease or on leave and licence basis. They have observed that by 1st Oct., 1964 first two essentials had already been concluded and, therefore, it was held that Company has commenced business from that date and they have further held that actual letting out is not that important as completion of first two categories of activities i.e. all activities culminating in being ready to actual letting out. same High Court in Prem Conductors Pvt. Ltd. vs. CIT 1976 CTR (Guj) 324:(1977) 108 ITR 654(Guj) were considering similar situation. In this case Company was to manufacture aluminium and copper conductors. During previous year relevant to asst. yr. 1965-66, Company incurred expenses on salaries, postage, rates and taxes, printing, etc. and submitted return of loss of Rs. 46,970 for asst. yr. 1966-67. Company again claimed loss of Rs. 58,000 from 1st Jan., to 26th of Jan.,, 1965 on which date Company had actually started production. question that was being considered by Their Lordships was whether claim of loss for asst yrs. 1965- 66 and 1966-67 could be allowed as revenue or not. Their Lordships referred to s. 3(1)(d) of IT Act regarding previous year and also cases of same High Court as well as Supreme Court (supra). They again laid emphasis on words "set up" and held that it is equivalent to word "Established". They have observed in page 666 that "Even activity of acquiring raw materials can be part of business activity of manufacturing unit because unless raw materials are ready, production cannot start and unless production is started, goods cannot actually be sold. All time, we have to bear in mind that test is of common sense and what in eye of businessman can be said to b e commencement of business. They further observed-one business activity m y procede other. What is required to be seen is-Whether one of essential activities for carrying on of business of assessee-company as whole was or was not commenced." According to them, therefore, procurement of orders has started business activity though actual production of aluminium and copper conductors was done subsequently. Bombay High Court in case of CIT vs. Ralliwolf Ltd.(1980) 121 ITR 262(Bom) were considering issue of expenses incurred after setting up of business, but before actual commencement of manufacturing operations. Their Lordships in page 267 observed that expression "setting up" mean, as defined in Oxford English Dictionary " to place on foot" or " to establish" and is in contradistinction to "commence". They further observed "The destination is this that when business is established and is ready to be commenced 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 interregnum, there may be interval between business which is set up and business which is commenced and all expenses incurred after setting up of business and before commencement of business, all expenses during interregnum, would be permissible deduction under s. 10(2). In page 267, they further observed "as in present case, as indicated in order of Tribunal, purchase were affected by assessee-company during relevant accounting period and items purchased may either be used for manufacture or for sale. Tribunal was justified in taking view that assessee can be said to have commended its business. As against these authorities which lay down clearly principle that what is important from point of view of IT Act is setting up of business in order to determine nature of expenditure and not actual commencement of business. There are no contrary authorities as cited before us by Department. Bombay High Court in case of Metropolitan Springs Pvt. Ltd. vs. CIT (1981) 22 CTR (Bom) 260:(1981) 132 ITR 893(Bom), which was cited by Department was considering issue of claim of deduction as new industrial undertaking. In this case, claim of assessee was that since it has carried on trial production it must be held that it has commenced manufacturing operations. Their Lordships held that trial production does not amount to manufacture. This case would not apply to facts of case at all as s. 15C of 1922 Act, lays emphasis on words which begins to manufacture "and only if industrial under taking has began to manufacture, then claim as new industrial undertaking would be allowed. Since we are concerned with issue of when assessee has commenced its business and not as to when it commenced manufacture this particular case as cited by Department has no relevance at all. ld. Departmental Representative has also relied on Supreme Court decision in case of Mc Dowell and Co. Ltd. (1985) 47 CTR (SC) 126:(1985) 154 ITR 148 (SC) for proposition that treatment of expenditures incurred as revenue from date of business being set up leads to tax avoidance, to our mind, is not only illogical but beyond common sense. Supreme Court in case of CWT vs. Ramaraju Surgincal Cotton Mills Ltd. (1967) 63 ITR 478 (SC) (supra) were considering claim of assessee of exemption under WT Act in respect of asset forming part of industrial under-taking. In year of claim, industrial unit was only set up while in assessment year of claim, industrial unit was only set up while in assessment year following, commencement of operation were started. Their Lordships at page 482 pointed out difference between operation which are carried out for establishment of unit as such and setting up of unit. They further observed that operations carried out for establishment of unit must be antecedent to actual date on which Company is held to have been set up. They further observed "the operations for establishment of unit ultimately culminate in setting up of unit. According to their Lordships, moment unit is set up, it is to be recognised as industrial undertaking and assessee was entitle to claim exemption under WT Act. From above discussion of Supreme Court, it is clear that what is relevant for purpose of Income-tax is to reckon from date on which business is set up from which date assessee's previous year for determination of income commences. What s. 35D talks of is regarding expenses incurred before commencement of business and not before commencement of production as has been advanced by Sr.D.R. before us. Merely for reason that ss.28 & 29 precede sections of expenditures from s . 30 onwards it does not follow that there must be income before any expenditure could be said to be incurred or allowable. Rather, reality of any situation is that once business is set up assessees have to necessarily incur expenses after which only income could be generated. Therefore, even this argument of Department as advanced by Sr. D.R. has no merit. Sr. DR has placed reliance on Patna High Court decision in case of CIT vs. Sheo Kumari Debi (1986) 50 CTR (Pat) 350:(1986) 157 ITR 13(Pat) and also Supreme Court decision in case of Workmen of Associated Rubber Industry Ltd. vs. Associated Rubber Industry Ltd. (1985) 48 CTR (SC) 355:(1986) 157 ITR 77 (SC) for proposition that object of enactment has to be taken into consideration and that provision to prevent evasion of tax should not be construed in favour of assessee and also that tax being welfare legislation approach of Court should be to counter act evasion. As already observed while dealing with Supreme Court decision in case of Mc Dowell, Act only talks of setting up of business and commencement of business except in s. 80J where they have used words 'begins to manufacture'. Therefore, since Legislature in their wisdom did not intend to use term begins to manufacture in s. 3(1)(d) or s. 35D which have been interpreted by Gujarat High Court, Bombay High Court as well as Supreme Court (supra), object of enactment clearly go to indicate that what is important is setting up of business, which is starting point for determination of revenue expenses and income. It is but natural that unless and until business is set up it cannot be said to be ready to commence business. Therefore, actual commencement of business follows setting up of business which is starting point. Expenditure incurred till setting up of business i.e., expenses, which are incurred on purchase of land, construction of building, purchase of plant and installation, etc., and all expenditure incurred till construction are completed and said to be capital in nature as till time construction activity is completed, all expenditures are incurred for purposes of construction as such. Once construction having been completed and trial production having been carried out business of manufacture has been set up. This means that from date on which all construction activities have been completed, assessee is ready to commence production. It is from that date that nature of expenses incurred with view to start production and subsequent carrying on production acquire character of revenue. They acquire such character as they have no relation whatsoever that assets already acquired and in no way to increase life of asset or improve asset as such. Since it is accepted principle that capital expenditures are those, which are incurred with view to acquire capital asset or with view to increase substantially life of asset by carrying out modifications on it and in present case none of expenditures incurred by assessee are disputed by Department as having any relation whatsoever with acquisition of assets, to our mind, they can never be treated as capital expenditure. If they are not capital expenditures, then how can Department refuse to allow them as revenue expenditure unless there is specific provision contained in Act which prohibits such allowance. There is no section in IT Act which prohibits allowing of such expenditures as revenue in nature. only prohibition that is contained in s. 35D and that too is in relation to such expenditures, which are incurred before commencement of business or if incurred after commencement of business in connection with extension of his industrial undertaking or in connection with his setting up new industrial unit. nature of such expenditures have been provided in sub-s.(ii) which are in nature of preparation of feasibility report, project report, conducting of market survey, expenses on drafting of agreement, memorandum and articles of Association, etc. and it also talks of certain other items of expenditure as may be prescribed. Even from words used in s. 35D it is absolutely clear that Legislatures are laying emphasis on setting up of business and it is clear that it is this date on which setting up activity is complete is important. Since none of expenditures falls in any of categories specified in s. 35D, expenses have to be allowed in full from date on which business have been set up i.e. from 1st April,1976. Thus, expenditure incurred of Rs. 13,31,143 from 1st April,1976 to 20th Nov.,1976 representing expenditures incurred from date of setting up of business till actual commencement of production is rightly till allowable as revenue expenditure. We, accordingly, uphold order of CIT(A) on this issue. second issue in this appeal is in respect of expenditure of Rs. 6,52,606 incurred from 1st April,1976 to 20th Nov., 1976 on design and development which has been treated as revenue expenditure by CIT(A). According to Sr. D.R. Mr. Ruhela, assessee which has bought technical data for manufacture of scooters expended this amount on developing of various parts and carrying out various corrections in designs with view to manufacture scooters. According to Mr. Ruhela, expenditure incurred is in nature of additional compensation as it amounted to improvement and modifications of original designs which goes to improve design as such is in nature of capital. He placed reliance on Scientific Engineering House(P) Ltd. vs. CIT (1985) 49 CTR (SC) 386 of Supreme Court. On other hand, argument of assessee was that in paragraph 4, reasoning given by ITO which was approved by IAC was that these r e disallowable as they have been incurred prior to commencement of production and they have not been treated to be plant as has been suggested by learned D.R. It was accordingly argued that Sr. D.R. cannot make new case at this juncture. Reliance was placed on CIT vs. Praga Tools Ltd.(1985) 49 case at this juncture. Reliance was placed on CIT vs. Praga Tools Ltd.(1985) 49 CTR (AP) 269:(1986) 157 ITR 282 (AP), CIT vs. Aluminium Corporation India Ltd.(1973) 92 ITR 563(Cal) and 8 TAXMAN 210. Referring to para 8 of CIT(A) order, he submitted that assessee did not carry out any modification in basic designs. assessee carried out development of parts as per designs and since scooters required precision made parts it carried out such operations for correction of parts which are developed so that any manufacturing defect could be sorted out and resolved before actual commencement of production. Such kind of operations are part of manufacturing operations as such as any improper part has to be either scrapped or had to be modified to suit to requirement of scooters as such. We have given careful consideration to arguments of both parties on this issue. case law relied on by ld. DR is on issue of drawings, designs, charts, plants and such other literature whether these could be termed as plant or not and whether depreciation could be allowed as such or not. This case would have no application to present case as facts are different. ITO had disallowed expenses on design and development of Rs. 6,52,606 on ground that expenditure in question was incurred prior to date of commercial production on which basis if it was not treated as expenditure of revenue nature. It is not disputed that no new designs have been developed but it is accepted that expenditure incurred are on carrying out correction on parts developed for their alignment so that quality scooters could be manufactured. Andhra Pradesh High Court was considering issue of development expenditure incurred for preparing and perfecting designs in case of Praga Tools Ltd. (1985) 49 CTR (AP) 269:(1986) 157 ITR 282(AP). assessee was manufacturing machine tools and in year under review carried out expenditure on development for preparing and perfecting designs. According to Lordships, expenditure incurred cannot be said to be incurred for acquiring asset of enduring nature. In fact, that this particular case squarely applies to facts of case before us as what assessee had done is only in respect of developing of parts as per designs and carrying out such modifications and improvements as are necessary for producing good quality scooters. This particular activity is continuous one and rather represents fundamentals for effecting quality control products. Therefore, under no circumstances, they can be said to be plant or capital in nature as no asset of enduring nature has been obtained. As already held in earlier paragraphs on issue of expenditure incurred after setting up of business, since this also has been disallowed for same reasons by Department for reasons observed by us above, which would also apply to situation, claim of assessee is fully justified and, accordingly, we uphold order of CIT(A) on this issue as well. next issue is regarding subsidy received of Rs. 15 lakhs whether should be deducted from cost of plant and machinery for allowing of depreciation not. This particular issue is fully covered by decision of Special Bench in case of Pioneer Match Works (1983) 15 TTJ (Mad) 88 (SB) 3 ITD 714(Mad) where it has been held that subsidy so received is against establishment of industrial undertaking and is not specifically towards any plant and machinery and, therefore, subsidy so received cannot be deducted from cost of plant and machinery for allowing of depreciation. Respectfully following said decision, we hold that subsidy so received is not to be deducted from cost of plant and machinery for allowing of depreciation. next issue is of direction provided by CIT(A) to allow Development rebate on plant and machinery on basis of total cost of plant and machinery installed. On behalf of Department, Mr. Ruhela's argument was that s. 34 of IT Act clearly provides that development rebate reserve would be allowed to assessee only when assessee follows certain procedure, like creation of development rebate reserve by charge to its profit and loss account. assessee had not created Development rebate reserve due to inadequacy of profits. According to Mr. Ruhela, Board's circular dt. 30th Jan., 1976 on which reliance has been placed by CIT(A) is not at all justified as Board is not empowered to do what Parliament did not do or it cannot under what Parliament did. Board's Circular dt. 30th Jan., 1976, according to him, is contrary to very provisions of law and, therefore, such circular has no validity in eyes of law. He placed reliance on A.C. Paul vs. TRO and Anr.(1979) 117 ITR 412(Mad), CIT vs. Malayala Manorama and Co. Ltd.(1983) 33 CTR (Ker) 277:(1983)143 ITR 29 (Ker), J.K. Manorama and Co. Ltd.(1983) 33 CTR (Ker) 277:(1983)143 ITR 29 (Ker), J.K. Synthetics Ltd. vs. CBDT (1972) 83 ITR 335 (SC) and also CIT vs. Arasan and Co.(1984) 40 CTR (Mad) 202. On other hand, counsel for assessee submitted that Board's circular dt. 30th Jan., 1976 has only clarified that in year of loss in which assessee should have normally made claim for development rebate could not do so, but does it in subsequent year when there is profit by creating reserve then assessee should not be deprived of its claim. According to counsel for assessee, Board's circular is not at all contrary to provisions of law and it is only when reserve is created by debit to profit and loss assessee would be entitled to make claim of development rebate. In year in view of fact that assessee at loss did not create reserve. He also referred to s. 33(2) which provides for allowing of Development rebate reserve to extent of availability of income and balance amount to carried forward. It was, therefore, argued that direction of CIT(A) to allow Development rebate reserve in year under review is, no doubt, clearly contrary to law but direction to allow claim of assessee in year in which assessee complies with requirement of s. 34 should suffice. After having heard parties on this issue, CBDT Circular dt. 30th Jan., 1976 which followed its earlier circular of 14th Oct., 1965 which was withdrawn in 1972 only clarified position that in year in which assessee suffers loss whereby assessee is unable to provide Development rebate reserve by charging to its profit and loss account to extent of 75 per cent of such claim as required under s. 34, claim of assessee should be allowed in year in which assessee provides for such reserve in subsequent year. This has been only to remove hardship which assessee might face in shape of litigation and also as advice to offices of Department to allow claim of assessee in subsequent year in which there is profit after verifying that assessee has complied with various conditions laid down in s. 34 in that year. Therefore, Circular issued by Board cannot be said to be overriding intention of Legislature or even can be said to undo intention of legislatures as argued by learned DR. direction of CIT(A) in his paragraph 21 is quite contrary to law whereby he has directed ITO to allow development rebate in year itself knowing fully well that assessee has not complied with conditions laid down under s. 34. assessee is free to claim development rebate in subsequent year in which it has positive income after complying with conditions laid down under s. 34 read together with Board's circular of 30th Jan., 1976. This disposes of quantum appeal of Department. In ITA No. 686, Department is aggrieved by order of CIT(A), who though has technically upheld action of ITO has cancelled same o n ground that issue is already covered in his main order on quantum. On behalf of Revenue, it was argued that ITO in his order under s. 154 has rectified mistake of not deducting subsidy amount received from cost of assets in arriving at capital employed of business for determining 80J claim. Referring to order of CIT(A) paragraph 3, Mr. Ruhela pointed out that ITO has clearly observed that subsidy amount was to be reduced from cost of assets and since he did not reduce amount while carrying out calculation he had rectified his order which has been upheld by CIT(A). CIT(A), however, has held it to be infructuous as against original order of ITO on issue of subsidy amount for arriving at cost of assets CIT(A) had already held that cost is not to be disturbed for allowing of depreciation. It was, therefore, argued by learned DR that when he accepts that it is mistake apparent from record then rectification as passed by ITO should have been upheld. On other hand, counsel for assessee argued that in paragraph 6, ITO talks of arriving at cost of assets for allowing of depreciation. In this paragraph, there is no discussion at all about capital employed for purpose of s. 80J. In paragraph 12, reference is to 80J claim in which there is no mention at all about subsidy to be deducted from cost of asset for arriving at capital employed. We have given careful considerations to arguments of both parties. In paragraph 6 of original order, discussion is regarding determination of cost of assets as defined under s. 43(1), for allowing of depreciation. ITO in paragraph 12 has clearly indicated that capital employed has to be calculated with reference to sub-r.(iii) or r. 19A of IT Rules, 1962 but when he carried out calculations as per r. 19A, he took value of fixed assets as per balance sheet of assessee. Since he was of view that cost of assets would mean cost of assets as shown by assessee less subsidy amount received, it only naturally follows that he had committed error while calculating capital employed. error is not reducing subsidy amount from cost of fixed assets. action of ITO to this extent is not doubt justified as has been rightly held by CIT(A). But at same time it brings in important question of law as well as to whether subsidy amount is in nature of loan or capital contribution by state for benefit of industry. This is so in view of fact that subsidy amount is provided to assessee with condition about it being utilised in proper fashion and that industry for which it has been given is properly established and turns out products for which it was established. In case industry fails, then government has prerogative of receiving it back and in case industry is successful enough, then after certain period of time subsidy amount becomes grant like. Therefore, till time of completion of certain period of time, which is about five years, nature is that of liability as government could make claim and on successful completion of period it becomes grant which is not repayable. It is under these circumstances that it raised important question of law and, therefore this cannot be subject matter of rectification under s. 154. CIT(A) was in error when he observed that issue has become infructuous and redundant for reasons observed above. In result ITA No. 386 of Department is partly allowed while ITA No. 686 is dismissed. H.S. AHLUWALIA,J.M. Personally speaking, I am of opinion that contention raised by DR, according to which allowance of revenue expenditure under s. 30 to 43A is permissible only when there is income from profits and gains of business or profession within meaning of s. 28 of IT Act is very sound argument. Only such income is to be computed under s. 29 and, therefore, unless s. 28 comes into play, question of applying subsequent provisions contained in ss. 30 to 43A would not apply. relevance of newly set up business is only with reference to previous year as defined in s. 3(1)(d) or (e) of IT Act and has nothing to do with computation of income from profits and gains of business which would not necessarily involves such activities before any deduction could be granted. However, all decided cases on subject quoted at Bar have nearly taken contrary view and solitary decision of Bombay High Court quoted by DR to contrary, namely, Metropolitan Springs Pvt. Ltd. vs. CIT (1981) 22 CTR (Bom) 260:(1981) 32 ITR 893(Bom) is not directly in point. All other decisions appear to have been taken under general tendency of Courts to give benefit of doubtful interpretation in taxation laws to assessee. Of course, this view has to be given go by in view of some recent decisions, for example, McDowell & Co. vs. CTO (1985) 47 CTR (SC) 126:(1985) 154 ITR 148 (SC), CIT vs. Sheo Kumari Devi (1986) 50 CTR (Pat) 350:(1986) 157 ITR 13(Pat). However, sitting as member of Tribunal it is probably too much for me to take rather abnormal view of matter particularly when my learned brother has taken contrary view and since matter has to go to Hon'ble High Court in any case, I concur with ultimate order proposed by my ld. brother. *** INCOME TAX OFFICER v. ARAVALI SWACHALIT VAHAN (P) LTD.