Commencement of business is a question of fact, but what activities constitute commencement of business is a mixed question of law and fact.

SYED SHAH MOHAMMED QUADRI, J.

( 1 ) THE Income-tax Appellate Tribunal, Hyderabad, referred the following question of law to the High Court for its opinion under section 256 (1) of the Income-tax Act :"1. Whether, on the facts and in the circumstances of the case, the assessee could be held to have commenced its business and, therefore, or otherwise, is entitled to the deduction of the administrative expenses and exploration and mining expenses from out of its interest income ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing the Income-tax Officer to consider, to the extent admissible, the claim of the assessee for setting off of interest received on short-term deposits against unadjusted expenditure for the assessment years 1976-77, 1977-78, 1978-79 and 1979-80 ?"

( 2 ) UNDER the United Nations development programme, the assessee-company was incorporated for establishment of a sponge iron plant. It is a Government company and is a subsidiary of the Andhra Pradesh Industrial Development corporation (APIDC), another State undertaking. The share capital is contributed by the State Government as well as the Central Government. Out of its share capital, the assessee made short-term deposits of Rs. 53,74,000 with banks and received interest as noted hereunder. Rs. 1,37,030 for the assessment year 1976-77. Rs. 1,80,930 for the assessment year 1977-78. Rs. 1,83,670 for the assessment year 1978-79. Rs. 2,80,240 for the assessment year 1979-80.

( 3 ) THIS was treated as income from "other sources" and the assessee was taxed. It claimed that it had already commenced its business and, therefore, the expenditure incurred in those assessment years and allocated under the head "exploration and general administration" may be allowed as deductions from out of that income. The Income-tax Officer found that the business of the assessee did not commerce at any time in the accounting years relevant to the said assessment years and he assessed the interest income to tax. Against the assessments four appeals were filed before the Commissioner of Income-tax (Appeals ). In the appeals, an alternative plea was taken that the interest would go to reduce the capital cost and should not be taxed as income from "other sources". The Commissioner agreed with the Income-tax Officer that the business did not commence and rejected the alternative contention also and thus dismissed the appeals. The assessee then carried the matter in appeal to the Income-tax Appellate tribunal. The Tribunal noted that the primary object of the assessee-company was to set up a sponge iron plant to produce 30,000 tonnes per annum and that it was for this purpose that a survey of raw materials was conducted at various places and a testing laboratory for different types of iron ore at Bayyaram, Bellary, Hospet and Bailadilla and other places was set up. The claim of the assessee that it started industrial consultancy even at the inception was not accepted on the ground that such a consultancy was developed only at a later stage and that there was no consultancy practically during the four assessment years in question. Having noticed that the assessee was engaged in the construction of the proposed factory for manufacture of sponge iron and that there was search for material and that erection of the plant was not completed and the closing stock did not indicate the existence of any raw material and that it contained only building materials, stores and tools in connection with construction work and that the plant and machinery were shown as under installation or transit and the expenditure in relation to the construction was shown as amount "awaiting allocation", and the structural work for the factory was given on contract and even the plant for preparation of raw materials was only ordered, the tribunal came to the conclusion that the business was not started and, on that basis, the assessee s claim for determination of loss on a

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